Abstract 

Fiscal federalism in India is one of the hotly contested issues in the country. There are two schools of thought on this, first is in favour of the strong centre to deal with the exigencies of the day, especially the post partition difficulties and the second school of thought argues for a fairer devolution of powers to the state  and the local governments for localised interventions based on the specific demands of the state’s ground realities. There exists two kinds of fiscal imbalances, one is the horizontal and the other is vertical and these impact the division of taxation powers among the Centre, State and the Local Governments. With the changing social, cultural and technological circumstances, the approach to the fiscal federalism has shifted from the The fiscal landscape of the country has been shaped by some of the bold economic reforms since the 1990s such as the 72nd CAA and 73rd CAA, GST, replacement of the Planning Commission with the Niti Aayog among others. During the past few years, there has been an imbalance in all the verticals, horizontal and fiscal. This has also led to tensions between the State and the Central governments as well as the North-South divide on the tax devolution framework. So. There is a need to rethink India’s federal fiscal architecture. The paper aims to  understand the various challenges of the current fiscal federalism in the country. Moreover, the paper also recommends policies for strengthening fiscal federalism.            

Keywords: Fiscal Federalism, North-South, devolution, Niti Aayog, technological, imbalance. 

Evolution of Fiscal Federalism in India 

There has been a built-in unitary bias in the Indian federal structure which was mainly  to cater to the exigencies of India’s Partition. India’s political dynamics has shifted from the one-party governance during post-independence times to becoming a multi-party system. Moreover, the nature of the polity, society, technology, demography and the development paradigm has undergone a transformation. These changes, especially post 1990s, have had a significant impact on the trajectory of India’s fiscal federalism.   

The division of powers between the Centre and the States is one of the hotly debated issues in the fiscal landscape of the country. On one hand, the states demand for more autonomy in their functioning, on the other hand, the Union Government emphasises the need for macroeconomic stability. In this context, it is also crucial to understand the constitutional aspect of fiscal federalism in India. Fiscal federalism involves the distribution of the financial responsibilities, duties and powers between the Union and the States. This also includes the distribution of taxation powers between the State governments, urban local bodies and the rural local bodies. Article 280 of the Indian Constitution provides for the constitution of a Finance Commission. The Finance Commission has been entrusted with the responsibility of maintaining smooth functioning of the Centre-State relations. The body has played a major role in addressing the various fiscal concerns, restoring budgetary balance and maintaining macroeconomic stability in the economy. The Finance Commission both at the State and the Central level plays an important role in shaping the fiscal federalism in India. Post the 73rd and 74th Constitutional Amendments, there has been transformation of the two-tier federation into a multi-tier fiscal system. India currently has a three-tier federal tax system with clear demarcation of the powers between the central, state and the local bodies. Article 270 outlines the distribution of the net tax proceeds between the Union and the States.  

Post the 1991 LPG (Liberalisation, Privatisation and Globalisation Reforms) ,there has been a shift from the planned economy to a market-mediated economic system. There has been the  transformation of a two-tier federation into a multi-tier fiscal system on account of the 73rd and 74th Constitutional Amendments. In the recent years, policy initiatives such as providing greater leeway to the functioning of the states in the NITI Aayog and increased frequency of the meetings between the PM and the Chief Ministers and the functioning of the PRAGATI has developed greater synergy of cooperation between the Centre and the States. Secondly, there has been the replacement of the Planning Commission with the NITI Aayog. Thirdly, the passage of the Fiscal Responsibility and Budget Management Act (FRBM) and the GST council have altered the fiscal landscape that has reshaped India’s Fiscal Federalism. The idea of NITI Aayog was a result of the conceptualisation of the concept of cooperative federalism, which marks a break from the traditional idea of competitive federalism. 

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