(Daily News Scan - DNS English) New Fiscal Federalism in India
Important Points:
Replacing the planning commission of India established in 1950, the government of India constituted NITI Aayog in 2015 to serve the needs and aspirations of people in India in a better way. But the implementation has not touched the desired goals.
NITI Aayog or The National Institute for Transforming India was formed by the Union Cabinet on January 1, 2015. NITI Aayog is the “think tank” of Indian government which provides directional and policy inputs, strategic policies, long term programmes, technical advices to the center and state of the Indian government.
India has undergone many changes since our constitution was made. The new India is now on a firm growth, but looking towards the obstacles, it is time to peep into India’s fiscal federalism and make some important changes to regularize the working of Indian economy, polity and society.
Talking about Fiscal Federalism, Fiscal Federalism is the division of responsibilities with regards to public expenditure and taxation between the different levels of the government. Having a Fiscal Federalism mechanism allows the government to optimize their costs on economies of scale, so that people will get preferred public service, and there will be no unnecessary expenditure.
Federalism in India is rooted with the Canadian model of federalism and describes the authority among national, state and local government.
Earlier the Indian fiscal federalism worked on planning commission and finance commission. Where planning commission of India formulated five-year plans in terms of social and economic growth of the society and looked into different purposes like allocation of country’s labor, foreign exchange, and raw material among different sectors of the economy.
The Finance Commission defined the financial relation between the Central government and State government along with the distribution of tax revenues between the union and the state and amongst the states.
The government replaced planning commission with NITI Aayog with a view that NITI Aayog would be more helpful in providing fresh and new ideas and it provided initiatives like Ayushmaan Bharat, Artificial Intelligence, Water conservation measures which are a good start towards the development of India. But it has not provided a balance in the federal system of India and India now faces fiscal imbalance.
Fiscal imbalance is the imbalance in the revenue powers and expenditure responsibilities of the government. And these imbalances are divided into two types: the vertical imbalance and the horizontal imbalance.
Vertical imbalance occurs when there is a mismatch in the revenue and expenditure of the government at the central and state level. While horizontal imbalance occurs when the same mismatch takes place at the similar level i.e. compared among the states only.
Although the constitution mandates more expenditure responsibilities to State government, the Local and state governments have to rely on Central government for their fund transfers to meet the expenditures. For example, after the Goods and Services tax in India, states share 60 % responsibilities while the Central government performs only 40% constitutionally mandated duties. These expenses are bared by the Finance Commission.
Horizontal imbalances are further divided into two types: type1 and type2.
Type1 imbalance deals with the basic public goods & services like electricity, parks, national defense, health, infrastructure etc. and type2 deals with the capital deficit. These two imbalances require two different policies or instruments and implementing two different policies require two different goals and these two different goals can only be achieved in a smooth manner if the government follows Tinbergen rule.
Tinbergen rule states that the policymakers trying to achieve multiple economic targets need to have control over at least one policy tool for each policy target. This is because the achievement of certain economic targets makes impossible to achieve other goals.
Earlier planning and finance commission worked hand in hand but after the planning commission dissolved, the burden came on finance commission. Here in this situation NITI Aayog is expected to become an instrument for the type2 imbalance. The NITI Aayog will work towards the development of sub-national levels in the economy. But the basic public goods and services should still remain under the finance commission as its primary aim is macro-economic stability and proper functioning of the financial system rather than supporting the growth of infrastructures. With these responsibilities the finance commission should become the first pillar of the new fiscal federalism.
Although NITI Aayog is a think tank of Indian government but it has no resources which renders it to take a transformational initiative. So it should receive significant resources like 1 or 2 % in the GDP to promote the growth of the states and help them to reduce infrastructure deficit. It should use formulas to allocate transformational capital, and formulas used in these allocations should be different from the traditional formulas used by finance commission.
Whatever formulas NITI Aayog uses to utilize grants, should be monitored and evaluated. And all these records should be kept in a separate and independent office of NITI Aayog.
It should not involve itself in the micro-management.
It should also be given an authority at the decision-making table so that it can communicate and buy-in resources from the richer states of the country as resources are transferred from the richer states to the poor states. With this the NITI Aayog should become the second pillar of the new fiscal federalism in India.
Not just the Central and State government are to be looked into, local self-government or the third tier of the Indian government should also get the equal consideration. Differences between the backward states and developed states create regional imbalance. The backwardness of the state can be due to many reasons such as economic inadequacy, failure of planning mechanism etc.
So the third pillar of the new fiscal federalism should be Decentralization. Decentralization involves the transfer of authorities from central to local government. For transferring these responsibilities, amendment 73 and 74 should be implemented with a seriousness leading to birth of missing public funds through creation of Panchayati raj institutions.
The Amendment act 73 was passed in April 1993 and provided a constitutional status to the Panchayati raj institutions in India.
Amendment act 74 was passed in June 1993, known as Nagarpalika Act, provided a constitutional status to the municipalities in India.
With the amendment of act 73 and 74 it will become mandatory to implement article 266 or 268 or 243X or 243H which states “All other public moneys received by or on behalf of the Government of India or the Government of a State shall be entitled to the public account of India or the public account of the State, as the case may be” With these amendments the central and state government will have to contribute an equal proportion of their Central GST and State GST to the third tier. This can finance public goods and services with more than 1% of GDP every year by the urban level bodies to the rural level bodies. Also, the state finance commission should be given the same status as finance commission to regularize the funds, its functions and functionaries. It will strengthen the democratic framework.
And at last, fourth pillar of the new Indian fiscal federalism is the flawless GST model. Though the GST model was passed without any opposition and with the agreement of all the people involved the model still needs further simplification.
Surcharge or service fee or handling and shipping fee on sin goods such as alcohol, tobacco, drugs, soft drinks, fast foods etc. needs to be charged.
Zero rating of exports, which simply means any dealer who is registered gets tax free supplies on his exports.
Integrated goods and services which mean the centre will impose tax on inter-state supplies of goods and services.
And also the e-way bill, e-way bill will allow movement of supplies that crosses 50,000 rs. As in the current situation a supplier cannot carry item more than 50,000 in worth.
All these changes in the fiscal federal system of India will result in more transparency and a new system will grow holding all the four pillars of new federalism which are finance commission, NITI Aayog, decentralization, and flawless GST model.
