Challenges and Issues in Indian Fiscal Federalism

Fiscal federalism in independent India evolved over the last 70 years has held the country together, provided identity and scope for various religious, ethnic, linguistic groups to function and has provided a reasonably flexible institutional framework for the functioning of the multilevel governance. There is clearly a strong idea of India gained during the independence struggle and cemented over the years after independence. At the same time, it would be erroneous to conclude that the system has worked to the satisfaction of all the groups and surely there is considerable scope for improvement in several areas. Indeed, development of the country and improving the well-being of 1.2 billion people depends on harnessing their energies which can be achieved only when we have an institutional framework to combining the advantages of a large market unfettered by impediments with sufficient scope to achieve regional specialization depending upon comparative advantage and with the regional governments cooperating and competing with one another to provide efficient level of social and physical infrastructure.

The centre-state relations in India have endured drastic changes during the last two decades of economic reforms. The economy moved away from a centralized federalism to that of cooperative and competitive federalism. The decision of the Union government to accept the recommendations of the 14th Finance Commission (FFC) (2015) to increase tax devolution to 42% of the sharable pool of taxes has increased the flow of untied resources to states is a major boost to the federal autonomy in the country. During the period 2015–2020, the untied statutory transfers would be more than 70% of the aggregate resource transfers from the Union to States and will add the autonomy of states in the allocation of resources. As per the Constitution of India, major taxes are collected by the Union government from the point of efficiency and equity and the proceeds of the same are shared with the state governments. On the other hand, even though major social services like education and health care are on the concurrent list of the Constitution, major expenditure responsibilities are with the state governments.

The States with low taxable capacity need special help in terms of more funds for providing the social and economic services. In addition to ‘equalization’, another important consideration in a sound federal fiscal transfer scheme is for ‘relative tax effort’. It is also one of the important objectives of a federation to induce federating units to make high resource mobilization efforts as is warranted by their capacity. Both fiscal capacity and tax efforts are very important criteria in the scheme of federal fiscal transfers aiming at achieving objectives of equity and efficiency. However, the usefulness of these criteria depends entirely upon their accurate measurement. A wrongly construed or arbitrarily measured taxable capacity or effort can defeat the very purpose of inclusion of these criteria in the scheme of devolution. Here, in this paper the focus is only on fiscal capacity and it is also treated as a measure of horizontal imbalances.

The paper attempts to understand the impact of tax transfers and grants from the Central Governments to the States on the latter economic growth. The study is conducted for the period 2004–05 to 2012–13 and includes 11 ‘Special’ Category states and 17 ‘Non-Special’ Category states. The paper finds that while tax transfers have a positive impact on economic growth of the states; grants have a mixed impact on growth. Fixed Effect model was selected to analyze the data.

The paper makes an attempt to analyze the trends and patterns of revenue and expenditure structure of the Southern States of India and analyze the fiscal gap and dependence of the southern states. The paper is organized in the following order: section one briefly describes the fiscal situation of southern states namely Karnataka, Kerala, Andhra Pradesh and Kerala. Section two explains the trends and patterns of various fiscal gap of the respective southern states. Section three analyses the trends and patterns of central transfers to southern states following which some conclusions are presented.

This work studies fiscal decentralisation at local level governments. It gives a critical narration to the empirical analysis in the fiscal decentralisation. The key components of fiscal decentralisation, fiscal autonomy has been given significant role while looking at the intergovernmental transactions between local governments with state and Centre. The aspects of fiscal responsibility also analysed.

The major objective of the study is to examine the impact of fiscal deficit on economic growth in India using Autoregressive Distributed Lag (ARDL) approach. It also analyzes whether the execution of Fiscal Responsibility and Budget Management (FRBM) Act has any influence on the fiscal deficit-economic growth linkage in India. The ARDL Bounds Testing Approaches to Cointegration confirm the long-run relationship among the selected variables. The estimated results show that fiscal deficit has an adverse effect on economic growth in both the long run and short run in India. The Pre-FRBM Act regime analysis reveals that implementation of FRBM Act has influenced and weakens the relationship between fiscal deficit and economic growth in India. The Government should contain the fiscal deficit and should try to achieve the target set by the FRBM Act.

The smooth transfer of the finances keeping in view the objectives and the requirements of the different levels of the government is an indicator of the healthy federal system. Further, it demarcates the degree of decentralization that exists within a federation. This study examines the relationship between Grants-in-Aid taken as a measure of fiscal decentralization and state domestic product in case of India using panel data for 14 non-specialized states for the period 1981–2014. The results showed that long-run equilibrium relationship exists between the two. The estimates from FMOLS, and dynamic OLS (DOLS) framework revealed that Grants-in-Aid have a positive and significant impact on the state domestic product. So from this angle, it is centralization that is growth enhancing, not decentralization. However, the study failed to detect the true nature of the causation between these two.

