Points to Remember:
- Vertical imbalance of resources
- Horizontal imbalance of resources
- Dependence on borrowings
- Tax buoyancy issues
- Fiscal deficit concerns
- Inefficient expenditure management
Introduction:
India operates under a federal system, dividing powers and responsibilities between the Union (central) government and the States. Federal finance, therefore, deals with the allocation of resources and revenue between these two levels. A healthy federal financial system is crucial for balanced development and economic stability. However, India’s federal finance system faces several persistent challenges. The Finance Commission, established under Article 280 of the Indian Constitution, plays a vital role in recommending the principles governing the distribution of tax revenue between the Union and the States. Despite this mechanism, significant problems persist.
Body:
1. Vertical Imbalance: This refers to the disproportionate distribution of resources between the Union and the States. The Union government, with its control over major tax sources like corporate income tax and customs duties, generally collects a larger share of revenue. States, on the other hand, rely heavily on relatively less buoyant sources like sales tax (now GST) and stamp duties. This creates a persistent demand for greater financial autonomy for states. The Finance Commission attempts to address this through its recommendations, but the imbalance remains a significant concern.
2. Horizontal Imbalance: This refers to the unequal distribution of resources among the States themselves. Some states are richer and more developed than others, leading to disparities in their revenue generation capacity and developmental needs. This necessitates mechanisms for resource redistribution to ensure equitable development across all states. The Finance Commission considers this aspect while making its recommendations, but achieving perfect horizontal equity remains a challenge.
3. Dependence on Borrowings: Both the Union and State governments often rely heavily on borrowings to finance their expenditures. This leads to increasing public debt, which can hinder long-term economic growth and stability. High levels of debt also limit the governments’ ability to invest in crucial sectors like education and healthcare. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, aims to control fiscal deficits, but its implementation faces challenges.
4. Tax Buoyancy Issues: The revenue generated from existing taxes often doesn’t keep pace with the growth in government expenditure. This necessitates either increasing tax rates (which can have negative economic consequences) or finding new revenue sources. The introduction of the Goods and Services Tax (GST) aimed to improve tax buoyancy and simplify the tax structure, but its full potential is yet to be realized. Issues of tax evasion and administration continue to impact revenue collection.
5. Fiscal Deficit Concerns: A persistent fiscal deficit (the difference between government expenditure and revenue) indicates that the government is spending more than it earns. This can lead to inflation and macroeconomic instability. While the FRBM Act aims to reduce fiscal deficits, both the Union and State governments often struggle to meet their targets, particularly during economic downturns or unforeseen crises.
6. Inefficient Expenditure Management: Lack of efficient expenditure management contributes to fiscal imbalances. This includes issues like leakages, corruption, and ineffective targeting of subsidies. Improving public financial management systems is crucial to optimize resource utilization and achieve better outcomes.
Conclusion:
The problems of federal finance in India are multifaceted and deeply interconnected. Vertical and horizontal imbalances, dependence on borrowings, low tax buoyancy, high fiscal deficits, and inefficient expenditure management all contribute to the challenges. While mechanisms like the Finance Commission and the FRBM Act exist to address these issues, their effectiveness is limited by various factors, including political considerations and administrative capacity. Moving forward, a comprehensive approach is needed, focusing on strengthening tax administration, improving expenditure management, promoting fiscal discipline, and fostering greater cooperation between the Union and State governments. This requires a commitment to transparency, accountability, and evidence-based policymaking, ultimately aiming for a more equitable and sustainable federal financial system that supports inclusive and holistic development across all parts of India, upholding the principles of federalism enshrined in the Constitution.
CGPCS Notes brings Prelims and Mains programs for CGPCS Prelims and CGPCS Mains Exam preparation. Various Programs initiated by CGPCS Notes are as follows:-