Finance Reviews

‘Indian Fiscal Federalism’ review: A shift towards the Centre

A dominant theme of the five years of the Modi government that generated less commentary than it ought to have is fiscal federalism. Former Reserve Bank Governor and Chairman, Fourteenth Finance Commission, Y.V. Reddy, and Adviser to the Government of Telangana, G.R. Reddy’s masterly critique Indian Fiscal Federalism has opened the debate. On this subject, there cannot be more qualified discussants.

Course reversal

“India’s fiscal federalism, which has withstood the test of times, is at a crossroads because of momentous changes since 2014,” the authors conclude.

The unprecedented and controversial elements the Centre has introduced in the Terms of Reference (ToR) of the Fifteenth Finance Commission, they write, render the constitutional body an instrument of policy of the Union government and the development strongly signals a bias in favour of the Union Government and a shift towards centralisation, a reversal of the trend seen in recent decades. “...the ToR... seem to not just reverse some of the recommendations of the previous Commission but give greater discretion than ever before to the Union Government.”

Both are quite critical of the NITI Aayog and call for its reinvention so that the institutional vacuum in the Centre-State fiscal relations created by the scrapping of the Planning Commission can be filled.

The new constitutional body, the Goods and Services Tax (GST) Council, has earned praise. The authors call it the most significant institutional innovation in the history of fiscal federalism. They are less impressed though by the design-related issues of the GST and caution that many of its features threaten the goal of making the indirect tax system in the country simpler. To make the GST a reality, States ceded more of their fiscal autonomy than the Centre has had to, and so the Centre should accommodate their concerns, the authors write.

The superbly researched and lucidly written book records India’s fiscal history and evolution starting from 1833. The current system was originally put in place in 1858 with the adoption of the principles of the English budget system — even though the British practices conform to a unitary form of government.

The Government of India Act, 1935 established the basic structure of Indian fiscal federalism, one that survives even today. Naturally, this design had not envisaged a partition would take place post-independence and complicate matters.

The governance framework the British left behind had features of a parliamentary system but the issues related to the Princely States meant that the federal system was incomplete: 40% of the territory was outside it.

The 14 Finance Commissions in post-colonial India and the life arc of the Planning Commission are discussed in detail.

Indian Fiscal Federalism; Y.V. Reddy, G.R. Reddy, Oxford University Press, ₹695.

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Printable version | May 4, 2021 8:49:18 AM |

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