More on Fiscal Federalism

The last couple of posts on this blog (here and here) have dealt with the GST Constitution Amendment and the issues pertaining to fiscal federalism. More on the subject:

1. Pratap Bhanu Mehta has piece entitled GST: A Constitutional Adventure in the Indian Express. He writes:
The claim that the GST cuts down the states’ autonomy is considerably overstated if looked at in a dynamic perspective. First, it is true that the states will not be able to use goods and services taxes to finance local practices. But for a while, they have considerable leeway on petroleum taxes that form a bulk of their revenue. Second, we are possibly underestimating the potential of non-goods and services-related revenue the states can deploy. In fact, one of the weaknesses of the current system was that the revenue efforts of most states were pretty meagre; they often took the easy way out. The degree to which states (and local governments) can deploy other kinds of taxes like property taxes is very much an open one. I would not underestimate the states’ creative capacities to find new sources of revenue if a distortionary mechanism is closed off. And in future, there could even be a debate on allowing some degree of state income taxes. Third, if the aggregate revenues go up because of the GST, that arguably creates a new kind of spending autonomy.
This analysis focusses more on the future capability to raise revenue and less on whether the States’ constitutional autonomy to determine its tax policy is curbed.

2. For those interested, Nirvikar Singh has an instructive essay on fiscal federalism in the Oxford Handbook of the Indian Constitution. Inter alia, Prof. Singh argues that vertical fiscal imbalance, i.e., the revenue raising capability of the States being inadequate to fulfil their constitutional expenditure responsibilities (Under Lists II and III of the 7th Schedule), was constitutionally envisaged. Thus, we have a balancing mechanism in the form of Finance Commission recommendations for Centre-State transfer under Article 280. This imbalance was noticed by the Supreme Court in cases like State of West Bengal v. Kesoram Industries (2004), where it was opined: “In the matter of finances, the States appear to have been placed in a less favourable position […] The Centre consuming the lion’s share of revenue has attracted good amount of criticism at the hands of the States and financial experts”. Similarly, fiscal autonomy of the States in terms of scope for borrowing is also limited (Article 293). States cannot borrow outside India, and cannot borrow without the consent of the Centre if there are outstanding loans to be paid to the Centre or in respect of which the Centre is a guarantor. Prof. Singh points out that the States have been heavily reliant on the Centre as a source of lending. This analysis goes to show that the balance of fiscal federalism also tilts towards the Centre.

(I would like to thank Arun Thiruvengadam for encouraging me to have a look at Nirvikar Singh’s work)

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