PolitySource: The Hindu
Key Challenges to Fiscal Federalism in India and Strategies for Improvement
Monday, 27 October 2025
Read Original ArticleKey Points
India's fiscal federalism faces significant challenges as recent reforms, including the abolition of the GST compensation cess, threaten state revenues. This is crucial for UPSC aspirants as it pertains to the dynamics of federalism, a key topic in GS Paper 2. Last Updated: 2025-10-27
Key Facts About Fiscal Federalism in India
- End of GST Compensation Cess affects states with low manufacturing capacities.
- Erosion of Fiscal Autonomy due to GST Council's dominance.
- Skewed Revenue Sharing with actual transfers declining post-14th Finance Commission.
- Cess and Surcharge Mechanism reduces effective devolution to states.
- Heavy Dependency on Central Transfers weakens fiscal autonomy.
- Vertical Fiscal Imbalance creates a fiscal gap due to centralized resource-raising.
- Political and Administrative Frictions undermine fairness in central transfers.
- Constitutional Regulation under Part XII governs fiscal relations.
India's Fiscal Federalism: A Broader Context
Fiscal federalism is integral to India's economic and social goals, ensuring equitable distribution of resources across states. The erosion of fiscal autonomy and skewed revenue sharing can hinder India's growth trajectory. Internationally, India's fiscal federalism model is compared with other federations, highlighting the need for reforms to maintain competitive growth and equitable development.
Related Government Schemes/Policies
- Finance Commission: Advises on tax distribution and state grants.
- GST Council: Governs the implementation of GST and related fiscal matters.
UPSC Relevance
- GS Paper 2: Polity and Governance - Federalism, Devolution of Powers.
- Prelims: Questions on GST, Finance Commission, fiscal terms.
- Mains: Analytical themes on cooperative federalism, fiscal autonomy.
- Essay Paper: Topics on federalism and economic governance.
FAQ Section
- What is fiscal federalism? Fiscal federalism refers to the financial relations between units of governments in a federal government system, focusing on the division of governmental functions and financial relations among levels of government.
- Why is fiscal federalism important? It is crucial for ensuring equitable resource distribution, maintaining fiscal autonomy of states, and promoting balanced regional development.
- What are the key features of fiscal federalism in India? Key features include the Finance Commission's role, GST Council's influence, and the constitutional regulation under Part XII, which governs fiscal relations.
Detailed Coverage
- End of GST Compensation Cess affects states with low manufacturing capacities.
- Erosion of Fiscal Autonomy due to GST Council's dominance.
- Skewed Revenue Sharing with actual transfers declining post-14th Finance Commission.
- Cess and Surcharge Mechanism reduces effective devolution to states.
- Heavy Dependency on Central Transfers weakens fiscal autonomy.
- Vertical Fiscal Imbalance creates a fiscal gap due to centralized resource-raising.
- Political and Administrative Frictions undermine fairness in central transfers.
- Constitutional Regulation under Part XII governs fiscal relations.
- Finance Commission advises on tax distribution and state grants.
- Measures to Restore Autonomy include reviewing mandates and sharing tax bases.
- Adopting International Models may enhance state financial autonomy.
- Need for Discussions on constitutional provisions for cooperative federalism.
- Impact of Reforms raises concerns over revenue losses.
- Importance of Fiscal Autonomy for equitable growth.
- Focus on Transparency in financial transfers.
- Strengthening Institutional Mechanisms for ongoing fiscal consultation.
Polity