ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Fiscal FederalismSubscribe to Fiscal Federalism

Continuity with Change

The two latest finance commissions—the Fourteenth Finance Commission and the Fifteenth Finance Commission—mark a break from the past. The paper explores the structural shift in federal finances with the abolition of the Planning Commission and contemporaneous circumstances that shaped the approach of the Fifteenth Finance Commission and examines the intersections and divergence, continuity and change with the Fourteenth Finance Commission in terms of its treatment of and approach to the three core issues of vertical and horizontal devolution, grants-in-aid to the states and transfers to local governments. It argues that the pervasive impact of the pandemic has shaped the recommendations of the Fifteenth Finance Commission in several ways without compromising on the constitutional principles and retaining the balance in federal transfers between the union and the states and amongst the states. At a time when the growth prospects of the economy are uncertain, the innovative use of targeted grants linked to performance-based criteria for specified sectors through the states and local governments addresses glaring gaps in public services and potentially trigger reform in critical sectors.

India’s Charade of Cooperative Federalism and State Debt Traps

India’s policies towards fiscal federalism are grounded in a colonial legacy that favours the power structure to be tilted towards the centre.

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.

Re-examining Vertical Sharing and Horizontal Distribution of Fiscal Resources in India

Previous efforts to decompose intergovernmental transfers made by the Twelfth and Thirteenth Finance Commissions into vertical and horizontal components estimate the extent of horizontal fiscal equalisation achieved through transfers at around 90%. But other channels of central transfers and spending, mostly bypassing state budgets, also have implications for regional welfare and horizontal fiscal equalisation. A comprehensive view is preferable for all central transfers and spendings having implications for regional welfare in examining vertical sharing and horizontal fiscal equalisation in India. Some methodological concerns over the decomposition of central transfers into vertical and horizontal components are addressed.

Should States Target a 3% Fiscal Deficit?

India’s current fiscal rules target a 3% fiscal deficit for the central and state governments. Though states have largely adhered to their borrowing ceilings, subnational debt is proliferating. A significant reduction in subnational borrowing is required to stabilise the states’ debt around the desired level of 20% of gross domestic product. Symmetry should not be forced on central and state borrowing flows, given their widely divergent levels of debt stocks.

‘Fiscal Federalism’ in India since 1991

The “reforms” in 1991 laid out a new trajectory in which federalism was dichotomised into two parts—political and fiscal. The fiscal was privileged and used to undermine the political. Fiscal federalism in India since 1991 rests on the contradictions generated by the theoretical infirmities of the sound finance paradigm along with a concerted undermining of federal provisions. This political drive is in keeping with the agenda since 1991, eroding the relative autonomy of the state to turn it into a facilitator of a macroeconomic expansion process in which the wage–surplus distribution becomes more and more favourable to capital.
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