From UPSC perspective, the following things are important :
Prelims level : Centre-State Financial Relations
Mains level : Read the attached story
- In India, disputes between the Central and State governments regarding economic policies have a long history, but in recent years, they have escalated in both frequency and intensity, taking on the character of ‘persistent frictions’ within the federal system.
- These disputes have significant implications for India’s economy and its federal structure.
- Impact of Economic Reforms: Economic reforms since 1991 have relaxed many controls on investments, granting some autonomy to States. However, States still rely on the Centre for revenue receipts.
- Shift from ‘Give and Take’ to Hardened Stance: Recent State resistance has transformed the cooperative Centre-State relationship into a more rigid and confrontational dynamic.
Emerging Conflict Areas
- Homogenization of Social Sector Policies: Conflicts arise over the homogenization of social sector policies, where States seek greater discretion, but central agencies push for uniformity.
- Functioning of Regulatory Institutions: Differences emerge regarding the functioning of regulatory institutions, leading to conflicts over jurisdiction.
- Powers of Central Agencies: Central agencies attempt to increase their influence, often imposing their preferences on States.
Economic Consequences of Interference
- Crowding Out State Investments: Centralization of planning and implementation limits States’ flexibility in infrastructure development. This has resulted in reduced State investments, particularly in projects like roads and bridges.
- Fiscal Competition: Frictions with the Centre have spurred fiscal competition between States and the Centre. States compete with each other and with the Centre, leading to complexities in welfare provisioning.
- Inefficiencies Due to Parallel Policies: Frictions have resulted in parallel policies, where either the Centre or States duplicate each other’s efforts. For example, some States have rolled back from the National Pension System (NPS) due to fiscal concerns.
- Article 258A: The Centre relies on States for the implementation of many laws and policies, particularly in concurrent spheres.
- Preserving Interdependence: In a large, diverse, developing society like India, interdependence between the Centre and States is inevitable and needs to be maintained.
- The growing Centre-State disputes in India’s federal system have far-reaching economic implications.
- Balancing autonomy and cooperation between the Centre and States is essential for the nation’s economic growth and effective governance.
Centre-State Financial Relations
|Article 268 to 281||Distribution of taxes between the Central Government and States, specifying various taxes and their sharing.|
|Article 282||Allows the Central Government to provide grants-in-aid to States for specific purposes, including welfare programs.|
|Article 293||Regulates borrowing powers of States, requiring Presidential consent for external borrowing to ensure fiscal discipline.|
|Article 280||Establishes the Finance Commission, which recommends tax revenue and grants distribution between the Centre and States.|
|Goods and Services Tax (GST)||Governed by the Constitution (One Hundred and First Amendment) Act, 2016, and associated laws, transforming taxation in India.|
|Fiscal Responsibility and Budget Management (FRBM) Act||Guides fiscal discipline and management by setting fiscal targets for both Central and State Governments.|
|Inter-State Council||Established under Article 263
Acts as a forum for dialogue between the Central Government and States on various issues.