Fiscal federalism: A Changing Pattern after the 2014

Fiscal federalism: A Changing Pattern after the 2014

 

Context: Dr. Bhim Rao Ambedkar, in his first speech in the constitution assembly regarding fiscal federalism stated that we should reduce the possibilities of political and social conflict. Economic inequality is a big challenge for the Indian democracy which should be curtailed and by reducing this economical inequality, social justice could not be established. Organized fiscal federalism is the only tool through which this economical inequality can be reduced 

Introduction 

The term fiscal federalism means the dedication of the fiscal power to the lowerest political units. In the Indian constitution, the financial right (Sharing and imposing of taxes) are given to various levels. Like state level and the panchayat level also. The basic objective of this decentralization of financial rights is to curtail the inequality 

Changing pattern of fiscal federalism 

Recently we observed the changing nature of fiscal federalism. If we observe the latest two latest finance commissions—the Fourteenth and Fifteenth. We can easily conclude that fiscal federalism is moving towards fiscal decentralization. The central government is continuously intervening in the financial rights of the state 

It seems that the government is ignoring the basic principles and the objective of fiscal federalism which is the reduction of economical inequality. In the process of political centralization, fiscal federalism is being ignored. To be sure, India was never truly federal — it was a ‘holding together federalism’ in contrast to the ‘coming together federalism,’ in which smaller independent entities come together to form a federation (as in the United States of America). 

Political India was more centralized in 1950, the federalism has been always the objective of the Indian constitution for the long term always. Throw recent policies the central government is weakening the financial power of the state. The central government is hallowing the fiscal capacity of the state.  Presently The ability of States to finance current expenditures from their own revenues has declined from 69% in 1955-56 to less than 38% in 2019-20. While the expenditure of the States has been shooting up, their revenues did not. The state government has to still invest and expend in education and the health sector which are the backbone of the country. The reduction of fiscal capacity would hamper the education and health sectors also. 

However, the share of the state is increased by the 14th finance commission from 32% to 42 % but it was subverted by raising non-divisive cess and surcharges that go directly into the Union kitty. This non-divisive pool in the Centre’s gross tax revenues shot up to 15.7% in 2020 from 9.43% in 2012, shrinking the divisible pool of resources for transfers to States. In addition, the recent drastic cut in corporate tax, with its adverse impact on the divisible pool, and ending GST compensation to States have had huge consequences.

States had to pay a high-interest rate of 10 % instead of 7 %. It is not just that States are also losing due to gross fiscal mismanagement — increased surplus cash in the balance of States that is money borrowed at higher interest rates — the Reserve Bank of India, when there is a surplus in the treasury, typically invests it in short treasury bills issued by the Union at the lower interest rate 

 Conclusion 

Finally, it can be concluded that the load of the fiscal deficit is continuously increasing in the state states; the capacity of the fiscal affairs is continuously decreasing. Extreme political centralization would never bring prosperity to the states. In India type diversified culture political and fiscal decentralization is necessary. Therefore, recent Trends, up to e certain extent reduce the financial capacity of the state. The government of India and the financial expert should think in this regard also. 

Yojna daily current affairs eng med 28 July

 

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