24/06/2019 - Indian Economy

KEY POINTS

Imbalances in Fiscal Federalism

·        A vertical imbalance arises because the tax systems are designed in a manner that yields much greater tax revenues to the Central government when compared to the State or provincial governments.

·        But the Constitution mandates relatively greater responsibilities to the State governments.

·        The horizontal imbalances arise because of differing levels of attainment by the States due to differential growth rates and their developmental status in terms of the state of social or infrastructure capital.

Understanding the imbalance

·        The adequate provision of basic public goods and services- Union Finance Commission

·        Acceleration of growth infrastructure or the transformational capital deficits – NITI Aayog.

Strategies

·        NITI Aayog is primarily a think tank with no resources to dispense, which renders it toothless to undertake a “transformational” intervention.

·        Towards this task of cooperative federalism, NITI Aayog 2.0 should receive significant resources (say 1% to 2% of the GDP) to promote accelerated growth in States that are lagging, thus reducing the developmental imbalance.

·        NITI Aayog 2.0 should also be mandated to create an independent evaluation office which will monitor and evaluate the efficacy of the utilisation of such grants.

·        The same perspective will have to be translated below the States to the third tier of government.

·        Decentralisation, in letter and spirit, has to be the third pillar of the new fiscal federal architecture.

·        One of the ways for this is through the creation of an urban local body/panchayati raj institutions consolidated fund.

·        This would mean that Articles 266/268/243H/243X of our Constitution will need to be amended to ensure that relevant monies directly flow into this consolidated fund of the third tier.

·        Through such constitutional amendments, the Centre and States should contribute an equal proportion of their Central GST (CGST) and State GST (SGST) collections and send the money to the consolidated fund of the third tier.

·        For instance, one-sixth sharing of the CGST and SGST with the third tier can generate more than 1% of the GDP every year for the financing of public goods by urban-level bodies. Such an arrangement will be the third pillar of fiscal federalism.

·        Further, the State Finance Commissions should be accorded the same status as the Finance Commission and the 3Fs of democratic decentralisation (funds, functions and functionaries) vigorously implemented. This will strengthen and deepen our foundational democratic framework.

·        GST needs further simplification and extended coverage. We need to quickly achieve the goal of a single rate GST with suitable surcharges on “sin goods,” zero rating of exports and reforming the Integrated Goods and Services Tax (IGST) and the e-way bill.

·        The GST Council should adopt transparency in its working, and create its own secretariat with independent experts also as its staff. This will enable it to undertake further reforms in an informed and transparent manner.

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