Centre-State Financial Relations: A Study on the Role of Finance Commission (original) (raw)
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India's fiscal federalism is a complex system that involves the distribution of financial resources between the central government and its constituent states. At the heart of this system lies the Union Finance Commission (UFC) and State Finance Commissions (SFCs), which play crucial roles in determining the allocation and utilization of funds across different levels of governance. This paper presents a comprehensive analysis of the functioning and significance of the UFC and SFCs in India's fiscal landscape. The study begins by examining the constitutional framework that delineates the powers and responsibilities of the central and state governments in fiscal matters. It then delves into the historical evolution of fiscal federalism in India, tracing the development of the UFC and SFCs over time. By exploring the mandate, composition, and functions of these institutions, the paper sheds light on their role in promoting fiscal discipline, equity, and efficiency. Furthermore, the analysis evaluates the effectiveness of the UFC and SFCs in achieving their objectives, taking into account factors such as resource mobilization, fiscal transfers, and intergovernmental relations. It also examines the challenges and limitations faced by these institutions, including issues related to autonomy, transparency, and accountability. In short, the paper offers insights into potential reforms and policy recommendations aimed at enhancing the functioning of India's fiscal federalism. By addressing gaps in governance, strengthening institutional capacity, and promoting greater fiscal autonomy at the sub-national level, these reforms seek to foster sustainable economic development and inclusive growth across the country. The study paper presents a significant, pressing, and relevant subject from a social, political, and economic standpoint. The research work's topic is clear from the title alone and is thought to be important.
HISTORICAL EVOLUTION OF FEDERAL FINANCES IN INDIA
The paper confirms that the provisions of fiscal federalism laid out in the Indian Constitution are connected to the legacy of the British rule in India. Applying historical analysis the author divides the period from the starting of British imperial administration in India to the enactment of Indian Constitution into five different phases on the basis of the evolution of Centre-Province financial relations. The principles of fiscal federalism in India gradually evolved from highly centralized fiscal governance during the initial period of the British rule until being manifested in the Constitution. Various parliamentary enactments, executive directions, committees and commissions as well as individual intervention contributed to this transformation. The paper further lays out the unique features of the Indian Constitution such as mutually exclusive tax domains and various mechanisms addressing fiscal imbalances due to the Government of India Act of 1935 enacted by the British Parliament. It concludes that while British authorities designed the system of fiscal administration in India after their preferences, the makers of the Indian Constitution preferred to retain the same provisions with minor variations in the Constitution of independent India.
INDIAN CENTRE STATE FINANCIAL RELATIONS: AN INSTITUTIONAL PARADOX
The federal arrangements provided in Indian Constitution, more so in case of financial relations was a watershed in laying the foundations for the intended pattern of socioeconomic development of the nation. However with the passage of time the complexities of the federal arrangements have had a value addition over the period of time, initiated with the setting up of the Planning commission. The complementarities between the two institutions are far less than the rivalries as they pursue the same goals of strengthening the centre – state financial relationship through well defined institutional mechanisms via two different channels the plan and the Non plan, giving rise to a huge set of strains and at times proving counterproductive. This paper is an attempt to address this institutional dichotomy, the problems associated with it and their fallout. It also attempts to bring to light certain other important shortcomings of the existing setup of centre state financial relations, viz, the centralization of revenues/state functions/ horizontal and vertical imbalances. The paper indeed comes up with certain inevitable corrective measures for a frictionless Centre-State relationship that can go a long way in the socio – economic stability of the Indian state. __________________________________________________________________________
The Dynamics of Fiscal Federalism in India and the Global Financial crises
India's fiscal federalism, though asymmetric in nature has so far worked well to keep the federation going. The asymmetry is both vertical as well as horizontal. Former is in terms of the disproportionate allocations of revenue sources and the responsibilities to be discharged to the Central and State governments and the latter, in terms of fiscal capacity of the States themselves. In order to make up for the inadequacy of revenue there is well elaborate mechanism of fiscal transfers from Centre to States. The channels of these transfers are statutory as well as non-statutory. This creates a problem that while States might be getting resources but are deprived of the fiscal instruments to pursue public policies. But the division of fiscal function is well in tune with the principles suggested by Musgrave in late fifties according to which 'economic stabilization' and 'distribution' to be assigned to Centre government while 'allocation' to the States. On a...
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