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Unit 24: Fiscal Federalism in India

• The property of the Union is exempt from State taxation. The property and income of the States Notes
are exempt from the Union taxation. In addition to the provisions for tax-sharing, Article 275 of
the Constitution provides for both general purpose and specific grants.
• Under the Constitution, the Government of India can borrow internally as well as externally.
The Article 292 empowers the Government of India to borrow upon the security of the
Consolidated Fund of India. States too are empowered to borrow under Article 293 which
States that a State cannot borrow outside India.
• The Finance Commission of India came into existence in 1951. It was established under Article
280 of the Indian Constitution of India by the President of India.
• In Centre-State financial relations, the Planning Commission is another important body which
has an important place. The responsibility for taking decisions and implementing plans rests
with the Union and the State Governments.
• It is observed that population has been given greater weightage for the basis of distribution of
shareable taxes amongst the States. The two salient features of tax-sharing determined by the
Finance Commissions are the growing importance of Union excise amongst the shared taxes
and the ascendancy of population as the principal basis of distribution.
• The sprawling powers of the Central Government eroding the foundations of fiscal federalism
have been questioned from time to time. Now, under the changed circumstances, need for
change in the outlook of the Union towards the States and of the States towards the Union is
being felt.
• The Twelfth Finance Commission was incorporated in the year 2005. The commission made
recommendations for the distribution of the net proceeds of the taxes between the Union and
the States. It also recommended taking of certain measures for augmenting the Consolidated
Fund of a State.
• According to the TFC recommendations, the total transfers should be 73.8% more than what its
predecessor allowed with both the share in Central taxes and grants-in-aid being higher. This
means the States have scant cause for complaint over the TFC report.
• The word ‘fisc’ means ‘state treasury’ and ‘fiscal policy’ refers to policy concerning the use of
‘state treasury’ or the government finances to achieve certain macroeconomic goals. Fiscal policy
has however been variously defined by the economists.
• A narrow concept of fiscal policy is budgetary policy. While budgetary policy refers to current
revenue and expenditure of the financial year, fiscal policy refers to budgetary operations
including both current and capital receipts and expenditure.
• The scope of fiscal policy comprises the fiscal instruments and the target variables. Fiscal instruments
are the variables that government can use and maneuver at its own discretion to achieve certain
economic goals.
• Fiscal policy is implemented through fiscal instruments also called ‘fiscal handles’, ‘fiscal tools’
and Tiscal levers’. The changes made in fiscal tools work through their linkage to the target
variables.
• Public borrowings include both internal and external borrowings. The governments make
borrowings, generally, with a view to financing their budget deficits.
• There is no unique fiscal policy that can provide appropriate solution to all kinds of economic
problems and under different condition in different countries and at different points of time.
• The automatic fiscal policy means adopting a fiscal system with built-in-flexibility of tax revenue
and government spending. Built-in-flexibility means automatic adjustment in the government
expenditure and tax revenue in response to rise and fall in GDP.
• The working of automatic stabilizer is simple. In a fast growing economy, tax collection increases
with increase in incomes which constraints aggregate demand. On the other hand,
unemployment decreases causing decline in government spending.

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