ADHERE TO PRINCIPLES OF FISCAL FEDERALISM

THE CONTEXT: The challenges and tensions in India’s fiscal federalism, highlighting the asymmetry in the distribution of fiscal responsibilities and resources between the central and state governments is a pivotal issue. Outlining recent legal disputes involving Kerala, Tamil Nadu, and Karnataka, which have sought judicial remedies for what they perceive as the Union government’s overreach or neglect in financial matters. The political dynamics that influence fiscal federal relations and the potential economic consequences of these disputes are a cause of concern.

ISSUES:

• Asymmetry in Fiscal Federalism: The inherent asymmetry in India’s fiscal federalism, where the vertical imbalance between the Union and the states has led to disproportionate allocations of revenue sources and responsibilities. This asymmetry has recently shown signs of stress, affecting the fiscal capacity of state governments to fulfill their constitutionally mandated duties.
• Judicial Interventions in Fiscal Matters: There are instances where states such as Kerala, Karnataka, and Tamil Nadu have sought judicial remedies through the Supreme Court for what they perceive as overreach or neglect by the Union government. These cases often revolve around the Union government’s control over borrowing limits and the timely disbursement of funds for disaster relief, which the states argue are crucial for managing local fiscal crises and fulfilling public service obligations.
• Political-Economic Tensions: The disputes between the Union and state governments are not merely fiscal but have deep political undertones. The Union government may use its fiscal controls for political expediency, particularly in dealings with opposition-ruled states. This politicization of fiscal federalism can undermine cooperative federalism and lead to contentious relations.
• Challenges in Managing Public Finance: Fiscal transfers from the Union government to the states do not always succeed in achieving revenue equalization or enhancing the states’ fiscal autonomy. States that rely too heavily on central transfers and borrowing may also potentially engage in fiscally irresponsible behavior.
• Need for Adherence to Fiscal Federalism Principles: There is a need for a return to fiscal federalism principles, such as fiscal discipline and reciprocity, to ensure that both levels of government work towards common objectives like supporting merit goods and managing public resources efficiently. This approach is deemed necessary to prevent fiscal distress and ensure macroeconomic stability.

THE WAY FORWARD:

• Revising Fiscal Responsibility and Budget Management (FRBM) Guidelines: Article 293(3) allows the Union government to place conditions on state borrowing. Amend the FRBM Act to provide more flexibility to states during emergencies or crises while maintaining overall macroeconomic stability. This could involve setting cyclically adjusted borrowing limits for economic downturns or natural disasters.
• Enhancing Transparency and Predictability in Fiscal Transfers: Article 280 mandates the Finance Commission to make recommendations on the distribution of tax revenues between the Union and the states. Implement a more transparent and formula-based system for fiscal transfers that reduces the central government’s discretionary power and provides predictable financial resources to states. This system should consider factors like population, income levels, and special needs due to natural disasters or economic downturns.
• Establishing an Independent Fiscal Council: Introduce a new constitutional amendment to establish an Independent Fiscal Council. This body could function similarly to the Comptroller and Auditor General (CAG), as outlined in Articles 148-151, providing oversight and audits of fiscal policies and practices.4. Improving Disaster Management Funding.
• Standardize and expedite the process for disaster management funding. Establish clear criteria and timelines for releasing funds under the National Disaster Response Fund (NDRF) to ensure timely support for states facing natural disasters. Article 275 could be amended to specifically include provisions for disaster management funding, providing timely and adequate financial support to states during emergencies.
• Strengthening Cooperative Federalism: Foster a cooperative federalism framework by organizing regular consultations and negotiations between the Union and state governments. This would help in preemptively addressing potential conflicts and aligning national economic goals with state-specific needs.

THE CONCLUSION:

A recommitment to the principles of fiscal federalism, emphasizing the need for budgetary discipline, reciprocity, and a focus on merit goods, is a desirable solution. Resolving fiscal disputes should be grounded in sound economics rather than political maneuvering. It underscores the importance of cooperative federalism and the role of states in human development and social goods provision, advocating for a more equitable and efficient fiscal federal structure in India.

UPSC PAST YEAR QUESTION:

Q.1 How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? 2014

Q.2 Explain the significance of the 101st Constitutional Amendment Act. To what extent does it reflect the accommodative spirit of federalism? 2023

MAINS PRACTICE QUESTION:

Q.1 Critically analyze the recent challenges faced by India’s fiscal federalism and the impact of these challenges on the principles of cooperative federalism and macroeconomic stability. Discuss the judiciary’s role in resolving disputes between the Union and state governments in the context of fiscal autonomy and responsibilities.

SOURCE:

https://www.deccanherald.com/opinion/adhere-to-principles-of-fiscal-federalism-2984668