Model Answer
0 min readIntroduction
Federalism, as a mode of governance, encompasses both political and fiscal dimensions. While political federalism deals with the distribution of political power, fiscal federalism concerns itself with the allocation of financial resources between different levels of government. Historically, India’s fiscal federalism has been characterized by a vertical imbalance, with the Union government possessing greater financial powers. This imbalance has been particularly pronounced in relation to states designated as ‘special category’ based on socio-economic backwardness and geographical disadvantages. Recent reforms, particularly post the 14th Finance Commission (2015-2020), have attempted to address these imbalances, leading to a significant evolution in the country’s fiscal federal structure.
Distinguishing Fiscal and Political Federalism
Political Federalism refers to the constitutional division of powers between the Union and State governments. It defines the legislative and executive authority of each level, ensuring a degree of autonomy for states within a unified national framework. This is enshrined in the Seventh Schedule of the Constitution, outlining the distribution of subjects among the Union, State, and Concurrent Lists.
Fiscal Federalism, on the other hand, deals with the financial relations between the Union and the States. It encompasses the allocation of tax revenues, expenditure responsibilities, and transfer of resources from the Union to the States. This is primarily achieved through constitutional provisions, Finance Commission recommendations, and various schemes.
| Feature | Political Federalism | Fiscal Federalism |
|---|---|---|
| Focus | Distribution of political power | Allocation of financial resources |
| Constitutional Basis | Seventh Schedule (Lists I, II, III) | Articles 268-293, Finance Commission |
| Key Aspects | Legislative powers, executive authority | Tax sharing, grants-in-aid, expenditure responsibilities |
Evolution of Fiscal Federalism
Pre-1992: A Centralized Approach
Prior to the 1992 constitutional amendments, fiscal federalism in India was heavily centralized. The Union government controlled the majority of tax revenues, and states were largely dependent on grants-in-aid from the Centre. ‘Special Category’ status was granted to states like Assam, Nagaland, and Jammu & Kashmir, entitling them to a 90% grant component in central assistance, recognizing their unique challenges.
Post-1992: Towards Decentralization
The 73rd and 74th Constitutional Amendments (1992) aimed to strengthen local bodies, indirectly impacting fiscal federalism by increasing the devolution of funds to the Panchayats and Municipalities. However, the significant shift came with the recommendations of the 14th Finance Commission (2015-2020).
14th & 15th Finance Commissions: A Transformative Phase
The 14th Finance Commission (Chair: Y.V. Reddy) dramatically increased the states’ share in the divisible pool of central taxes from 32% to 42%. This significantly enhanced the fiscal autonomy of states. It also recommended the phasing out of the distinction between ‘Plan’ and ‘Non-Plan’ expenditure. The Commission also emphasized the need for greater fiscal discipline and transparency.
The 15th Finance Commission (Chair: N.K. Singh) recommended maintaining the states’ share at 41% (a 1% reduction due to the creation of Union Territories of Jammu & Kashmir and Ladakh). It introduced new criteria for determining states’ share, including demographic performance, forest and ecology, tax effort, and income distance. It also focused on performance-based incentives for states.
Fiscal Federalism and Special Category States
The concept of ‘Special Category’ status has undergone significant changes. The NITI Aayog, in 2015, proposed a new methodology for categorizing states based on a composite index considering backwardness, socio-economic indicators, and human development indices. This led to the abolition of the ‘Special Category’ status. However, states previously enjoying this status continue to receive preferential treatment through various schemes and grants.
States like the North-Eastern states, Himachal Pradesh, and Uttarakhand continue to receive substantial central assistance under schemes like the North East Special Infrastructure Development Scheme (NESIDS). The 15th Finance Commission also provided specific grants to states for improving health infrastructure and local bodies.
General category states have benefited from the increased share in central taxes recommended by the 14th and 15th Finance Commissions, allowing them greater flexibility in planning and implementing development programs. However, concerns remain regarding the horizontal equity – ensuring fair distribution of resources among states with varying needs and capacities.
Conclusion
Fiscal federalism in India has undergone a significant transformation, moving from a centralized to a more decentralized model. The recommendations of the 14th and 15th Finance Commissions have played a crucial role in enhancing the fiscal autonomy of states. While the ‘Special Category’ status has been abolished, states previously enjoying this status continue to receive preferential treatment. However, challenges remain in ensuring equitable distribution of resources and promoting fiscal discipline at all levels of government. Further reforms are needed to strengthen cooperative federalism and address the evolving needs of a diverse nation.
Answer Length
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