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Rethink the emerging dynamics of India’s fiscal federalism

  • Published
    26th Aug, 2023

This following brief delves into India's evolving fiscal federalism, necessitating reconsideration amidst shifting dynamics.

Evolution and Key Challenges

  • Adaptability issue:The Indian Constitution, molded to manage centrifugal forces, has exhibited adaptability over time, encompassing economic shifts, multi-tier governance structures, and fiscal adjustments.
  • Changed fiscal landscape:The transformation from a planned to market-driven economy, coupled with Constitutional Amendments and fiscal regulations, has reshaped the nation's fiscal landscape.
  • Need for re-valuation:Amidst these changes, there arises a pressing need for a comprehensive reevaluation of India's fiscal federalism to align it with the evolving realities.

Key Focus Areas for Reform

  • Equity in intergovernmental transfersis a central concern. Economic growth often disproportionately benefits the affluent, leading to rising income inequality.
  • Introducing factorssuch as the Human Development Index (HDI) in tax distribution can help create a more equitable approach.
  • Ensuring clarity:The evolving landscape, including a shift to a multi-party system and changing demographics, necessitates a fresh examination of the division of powers and responsibilities among various tiers of government.

Enhancing Fiscal Transparency and Balance

  • Strengthening fiscal federalismalso entails bolstering local governance and addressing off-budget borrowing practices.
  • Uniform system:Neglecting panchayat raj institutions and municipalities hampers the third tier's potential. A uniform financial reporting system for all tiers can enhance transparency, accountability, and efficiency.
  • Reviewing off-budget borrowing:Additionally, reviewing off-budget borrowing practices by both Union and State governments is vital. Ensuring that all income and expenditure transactions fall under budgetary heads promotes transparency and financial discipline.
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