Context: 

India is a ‘holding together federation’ with a unitary bias. Beginning with the shift from a planned economy to a market-mediated economic system, there are a number of issues that have varying consequences on India’s fiscal federalism which need review.

Difference between Coming Together and Holding Together Federation:

Transformations Experienced in India: 

• The shift from a planned economy to a market-mediated economic system
• The transformation of a two-tier federation into a multi-tier fiscal system following the 73rd and 74th Constitutional Amendments
• The abolition of the Planning Commission and its replacement with NITI Aayog
• The passing of the Fiscal Responsibility and Budget Management (FRBM) Act
• The Goods and Services (GST) Act 
• The extensive use of cess and surcharges 

Challenges with the Fiscal Federalism in India:

• Prevalence of High Inequality: Chancel and Piketty (2019) estimate that the top 1% earners in India captured very high total income. 
• Burden on States: Under the changing conditions, States are facing an extra burden due to various legislations of the Union Government.
  • Example: Shifting education from the Concurrent List to the State List.
• No Fruits of Re-examination: Although the 73rd and 74th Constitutional Amendments provided an opportunity to re-examine the issue, in practicality, only confusion was added. 
• Irrelevant Retention: The retention of the irrelevant items in the State list is an insult on the third tier. 
• Missing Proper Space for Third Tier: The persistent failure to place the third tier properly on the fiscal federal map of India is a serious issue.
• Absence of a Uniform Financial Reporting System: Lacking standard budgeting rules for all tiers is a major deficit. 
• Lacking Local Democratic Base: The failure in building the local democratic base of India, which has over 3.2 million elected representatives, and 2.5 lakh rural and urban local governments
• Off-Budget borrowings: These borrowings are not provided in the Budget but whose repayment liabilities fall on the Budget. They are generally unscrutinised and unreported. 
• Resources raised by State public sector undertakings and special purpose vehicles: The servicing burden often falls on the State government. 
• Escape Clause: Although the States are disciplined through Article 293(3) and through the FRBM Act, the Union often escapes such controls. 

The Path Ahead:

• Equity-Oriented System: India’s intergovernmental transfer system should be decidedly more equity-oriented. Equity should be the overarching concern of the 16th Finance Commission. 
• Need for revisiting Constitutional Provisions:  Article 246 and the Seventh Schedule should be revisited by the 16th Finance Commission.
  • Article 246 of the Indian Constitution states that the powers between the Union and the  State are classified into the State List, the Union List, and the Concurrent List. 
• Strengthening of the Local Democratic base of India: The prime objective should be to provide basic services of standard quality to every citizen irrespective of her choice of residence.
• Transparent Extra-budgetary Transactions: Union, States and local governments need to bring all extra-budgetary transactions to the public domain.
• Need of a new Local List: To map out the functional and financial responsibilities of the panchayat raj institutions and municipalities is inevitable.

News Source: The Hindu