Impact of the New Economic Measures on Fiscal Ties
Between the Union and States in India
Introduction
- Fiscal relations between the centre and states in India are clearly defined by the Constitution, which lays down the means of tax distribution and provides for appointment of the finance commission every five years.
- The finance commission addresses asymmetry between the centre and states in terms of taxation powers, revenue earnings, and functional responsibilities along with the fiscal considerations.
- In recent years, there have been rising demands by states for fiscal independence and the centre has made attempts to give way for fiscal federalism through measures such as the FRBM (Fiscal Responsibility and Budget Management) Act, 2003, the GST Act, 2016, and implementation of the finance commission’s recommendations.
- Main argument of the essay: The new measures undertaken by the government will go a long way in ensuring fiscal federalism and independence for states. However, the friction created while implementing these measures needs to be addressed properly.
Body
The new economic measures:
- Recommendations of the 14th Finance Commission substantially increased the share of tax revenue of states from 32% to 42%. Further, the central sector schemes have been streamlined, which allows for greater say by states in spending their budgets.
- The FRBM Act, 2003, has set the limit for fiscal deficit, which means the centre has to control its deficit spending and rely on states to spend on development activities.
- The Goods and Services Tax Act again changes the fiscal relations between the centre and states. It will require more cooperation between these entities through the GST council and will give more say to the states in determining future tax configuration. It will also help in creating a single marker for goods and services, and increase transparency in tax collection.
Positive impact of the new measures on fiscal ties:
- In the long run, the states’ revenue will increase due to GST and they will have more independence in spending the revenues according to their requirements.
- Fiscal federalism will be brought about by these measures and the centre-state relations will be on more equal footing than before. This will help address the concerns posed by some states that feel that their voice does not get heard.
- Fiscal federalism will also give rise to competition among states to enhance their own revenues and attract business and investment on their own terms.
Apprehensions about the new measures
- Implementation of GST will lead to loss of revenue for many states at least in initial years. Some states feel that the compensation offered by the council is not enough to make up for the losses.
- The new measures assume that all states have the capacity to utilize and manage the increased resources given to them, while in reality many states lack such administrative and physical capacity. This may lead to regional imbalance in the future.
- Competitive federalism also ignores the differences among states with regard to geography, climate, population densities, and local political environments. Disadvantages posed by these factors can further the regional imbalance.
Conclusion
- The Constitution provides for fiscal rights and responsibilities of the centre and states by providing for a Finance Commission and by dividing the tax powers of these entities.
- The government has brought in multiple new economic measures such as the FRBM Act, GST Act, and the implementation of finance commission recommendations that give the states a greater share in revenues and the freedom to spend this money.
- These measures have both positive and negative impacts-states will get more independence, equal footing, and competitive edge; but they may also face difficulties adjusting to the GST regime and coping up with the management of increased revenues with limited capacities.
- If these new economic measures are to be successful in bringing about a positive impact, there is a need to focus on enhancing the capacities of states, assuaging their fears related to GST, and ensuring them help at all levels on the way to fiscal federalism.
Notes
- Keywords: new economic measures, fiscal ties, union and states
- The essay needs to clearly identify and elaborate upon what the new economic measures are in order to answer the second part of the essay.
- This is a very specific and demanding essay in terms of content; so you should choose such an essay only if you are confident about knowing the content.