QUES . What are the emerging issues raised by some states in India in the context of fiscal federalism? Explain your view in this context. UPSC IES/ISS EXAM 2024 General Studies. 200 Words. 5 Marks.

HINTS:

Fiscal federalism in India has always been deeply problematic, with vertical and horizontal imbalances persisting not only till date but also getting aggravated in many cases. Resources have always remained centralised in the hands of the Union Government with the States suffering from gross inadequacy of resources in relation to their development needs.

Issues and Challenges in Centre-State Financial Relations and Fiscal Federalism

Allocation of resources

There is often a dispute between the Centre and the states over the allocation of resources. There are concerns relating to the revenue-sharing criteria used by the Finance Commission.

Must read: Finance Commission : Constitutional Provisions and Functions

Vertical Fiscal Imbalance

There is often a disparity between the revenues collected by the centre and the expenditure responsibilities assigned to the States. This leads to a fiscal imbalance that requires central transfers.

Uncertainty in GST Revenue Sharing

The introduction of GST has caused some uncertainty regarding the adequacy of revenue sharing between the Centre and States, as some States have faced revenue shortfalls due to the transition.

Modification of provisions

Some provisions are explained or modified in such a way that the financial strength of the union government improves and financial strength of the state government weakens. For example ‘Industries’ is part of the state list but the union list permits Parliament to legislate in respect of ‘industries’ the control of which by the union is declared by law to be expedient in the public interest. Empowered by this provision of constitution ‘Industries (development and Regulation) Act 1951’ was enacted by Parliament which specifies those ‘industries’ which are of public interest. In course of time more and more industries are added in this act. Thus without any amendment, Industries transferred into the Union list.

Dispute over Tax Devolution

States often raise concerns about the adequacy of tax devolution, with some States arguing that the allocation process by the Finance Commission does not fully address their financial needs.

Over dependence on Central Grants

States with limited revenue generating capacity may become overly dependent on Central transfers and grants, which can limit their fiscal autonomy and flexibility.

Fiscal Deficit and Debt Sustainability

Maintaining fiscal discipline is a challenge for both the Centre and States. States that exceed their borrowing limits may face difficulties in managing their finances, which impacts the overall economic stability.

Conclusion

Fiscal federalism ensures the distribution of resources between the Centre and states in a fair and transparent manner. The Centre and states should work towards promoting fiscal federalism to ensure equitable distribution of resources.