Indian Fiscal Federalism at the Crossroads

The abolition of the Planning Commission, the creation of the NITI Aayog, the constitutional amendment to introduce the goods and services tax, the establishment of the goods and services tax council, and the historically high tax devolution to the states based on the Fourteenth Finance Commission have changed the union–state fiscal relations fundamentally. The changing contours of union–state fiscal relations discussed in the context of the release of a recent book Indian Fiscal Federalism by Y V Reddy and G R Reddy are presented here.

This article was first published as a Levy Institute Working Paper. It is an analysis of the issues highlighted on centre–state financial relations in the book launch of Indian Fiscal Federalism written by Y V Reddy and G R Reddy. The book was released by N K Singh, the Chairman of the Fifteenth Finance Commission.

The author was one of the panellists at the launching of the book along with Bibek Debroy, Montek Singh Ahluwalia and Haseeb Drabu. This book was launched at India International Centre, New Delhi on 28 March 2019.

Special thanks are due to the anonymous referee for the valuable comments and suggestions.

A Google search for “Indian fiscal federalism” shows 1.7 million results. The top hit among these results was the recent book on the topic written by Y V Reddy and G R Reddy (2019). Recent murmurings in India about fiscal federalism, as listed out by the authors, are the following: (i) the chapter in the book, “Of Counsel,” written by the former Chief Economic Advisor Arvind Subramanian (2018) about the need for a new federalism framework; (ii) former Finance Secretary and Chairman of the Thirteenth Finance Commission Vijay Kelkar’s (2019) concerns about growing spatial inequalities; (iii) former Chairman of the Prime Minister’s Economic Advisory Council and Chairman of the Twelfth Finance Commission, Chakravarty Rangarajan’s urge to make the quantum of devolution mandatory through a constitutional amendment in the post-goods and services tax (GST) era (Hindu 2019); (iv) the Reserve Bank of India (RBI 2019) Governor Shaktikanta Das’s view to make the finance commissions permanent; and (v) the growing “trust deficit” among the states and the first-ever meeting by the state finance ministers on the terms of reference (ToR) for the Fifteenth Finance Commission. Reddy and Reddy (2019) acknowledge that something fundamental was happening in Indian fiscal federalism and has given emphasis to these developments with empirical evidence in which hysteresis of fiscal federalism was analysed to get the contemporary debates right.

Tax Devolution