In the eve of inconclusive controversy over the “cause-effect” relationship between public debt and economic growth, this paper tries to examine this dynamic relationship empirically for the Indian economy over the period of 1980–1981 to 2015–2016. This paper applies the time-series techniques like unit root test, VAR lag selection criteria, Johansen cointegration test, VECM, VEC granger causality test, impulse response function, and variance decomposition function. The application of Johansen test on first order integrated series shows the presence of long-run cointegration among variables like domestic debt, external debt, and economic growth. The VECM model found the statistically significant and negative coefficient of error correction term in external debt equation expressing the restoration of the long-run equilibrium at the rate of 6.83% every year between growth, domestic debt, and external debt. The infliction of the VEC Granger causality test noticed that there is no feedback relationship among the variables in short run, but there exists the unidirectional causality from economic growth and domestic debt to external debt in long run. The result of impulse response function and variance decomposition function also confirms the long-run causality from growth and domestic debt to external debt. Therefore, these empirical results suggest that reliance on debt for development purposes is not a safe option, even though the presence of no feedback relationship among the said variables in short runs. So, Indian economy should ensure higher growth rate while accumulating public debt and should extend its efforts to increase the revenue to finance the development expenditure.

State governments plays important role in ensuring health of its residence by making them available affordable and quality health services. However, states in India largely differ in their achievements in crucial health indicators like IMR, CMR and MMR. These wide differences in improvement in these health indicators can be attributed to either inadequate public investment in the health sector or inefficiency of utilising these resources or both. The present study mainly focuses on these two aspects namely efficiency of public resources in improving health indicators and adequacy of current level of health inputs in achieving maximum improvement in health indicators. Using Stochastic Frontier Analysis, the study has measured efficiency of major Indian states for the period 2003–2004 to 2012–2013. The efficiency analysis indicates that the states have achieved lower levels of improvements in health indicators than their potential levels. On the other hand, the analysis of adequacy of health inputs indicates that most of the states will not achieve higher improvement of health indicators by mere improving in efficiency. These states, particularly low income states need to increase health inputs drastically in order to improve health indicators further. The study also finds that spread of rural health infrastructure and manpower (spread of sub-centres and health workers) will improve health indicators substantially.

India is the largest democracy with multireligious, multilingual, multiracial and multicultural country of the world. Its high complex and colourful social variety mosaic is clearly a discernible pattern, wherein sociocultural diversity draws its strength and sustenance from India’s composite culture and civilizational plunge. The present study introduces a conceptual distinction between diversity claims and equality claims in order to reflect critically on the relation between federalism and democracy in India. Since, one of the most pressing issues facing by Indian democracy is the politicization of ethno-cultural diversity. Meanwhile, the paper engages with the issue of accommodation of diversity in the wake of federation building and the relation between federalism and democracy in India. A large attempt has been made in the paper to answer the sensitive question as, ‘how far Indian federalism and decentralization contributed as well as succeeded in world’s largest democratic State to foster its cultural diversity?’ India’s federal experiment has undergone, over the past sixty six years, an attempt has been made in the next part of paper therefore to capture the defining features of this experience, the hesitations, mistakes and failures as well as the success of Indian federal system. Viewed from this position, the paper finally concludes with an argument that federalism in India can be understood as a constitutional model, which would not only tolerate diversity but also foster it as an additional value for which the Indian multicultural state stands.

Prior to the Liberalization of Indian economy, India’s tax regime had many problems. In terms of Direct taxes, there was a high degree of progressiveness in 1960s and 1970s that led to adverse effect on tax collection efficiency; further there was a large number of exemptions eroded the narrow tax base in the country. Then enforcement of Direct taxes led to the tax evasion. The efforts reform India’s tax system began in mid-1980s when government announced a Long-term Fiscal policy in 1985. This recognized that the fiscal position of the country is going down and there was a need to make changes in the tax system. Then the government of India appointed a tax reform committee headed by Prof Raja Chellaiah in 1991 to layout agenda for reforming India’s tax system. The committee submitted its three reports in 1991, 1992 and 1993. The report reflected the tax cuts policy and Laffer curve hypothesis. Now much more of the Indian tax system depends on the implementation of second-generation fiscal reforms.