Q.7 Critically analyze the challenges in Centre-State financial relations in India.
Ans: Centre-State financial relations in India are governed by the Constitution, but they face persistent challenges due to vertical and horizontal imbalances, overlapping responsibilities, and inadequate fiscal autonomy. These issues often lead to tensions and inefficiencies in resource allocation and governance.
Challenges in Centre-State Financial Relations
- Vertical Imbalance: The Centre collects a larger share of revenue (through taxes like income tax and GST) but states bear a significant burden of expenditure (on health, education, and infrastructure). Example: States rely heavily on central grants and devolution, as seen in the 14th and 15th Finance Commission recommendations.
- Horizontal Imbalance: Disparities in revenue generation capacities among states create inequities in resource distribution. Example: Industrially advanced states like Maharashtra and Tamil Nadu generate more revenue than poorer states like Bihar and Odisha.
- GST and Revenue Sharing: The introduction of GST has centralized tax collection, reducing states’ fiscal autonomy. Example: States often face delays in GST compensation, as seen during the COVID-19 pandemic when the Centre deferred payments.
- Conditional Grants and Centrally Sponsored Schemes (CSS): The Centre imposes conditions on grants and schemes, limiting states’ flexibility in addressing local priorities. Example: The Pradhan Mantri Awas Yojana (PMAY) mandates specific guidelines, which may not align with states’ housing needs.
- Debt and Fiscal Responsibility: States face borrowing limits under the Fiscal Responsibility and Budget Management (FRBM) Act, restricting their ability to fund development projects. Example: States like Punjab and Kerala have high debt-to-GDP ratios, limiting their fiscal space.
- Inter-State Disputes: Disputes over resource sharing, such as water and minerals, exacerbate financial tensions. Example: The Cauvery water dispute between Karnataka and Tamil Nadu has led to prolonged legal battles and strained relations.
- Inadequate Devolution: Despite recommendations by the Finance Commission, states often receive less than their due share of central taxes. Example: The 15th Finance Commission recommended 41% devolution, but states argue that this is insufficient to meet their needs.
- Impact of COVID-19: The pandemic exacerbated financial stress, with states facing reduced revenues and increased healthcare expenditures. Example: States like Maharashtra and Delhi struggled to fund healthcare infrastructure during the pandemic.
Addressing these challenges requires greater fiscal autonomy for states, equitable resource distribution, and cooperative federalism to ensure balanced and sustainable development.
| Keywords: Vertical Imbalance, Horizontal Imbalance , GST, Fiscal Autonomy , Finance Commission , Cooperative Federalism |
| Extra Info : Centre-State Financial Relations The Indian Constitution has all the features of a federation with the specification of financial powers and functional responsibilities of the Centre and the States .The Union and the State Lists under the Seventh Schedule prescribed in the Constitution under Article 246 contain subjects in respect of which the Union and the States have exclusive jurisdiction to make laws, respectively.In addition, a few subjects are listed in the Concurrent List in respect to which both the Union and the States have concurrent powers to make laws.Article 270 of the Constitution provides for the scheme of distribution of net tax proceeds collected by the Union government between the Centre and the States.The taxes that are shared between the Centre and the States include corporation tax, personal income tax, Central GST, the Centre’s share of the Integrated Goods and Services Tax (IGST) etc. |