Fiscal Federalism

Andhra Pradesh is undergoing acute financial distress due to structural fiscal deficits following its bifurcation in 2014. The loss of a major revenue-generating urban center has weakened its own revenue capacity. Amid debates over Special Category Status and competitive populism, calls for an objective, institutional solution have intensified, highlighting the role of the Finance Commission.

Impact of Bifurcation on Fiscal Capacity

• Loss of Revenue-Generating Capital: The bifurcation resulted in the exclusion of a high-revenue urban hub from Andhra Pradesh, drastically reducing its share of own tax revenue and leaving it fiscally weaker than before.
• Absence of Statutory Relief Mechanism: Despite assurances made in Parliament, the Andhra Pradesh Reorganisation Act, 2014, did not include provisions for Special Category Status or any statutory compensation for fiscal losses.
• Policy Shift by the Centre: The central government cited the 14th Finance Commission’s recommendations to justify the discontinuation of the Special Category Status scheme, limiting further institutional recourse for affected States.

Current Financial Strain and Support Mechanisms

• Mounting Fiscal Liabilities: The State is burdened by rising expenditures due to electoral promises and legacy welfare schemes, aggravating the post-bifurcation revenue shortfall.
• Limitations of Existing Special Category Status: The benefits of Special Category Status have been diluted, now offering primarily concessional external loans instead of significant plan-based assistance, making it an inadequate instrument of support.
• Alternative through Special Assistance Package: A discretionary, politically-neutral special assistance package tailored to the State’s structural needs could provide a more effective solution, as seen in earlier precedents like Kalahandi or Bundelkhand packages.

Role of Finance Commission and Need for Reform

• Finance Commission as an Apolitical Institution: The Finance Commission, by virtue of its constitutional mandate, can recommend objective, formula-based compensatory mechanisms without undermining cooperative federalism.
• Evidence from Past State Divisions: Data from State reorganisations post-2000 show that residual States such as Bihar and Andhra Pradesh suffered significant declines in per capita own revenue, while carved-out States registered revenue gains.
• Proposal for Formula-Based Compensation: A threshold-based approach—such as compensating States that lost over 10% of fiscal capacity due to bifurcation—could institutionalise fairness and reduce political arbitrariness in fiscal transfers.

Practice Question:

Q. “Post-bifurcation economic disparities raise critical questions about the design of fiscal federalism in India. Examine the role of the Finance Commission in addressing such disparities, with reference to Andhra Pradesh.”    (250 words)