Model Answer
0 min readIntroduction
Fiscal federalism, at its core, refers to the financial relationship between different levels of government – the Union, States, and local bodies – within a federal structure. In India, this relationship is constitutionally defined, with Articles 268-293 dealing with the distribution of taxes and financial resources. While the Constitution envisions a degree of financial autonomy for states, the reality has been one of significant central control. The 15th Finance Commission (2020-2026) recommendations, for instance, have sparked debate regarding the vertical and horizontal devolution of resources, highlighting the ongoing tension between cooperative and competitive federalism in the Indian context. This analysis will delve into the state of resource devolution, examining its evolution and current challenges.
Constitutional Framework and Principles
The Indian Constitution establishes a quasi-federal structure with a strong centre. The distribution of legislative and executive powers between the Union and States is outlined in the Seventh Schedule. However, financial powers are more concentrated with the Union. Key constitutional provisions include:
- Article 268: Deals with taxes levied by the Union but collected and appropriated by the States.
- Article 270: Provides for grants-in-aid from the Union to the States.
- Article 282: Empowers the President to make grants to States.
The principle of fiscal federalism in India is guided by the need to balance equity (reducing regional disparities) and efficiency (incentivizing states to perform). However, the historical trend has leaned towards greater central control.
Mechanisms of Resource Devolution
Resource devolution from the Centre to the States occurs through several mechanisms:
- Tax Devolution: A share of central taxes (Income Tax, Central Excise Duty, Goods and Services Tax - GST) is devolved to states as per the recommendations of the Finance Commission. The 15th Finance Commission recommended a share of 41% of the divisible pool of central taxes to states, a reduction from the 42% recommended by the 14th Finance Commission.
- Grants-in-Aid: These are financial assistance provided by the Centre to States, categorized as:
- Statutory Grants: Based on constitutional provisions (e.g., grants under Article 275 for tribal areas).
- Discretionary Grants: Given at the Centre’s discretion, often linked to specific projects or schemes.
- Centrally Sponsored Schemes (CSS): These schemes are funded by the Centre and implemented by the States. The funding pattern has evolved over time, with a greater emphasis on state contributions in recent years.
Analysis of the Current State of Devolution
The state of devolution is marked by several key trends:
- Increased Tax Devolution (Historically): Prior to the GST regime, successive Finance Commissions generally increased the share of states in the divisible pool of central taxes. However, the 15th FC’s recommendation of 41% represents a slight reversal.
- Rise of CSS: The number and financial importance of CSS have increased significantly, giving the Centre greater leverage over state policies. This has been criticized for undermining state autonomy.
- GST Impact: The implementation of GST in 2017 has fundamentally altered the fiscal landscape. While GST aimed to create a unified national market, it has also led to revenue shortfalls for many states, requiring Centre’s compensation. The compensation period ended in June 2022, creating further fiscal stress for states.
- Vertical and Horizontal Imbalance: A significant vertical imbalance exists, with the Centre having greater revenue-raising powers than the States. Horizontal imbalances (disparities between states) also persist, requiring equalization measures.
| Aspect | Pre-GST (Approx. 2016-17) | Post-GST (Approx. 2021-22) |
|---|---|---|
| State’s Own Tax Revenue | 60% of total state revenue | 50% of total state revenue |
| Central Transfers (Tax Devolution + Grants) | 40% of total state revenue | 50% of total state revenue |
Challenges and Concerns
Several challenges hinder effective resource devolution:
- Centre’s Increasing Fiscal Dominance: The Centre’s growing reliance on cesses and surcharges (which are not shared with states) reduces the divisible pool of taxes.
- Conditionalities Attached to Grants: Grants-in-aid often come with conditions that restrict state autonomy and flexibility.
- Delayed Release of Funds: Delays in the release of central funds to states disrupt planning and implementation of development programs.
- Lack of Transparency: The criteria used for allocating grants and CSS are not always transparent, leading to perceptions of bias.
Conclusion
The state of devolution in India remains a complex issue. While constitutional provisions and Finance Commission recommendations aim to ensure a fair distribution of resources, the Centre continues to exert significant fiscal control. The GST regime, while promising, has presented new challenges for states. Addressing the vertical and horizontal imbalances, enhancing transparency in fund allocation, and reducing conditionalities attached to grants are crucial steps towards strengthening fiscal federalism and promoting cooperative governance in India. A more balanced approach is needed to empower states and ensure inclusive and sustainable development.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.