Fiscal Federalism (Yojana 2021) (Download PDF)

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Fiscal Federalism

  • Fiscal Federalism refers to the financial relations between the country՚s Central Govt. and other units of Govt.
  • New reforms are required in public financial management system both at Central and State level.
  • Fiscal federalism helps govt. realize cost efficiency by economies of scale in providing public services corresponding most closely to the preference of the people.
  • Fiscal federalism originated in pre-independence India.
  • Represents how expenditure and revenue are allocated across different layers of Govt. administration.
  • Evolution of fiscal federalism in India has its roots from 1858, the British govt. assumed direct sovereignty over the Indian territory.
  • During the time of Britishers, there was no standardized system of accounting. Also, no annual budgets did not exist.
  • Central Govt. retained the entire control on finances and made grants of money at its discretion.
  • Local Governments collected revenue as the agents of Central Government.
  • In 1927, Simon Commission reviewed the Govt. of India Act, 1919 and recommended the establishment of a federation of Indian States and provinces.
  • Expert Committee of 1931 with Lord Viscount Peel as the Chairman examined the fiscal relations between the Centre and Provinces. Also, it suggested sharing of income tax between Centre and Provinces while fixing the share of Provinces for a period of five years.

CAA

  • 73rd and 74th Constitutional Amendment Acts passed in 1992.
  • The two-tiered Indian federal structure evolved into three-tiered structure.
  • Giving constitutional status to the rural and urban local bodies.
  • State legislature are expected to develop responsibilities, powers and authorities to the Panchayats and Municipalities.
  • To bring about greater decentralization.
  • To increase the involvement of the community in implementing schemes, bringing transparency in decision-making, ensuring accountability, and monitoring of outcomes.

Central Transfers to States

Central Transfers to States

Structural Changes in the Centre State Financial Relations

Increase in United Funds Devolved to States

  • Transfers increased from 60.1 % of total transfers in the award period of the FC-VIII to 68.6 % in the award period of the FC-X and remained stable till the award period of the FC-XII.
  • The share of non-FC transfers increased to around 32 % .
  • Following the recommendation of FC-XIV to increase the share of union tax proceeds from 32 % to 42 % .
  • The share of FC grants in total transfers increased to 74 % .
  • Whooping increase of 10 % in the share of union tax.
  • Quantum of central transfers to states rose from ₹ 5.61 lakh crore in 2011 - 12 to ₹ 6.71 lakh crore in 2014 - 15, increased significantly to ₹ 11.18 lakh crore in 2019 - 20.
Cooperative & Competitive Federalism NITI՚s Initiatives

Rationalization of Centrally Sponsored Schemes

  • Total number of Centrally Sponsored Schemes has evolved over time.
  • 190 at the end of Fifth Plan to 360 at the end of 9th Plan, to 66 at the beginning of 12th Plan.
  • The number of Centrally Sponsored Schemes were reduced to 28 from 66 based on the recommendations of the report submitted by the subgroup formulated under NITI Aayog.
  • Funding pattern of core schemes was changed for large States to 60: 40 (Centre: State) from 70: 30 earlier.
  • The flexibility for States to use funds as per their local needs and requirements increased from 10 % to 25 % .
  • NITI Aayog was entrusted with carrying out third party evaluation to improve efficiency of expenditure and to improve outcomes.

End to Centralized Planning Era and Discretionary Grants

  • Plan and No-Plan distinction in the budgeting exercise done away by the Union Budget 2017 - 18.
  • Untied transfers, discretionary transfers, additional central assistance, special plan assistance, special central assistance were discontinued by the Planning Commission.

Introduction of GsT

  • Article 279 A provided for creation of a GST Council.
  • A joint forum of the union and states.
  • Responsibility of making recommendations on GST rates, taxes, cesses, exemptions, etc.

Outcome Based Budgeting

  • An important expenditure reform was introduced in 2017 - 18.
  • Formulation of output outcome framework for 68 Ministries/Departments along with the Union Budget document.
  • Data Monitoring and Evaluation Office (DMEO) of NITI Aayog and Public Finance (States) of Ministry of Finance as the key coordinators in finalizing and monitoring the framework.

Role of NITI Aayog in Strengthening Federalism

  • Established models and programmes for development of infrastructure.
  • To reignite and establish private-public partnership such as the Centre-State partnership model.
  • Development Support Services to States and Union Territories (DSSS) .
  • Sustainable Action for Transforming Human Capital (SATH) programme.
  • Has been providing relevant technical advice to the Centre, States and UTs.
  • Special steps and support to areas in the north-east, islands and the Himalayas.
  • Endeavored to promote competitive federalism by facilitating improved performance of States/UTs.
  • Dynamic real time-based portals have been put in place to facilitate States/UTs to feed data and monitor their performance in various sectors vis-à-vis other States/UTs including third part validation of data.

Indices Launched by NITI Aayog

Indices Launched by NITI Aayog

Centre and State Relations

  • Important fiscal implications for country finances.
  • Sharing ratio of total debt among center and state, fiscal marksmanship, empowerment of rural and urban local bodies.
  • Rationalization of subsidies.
  • User charges reforms in order to restrict fiscally unconducive policies.
  • Requirement of new reforms in public financial management system both at Centre and State level due to constantly changing economic conditions, development of new technologies and evolving new governance structure.
  • Two-way communication channel needs to remain open all the time for quick resolution of issues.

- Published/Last Modified on: May 11, 2021

Govt. Schemes/Projects, Committees/Govt. Bodies, Yojana

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