Indian Fiscal Federalism at the Crossroads: Some reflections

There is a growing recognition that something “fundamental” is happening in Indian fiscal federalism ex-post to the institutional changes like the abolition of the Planning Commission; creation of the NITI Aayog; the Constitutional amendment to introduce GST and the establishment of GST Council; and the historic high tax devolution to the States based on the recommendations of the Fourteenth Finance Commission. Recently the policy makers and experts have raised a few issues, which are (i) to make Finance Commissions permanent or to abolish the Finance Commissions by making the tax devolution share constant through Constitutional Amendment, (ii) the need for an institution to redress spatial inequalities, to fill in the vacuum created by abolishing the Planning Commission, and (iii) arguing the case for Article 282 of the Constitution to be circumscribed. The debates are also focused on whether there is a need establish a link between GST Council and Finance Commissions and should India devise a mechanism of transfer which is predominantly based on sharing of grants for equalization of services rather than tax sharing. What could be a plausible framework for debt-deficit dynamics keeping intact the fiscal autonomy of States and to ensure “output gap” reduction and public investment at the subnational level, without creating bad equilibrium was also another matter of concern. These debates attain significance, especially when for the first time ever a group of States came together to question the Terms of Reference (TOR) of the 15th Finance Commission and there is a growing tension in the Centre-State relations in India.