Why Fiscal Federalism In India Appears To Be A Zero-sum Game

Context: An analysis of trends in fiscal federalism in India.

Trends in fiscal federalism in India

• Widening scope of devolutions: Number of taxes included in the divisible pool has increased since 1951, and the States have been allocated a growing share of the taxes collected in the divisible pool.
• In 2000, as a result of a constitutional amendment, all taxes collected by the Union government were made shareable with states.

Issues with the fiscal federalism in India

• Lack of adequate devolution: State governments have had growing fiscal responsibilities.
  • The actual share of states in the gross revenues of the Union government has been less than 35% in the past five years.
  • Share of cesses in gross central tax revenues has nearly doubled from 10.4% in 2011-12 to 19.9% in 2021-22.
• Stagnant tax revenues: Tax revenue of Union and states stood at about 17% of GDP in 2017-18 and has remained broadly constant since the early 1990s.

Need of the hour

• Implement 15th FC recommendations: Regarding fiscal reforms to increase the tax-to-GDP ratio, especially through an overhaul of goods and services tax.
• A buoyant tax system: can ease the battle for resources in our federal system, and hopefully minimize the mis- trust that has grown in recent years between the Centre and states.