FISCAL FEDERALISM

INTRODUCTION

NEED FOR REVISING PROVISIONS

• Failure to apply the principle of Subsidiarity (decision to be taken at lower levels and should be delegated upwards only if the lower levels cannot perform them) because of the over reliance on Government of India Act 1935.
• Transition from a one-party system to a multi-party setup has changed fiscal relations between the Centre and the state. Possibility of preference for states ruled by the same party at the Centre puts other states at a disadvantage.
• Plethora of Centrally Sponsored Schemes (CSS) passes economic burden to the states, especially Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005, the Right of Children to Free and Compulsory Education (RTE) Act 2009, the National Food Security Act (NFSA) 2013. This is reflected in states’ opposition to recent schemes like the PM-USHA (scheme for higher education) scheme which also impose conditionalities for receiving funds from the Centre.
• Asymmetrical financial powers as the Centre relies on off-budget borrowing while states’ borrowing limits are restricted by Article 293 (3) and the FRBM Act; Clear absence of standard budgeting rules for all tiers of govt.
• Poor financial devolution to local bodies; Lack of operational meaning in the lists under 11th and 12th schedule as they were directly taken from the state and concurrent list without deeper specifications.
• Incongruence of Article 282 and the 7th Schedule.

15th FC RECOMMENDATIONS

• Vertical devolution: The share of states in the central taxes for the period 2021-26 to be 41%, (less than the 42% share recommended by the 14th FC; The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the centre’s resources).
• Criteria for horizontal devolution:
• Grants provided: revenue deficit grants, sector specific grants (ex., higher education, health, aspirational districts), state-specific grants, grants to local bodies, disaster risk management.
• Fiscal deficit: Centre to bring down fiscal deficit to 4% of GDP by 2025-26 and for states(i) 4% of GSDP in 2021-22(ii) 3.5% of GSDP in 2022-23 (iii) 3% of GSDP in 2023-26
• Forming a high powered inter governmental group to (i) Review FRBM act (ii) New FRBM framework for centre as well as states.
• Revenue mobilization: Income and asset-based taxation should be strengthened. Expansion of collection at source (TDS/TCS) to reduce dependence on income tax on salaried incomes
• »  States need to streamline methodology for property evaluation; computerized property records should be integrated with the registration of transactions.
• GST: Resolving the inverted duty structure between intermediate inputs and final outputs
• »  Revenue neutrality of GST rate should be restored which has been compromised by multiple rate structures and several downward adjustments.
• »  Rationalization of rate structure by merging the rates of 12% and 18%.
•  Transparency in financial management:
• » Establishment of an independent Fiscal Council with powers to assess records from the centre as well as states.
• »  A time-bound plan for phased adoption of standard-based accounting and financial reporting for both centre and states with eventual adoption of accrual-based accounting.
• »  The centre as well as states should not resort to off-budget financing or any other non-transparent means of financing for any expenditure. A standardized framework for reporting of contingent liabilities should be devised.
• » States’ fiscal responsibility legislations should be consistent with central laws, especially in defining debt; need for more avenues of short-term borrowings for states other than the ways and means advances, and overdraft facility from the RBI.
•    Health: States should increase spending on health to more than 8% of their budget by 2022.

»     Primary healthcare expenditure should be two-thirds of the total health expenditure by 2022.

»     Flexibility in CSS in the health sector for states to adapt; shifting focus from inputs to outcome in CSS; establishment of All India Medical and Health Service.

• Centrally-sponsored schemes (CSS): Assigning a fixed threshold for annual allocation to CSS below which the funding for a CSS should be stopped (to phase out CSS which outlived its utility or has insignificant outlay); Third-party evaluation of all CSS within the given time frame; Funding pattern should be fixed upfront in a transparent manner and be kept stable.
• Miscellaneous Recommedations [ not by FC] :-
• (i) Consideration of equity as an indicator by the Finance Commission; use of HDI as a criteria for horizontal distribution of tax devolution equity .
• (ii) Breaking down items in 11th and 12th schedule down into activities and sub-activities as done by Kerala and few other states for clear demarcation of funds and functions

CONCLUSION