The Hindu Editorial Analysis- 7th February 2024 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Why in News?

Ever since the start of the Fourteenth Finance Commission award period (2015-16), the Union government has been reducing financial transfers to States. This is particularly strange given that the Fourteenth Finance Commission recommended devolving 42% of Union tax revenues to States, which is a clean 10 percentage points increase over the 13th Finance Commission’s recommendation.

What is Fiscal Federalism?

Fiscal federalism deals with the division of financial powers as well as the functions between multiple levels of the government in a country. It has within its ambit the imposition of taxes as well as the division of different taxes between the Centre and the constituent units.

Tools for Fiscal Federalism:

Issues in the Fiscal Federalism in India:

Role of the 15th Finance Commission in fostering fiscal federalism:

1. Increased tax devolution to states from 32% to 41%: This enhances states’ fiscal capacity and autonomy on spending, allocating more resources to states for economic development and governance roles. States’ fiscal buffer has widened.
2. Emphasis on sector-specific purpose-based grants: The commission has provisioned Rs 4.36 lakh crore performance-based grants to states in areas like health, education, rural connectivity, and water conservation that address development gaps.
3. Boosts local government finance: The commission mandates a 31% share of the divisible pool for local governments. Over Rs 2 lakh crore, grants to urban and rural local bodies strengthen decentralization.

Shortcomings:

1. Centre retains larger revenue-raising powers and control over citizens’ vital personal finances & expenditures through GST, corporate taxes etc. constraining states’ capacity. RBI’s monetary powers also lie with the central government. This severely skews fiscal imbalance against states.
2. Rigid fiscal consolidation goals overlook economic constraints: Mandating 4% fiscal deficit limits for states could curb their capital spending abilities and reduce fiscal legroom, posing risks amid the economic revival phase.
3. Limited sectoral grants in a few specialized domains: The absence of performance incentives for states in many areas like environmental management, digital governance, and social security benefits leaves critical sectors underfunded hampering states’ capacity to uplift them.

 Key principles that guided 15^th Finance Commission recommendations:

1. Equity: Balanced distribution of resources between the Centre and states based on sound criteria like demographics, development levels etc. to bridge inequality.
2. Efficiency: Results-based incentives were introduced for the first time across sectors like agriculture, education, and health to boost effective governance.
3. Conditionality: Certain sector grants are tied to state-level reforms to enable the realization of national priorities like power sector viability and ease of doing business.
4. Inclusiveness: Enhanced funds allocation to deprived groups and backward regions to ensure even development. Also empowered local governments by allotting them a share of central taxes.
5. Responsiveness: Sector-specific grants responsive to emerging priorities like improving air quality, water conservation and metro connectivity made growth more sustainable.
6. Cooperative Federalism: Constant consultation between the Centre and states throughout the Commission’s five-year award period to better reconcile national and sub-national priorities.

 Suggested measures for improving centre-state fiscal relations:

Conclusion

A careful re-evaluation of fiscal arrangements, prioritization of central expenditure, and discussions on a new grant framework are crucial for fostering effective fiscal federalism in India. The government has given the Terms of Reference of the 16^th Finance Commission in order to better prioritise government finances.