Editorial Analysis for IAS - Challenges to Fiscal Federalism in India

Challenges to Fiscal Federalism in India


  • With coming in of the GST regime, the states have lost their revenue generating capacity and with waning away of the Planning Commission, there are apprehensions about the weakening of the principle of Fiscal Federalism in India.
  • Even from the Nehruvian era there was inclination towards centralization of fiscal powers as it was justified that it was required to address the concerns of socio-economic and regional disparities.
  • After that Planning commission played a huge role in terms of fiscal transfers to the states but even this erstwhile institution has been abolished after 2014.
  • Now it is the Finance Commission which has become a major means of fiscal transfer.
  • But the Finance Commission has been subject to accusations of being a politicised institution with arbitrariness and inherent bias towards the Union government.
Capabilities of the States:
  • The current capability of States to finance their expenditures from their own revenues has declined significantly from 69% in 1955-56 to less than 38% in 2019-20.
  • As a matter of fact, the expenditure of the states have been increasing significantly but their revenues remain stagnant.
  • As many of the earlier taxes have been subsumed within the GST, the states have only been left with petroleum products, electricity and alcohol for their revenue.
  • Even though the devolution of taxes was increased from 32% to 42% after the recommendation of Fourteenth Finance Commission, the non-divisive pool of the cess and surcharges were increased.
  • This non-divisive pool in the Centre’s gross tax revenues shot up to 15.7% in 2020 from 9.43% in 2012, shrinking the divisible pool of resources for transfers to States. 
Centrally Sponsored Scheme:
  • At present there are around 131 centrally sponsored schemes, with only a few of them accounting for 90% of the allocation, and States required to pitch in their share.
  • The states spend about 25% to 40% as matching grants at the expense of their priorities.
  • These schemes, driven by the one-size-fits-all approach, are given precedence over State schemes, undermining the electorally mandated democratic politics of States.

    Source The Hindu

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