Basic principle is “Subsidiarity” i.e. seat of government is nearest to the people for a democracy to be more representative.
FC & Indian Federalism
India is the ―Union of States. To deal with issues of finances between centre and state under Article 280 Finance Commission needs to be appointment by President every five years. But it has only advisory function, which has affected states badly.
State revenues are mostly utilized in payments of loans in large parts of the programmes, projects and services initiated by the Centre are executed in the states. Many of the programmes undertaken by the states also have wider implications for the centre as well as local governments.
“Punchi commission” recommended inclusion for upgrading of the planning model to remove regional imbalances.
“Sarkaria commission” recommended that the Finance Commission has the right credentials (being a constitutional body) to oversee the smooth transfer of funds from the Centre to the States.
“Thirteenth finance commission” report estimated that over the period 2010-2015 the states would get around Rs 14.5 lakhs crore as their share of Central taxes and duties and another Rs 3.1 lakhs crore as grants-in-aid if its recommendations are implemented.
On the one hand, the financial requirements of the states are vastly increasing, and on the other hand, the Centre has been gradually encroaching on financial powers and cornering for itself a major share of the total national resources.
Finance commission should be given more powers and authorization to decide on sharing finances between states and centre because the State governments generally prefer allocation of fiscal resources through the Finance Commission, as it is a constitutionally mandated body.
New Federalism: In light of GST & 14th FC
The latest move by central govt to provide 42% of central pool of taxes (FFC) and combination of GST is a big step in realizing cooperative federalism. However real challenge is lies fulfilling certain conditions which will make it more effective. Few concerns are:
- Whether the greater freedom of expenditure can be used optimally, particularly by the states that are lowest on the development scale
- More money and more freedom without the capacity to spend wisely could worsen development outcomes for the country as a whole
- Whether the expertise of bureaucracy can used wisely?
- Whether there will be coordination between central and state ministry?
How can these issues be resolved?
- In the first case Niti Ayog can play a vital role. It can be used to monitor it and help states in building the capacity. Also, it can help in solving the inter-state disputes like for water and transport.
- Transfer of civil servants should be broadened and driven by the objective of transmitting experience and expertise in specific domains directly across states.
- Reorientation of the roles and responsibilities of central ministries and other institutions and ore coordination with the state ministries is necessary.
- Continuous evaluation of the progress.
Therefore, the new federalism provides an opportunity to significantly improve the effectiveness of public finances, both in terms of revenues and expenditure. However, its full potential will only be realized if appropriate institutional mechanisms and capacities are created both at the centre and the states.
The state’s limited revenue sources proved as a hindrance to the development of effective federalism in the country and this needs to change. Substantiate. (200 Words)
The new federalism, comprising the combination of the GST (Goods and Services Tax) and the FFC (Fourteenth Finance Commission), creates the framework for both mobilizing more resources by government and spending them with greater impact. However, like all good things, realizing these potential benefits will require several conditions to be fulfilled. Examine these conditions and explain how they can be fulfilled. (200 Words)