Congress Flags Fiscal Federalism, Inequality Concerns Ahead of Union Budget
Congress raises concerns about fiscal federalism, investment, and inequality before the Union Budget.
Photo by Marcos Gabarda
Key Facts
16th Finance Commission: Report submitted on November 17
Fiscal devolution: States concerned about Centre’s approach
Cost-sharing formula: 60:40 under laws affecting MGNREGA
Private investment: Remains sluggish despite tax cuts
UPSC Exam Angles
GS Paper II: Issues relating to devolution of powers and finances up to local levels and challenges therein
GS Paper III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Potential question types: Statement-based, analytical questions on fiscal federalism and resource allocation
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Background
The concept of fiscal federalism in India has evolved significantly since independence. The Government of India Act, 1935 laid the groundwork for a federal structure, but the true evolution began with the Constitution of India. The Finance Commission, established under Article 280, plays a crucial role in recommending principles governing the distribution of tax revenues between the Union and the States.
Early Finance Commissions focused primarily on revenue sharing based on population and needs. Over time, criteria like fiscal discipline, infrastructure development, and environmental protection have been incorporated. The Gadgil-Mukherjee formula, used before the 14th Finance Commission, marked a shift towards a more nuanced approach to resource allocation, considering factors beyond just population and poverty.
The debate surrounding centrally sponsored schemes and their impact on state autonomy has been a recurring theme in the evolution of fiscal federalism in India.
Latest Developments
In recent years, there has been increasing scrutiny of the Centre's use of cesses and surcharges, which are not shared with states, impacting the divisible pool of taxes. The Goods and Services Tax (GST) implementation has also altered the fiscal dynamics, with states relying more on compensation from the Centre for revenue shortfalls. The COVID-19 pandemic further strained the fiscal relationship, highlighting the need for greater cooperation and flexibility.
The 15th Finance Commission recommended significant changes in the horizontal distribution formula, increasing the weightage given to demographic performance and tax effort. Looking ahead, discussions are expected to focus on strengthening cooperative federalism, addressing regional disparities, and ensuring sustainable fiscal practices at both the Union and State levels. The role of institutions like the GST Council and the Inter-State Council will be crucial in fostering consensus and resolving disputes.
Practice Questions (MCQs)
1. Consider the following statements regarding the Finance Commission in India: 1. It is a constitutional body established under Article 280 of the Constitution. 2. The recommendations of the Finance Commission are binding on the Union Government. 3. The Finance Commission determines the methodology for distribution of GST revenues between the Union and the States. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: A
Statement 1 is correct as the Finance Commission is a constitutional body under Article 280. Statement 2 is incorrect because the recommendations are advisory, not binding. Statement 3 is incorrect as the GST Council determines the methodology for GST revenue distribution.
2. Which of the following factors is NOT typically considered by the Finance Commission while recommending the distribution of tax revenues between the Union and the States?
- A.Population of the State
- B.Fiscal discipline of the State
- C.Infrastructure development in the State
- D.Foreign policy initiatives of the State
Show Answer
Answer: D
The Finance Commission considers factors like population, fiscal discipline, and infrastructure development. Foreign policy initiatives are not directly relevant to tax revenue distribution.
3. Assertion (A): States are increasingly concerned about the Centre’s approach to fiscal devolution, particularly the cost-sharing formula in centrally sponsored schemes. Reason (R): Centrally sponsored schemes often impose conditions that limit the states' flexibility in utilizing funds according to their specific needs. In the context of the above, which of the following is correct?
- A.Both A and R are true and R is the correct explanation of A
- B.Both A and R are true but R is NOT the correct explanation of A
- C.A is true but R is false
- D.A is false but R is true
Show Answer
Answer: A
Both the assertion and the reason are true, and the reason correctly explains why states are concerned about the Centre's approach to fiscal devolution. The cost-sharing formula and conditions attached to centrally sponsored schemes can limit states' autonomy.
Source Articles
Congress raises fiscal federalism, inequality concerns ahead of Budget - The Hindu
Parliament Budget Session 2025 LIVE updates: Bhartruhari Mahtab raises concern about attack on Hindu temples in U.S. - The Hindu
Congress leaders chalk out strategy for upcoming parliamentary Budget session - The Hindu
Live: Budget session resumes - The Hindu
Congress voices concern over ‘turbulent times’ in Indo-U.S. relations - The Hindu