Mains Marathon

Approach

• Begin by defining fiscal federalism.
• Discuss its constitutional and institutional framework.
• Explain how fiscal federalism in India seeks to balance equity with efficiency.
• Conclude with a scholarly remark.

Introduction

Fiscal federalism refers to the financial relations between units of government in a federal setup, primarily the division of taxation powers and expenditure responsibilities between the Union and the States. In India, it reflects a constant effort to balance equity (fair distribution of resources) with efficiency (optimal use of resources and incentives for good governance).

Body

Constitutional and Institutional Framework

• Taxation Powers: Articles 268–293 divide taxes between the Union and the States.
• Finance Commission (Article 280): Recommends vertical (Union–States) and horizontal (among States) devolution of taxes.
• GST Council: A federal institution promoting cooperative decision-making in indirect taxation.
• Grants-in-Aid under Article 275 support resource-deficient states.

Balancing Equity and Efficiency

• Equitable Resource Distribution:
  • Vertical Devolution: The 15^th Finance Commission recommended that 41% of the divisible pool be devolved to States.
  • Horizontal Devolution: Based on criteria like population, income distance, forest cover, and demographic performance.
  • Grants-in-aid: Address regional disparities and support social sector needs in backward regions.
• Economic Efficiency:
  • Performance-based Transfers: Incentivize fiscal discipline and governance reforms.
  • GST Regime: Promotes a unified market and ease of doing business, reducing economic distortions.
  • FRBM Act: Encourages prudent fiscal management and responsible borrowing.

Challenges to Fiscal Federalism

• Vertical Fiscal Imbalance: Union controls most revenue sources while States handle major expenditures like health and education.
• Centrally Sponsored Schemes (CSS): Often criticized for limiting States’ fiscal autonomy.
• GST Compensation Delay: Undermined trust in cooperative federalism.
• Borrowing Constraints: States require Union consent under Article 293(3), limiting financial flexibility.

Recent Reforms

• The 15th Finance Commission introduced conditional grants for power sector reforms, health, and demographic management.
• Emphasis on collaborative federal institutions like NITI Aayog for better Centre-State coordination.

Conclusion:

As Dr. Y.V. Reddy, former RBI Governor and Chairman of the 14th Finance Commission, rightly observed:

“Fiscal federalism in India is not just about sharing resources—it is about sharing responsibilities.”

Thus, sustaining the spirit of fiscal federalism requires not only financial decentralization, but also a commitment from both Centre and States to cooperative governance, fiscal responsibility, and developmental accountability.