What is Fiscal Federalism?

2 minute read
What is Fiscal Federalism?

Fiscal federalism is the financial division of power and responsibilities between different levels of Government in a federal system. In simple terms, it is about who gets to decide how money is collected (through taxes) and how it is spent (on things like education, healthcare, infrastructure, etc.). Consequently, the goal is to achieve a balance between efficiency (providing services effectively) and equity (fair distribution of resources across regions). Furthermore, there are usually two main levels of government, the central or national government and the state or local governments. Thus, the idea is to strike a balance between these levels, so they can work together effectively without one overpowering the other. Now let us get to know about Fiscal Federalism in India.

What is Fiscal Federalism in India?

India’s federal system divides power between the Central government and State governments, with Local governments having some autonomy. Moreover, Fiscal Federalism in India focuses on how these levels share financial resources.

  • Tax Sharing: The Indian Constitution allocates specific tax sources to each level (for example, income tax to the Central government and sales tax to States). There is also a mechanism for sharing certain taxes (such as Goods and Services Tax).
  • Grants-in-Aid: The Central government offers grants to States for specific purposes (for example, rural development).

Thus, fiscal federalism in India aims to guarantee States have sufficient funds to deliver essential services. Especially those States with lower tax bases.

Also Read: Devolution of Powers and Finances up to Local Levels

Who Wrote Indian Fiscal Federalism?

Indian Fiscal Federalism was written by Yaga Venugopal Reddy, a former governor of the RBI and G. Ram Reddy, an advisor on public finance. It was published on the 27th of December, 2018. The book uses the analogy of a game between the Central government and States to explain the complex dynamics of fiscal federalism in India. Furthermore, it dives into the historical perspective and the role of Finance Commissions in resource allocation. 

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