Impact of the new economic measures on fiscal ties between the union and states in India Domain
Paraphrase
This essay explores how recent economic policies affect the financial relationship and revenue-sharing arrangements between the central government and state administrations in India.
Intent of the Essay
Analyze the impact of recent economic policies on fiscal ties between the Union and States in India with insights from UPSC Essay PYQ 2017.
The implementation of the Goods and Services Tax (GST) restructured the tax system, altering fiscal relations between the Union and states.
States agreed to relinquish significant taxation powers to the central government, reducing their revenue autonomy.
For instance, states’ share in GST revenue is fixed at 14% of CGST, which may not sufficiently address revenue shortages.
Increased Dependence on the Union
Post-GST, many states have become heavily reliant on central grants and fiscal transfers to meet their financial needs, as their own tax revenue has decreased.
This dependency undermines financial autonomy, affecting the dynamics of federalism in India.
For example, states’ self-generated revenue may drop by 10-15% due to the centralized nature of GST.
Enhanced Role of the Finance Commission
The 15th Finance Commission focuses on resource devolution, fiscal consolidation, and debt sustainability.
While it acknowledges the fiscal needs of states, it also emphasizes the need for efficiency in planning and spending.
Data shows that states failing to meet performance benchmarks may experience reduced central transfers.
Linking Central Schemes to Compliance
Various central schemes have introduced strict compliance conditions, tying state funding to performance targets, thus limiting financial autonomy.
States may be compelled to adapt to these requirements, reducing their discretion over local fiscal matters.
For example, the compliance conditions of schemes like PM-KISAN can influence funding allocation and have political ramifications during elections.
Differences in State Responses
States have varied in their response to new economic measures, depending on their financial health, capacity to mobilize resources, and governance structures.
States with strong administrative frameworks are better able to take advantage of these measures, leading to greater fiscal disparities between them.
For instance, states like Maharashtra and Gujarat have been more successful in utilizing these measures compared to Bihar and Uttar Pradesh.
Case Studies/Examples
Case Study
Key Insights
Relevance
GST Revenue Impacts
Reduction in states’ own tax revenues; reliance on compensation from the Center
Highlights the shift in fiscal federalism dynamics
Maharashtra’s Growth Strategy
Leveraged GST revenues effectively for development projects
Demonstrates the potential benefits when states adapt successfully
Bihar’s Fiscal Strain Post-GST
Increased dependency on central funds leading to budgetary stress
Exhibits challenges faced by states with weaker fiscal structures
Additional Tips
Impact of Economic Policies: Assess how broader economic initiatives such as Aatmanirbhar Bharat and digital economy programs could influence fiscal relations between the Union and states.
Equity Concerns: Discuss how unequal distribution of resources across states may intensify inter-state disparities, leading to imbalances in fiscal arrangements and financial distribution.
Historical Context of Fiscal Relations: Analyze current fiscal arrangements in comparison to the pre-GST era to highlight how financial ties have evolved over time.
Policy Recommendations: Recommend measures to strengthen fiscal federalism, such as allowing states more freedom in generating revenue or reassessing the criteria for central transfers based on performance and specific needs.
