From UPSC perspective, the following things are important :
Prelims level : Nothing Much
Mains level : New vision for Niti Ayog
India’s Constitution-makers thought of India as a union of States with a centripetal bias, done, advisedly, to preserve the unity and integrity of a newly fledged nation.
Change in situation
- Since then, the Indian economy, polity, demography and society have undergone many changes. The new aspirational India is now firmly on a growth turnpike. It is in this context that we revisit India’s fiscal federalism and propose redesigning it around its four pillars.
- Challenges before federations
- Typically, federations (including the Indian one) face vertical and horizontal imbalances.
A vertical imbalance arises because the tax systems are designed in a manner that yields much greater tax revenues to the Central government when compared to the State or provincial governments; the Constitution mandates relatively greater responsibilities to the State governments. For example, in India, post the advent of Goods and Services Tax (GST), the share of States in the public expenditure is 60% while it is 40% for the Centre to perform their constitutionally mandated duties.
- The horizontal imbalances arise because of differing levels of attainment by the States due to differential growth rates and their developmental status in terms of the state of social or infrastructure capital.
- Traditionally, Finance Commissions have dealt with these imbalances in a stellar manner, and they should continue to be the first pillar of the new fiscal federal structure of India.
Understanding the imbalance
- However, in India, the phenomenon of horizontal imbalance needs to be understood in a more nuanced fashion.
- It involves two types of imbalances. Type I is to do with the adequate provision of basic public goods and services, while the second, Type II, is due to growth accelerating infrastructure or the transformational capital deficits.
- It is here that we believe that NITI Aayog 2.0 must create a niche, assume the role of another policy instrument and become the second pillar of the new fiscal federal structure.
- It is best that the Union Finance Commission be confined to focussing on the removal of the horizontal imbalance across States of the Type I: i.e. the basic public goods imbalance.
- We need another institution to tackle the horizontal imbalance of the Type II; for this the NITI Aayog is the most appropriate institution.
Tasks for Niti Ayog
- NITI Aayog 2.0 should receive significant resources (say 1% to 2% of the GDP) to promote accelerated growth in States that are lagging, and overcome their historically conditioned infrastructure deficit, thus reducing the developmental imbalance.
- NITI Aayog 2.0 should also be mandated to create an independent evaluation office which will monitor and evaluate the efficacy of the utilisation of such grants.
Ushering in decentralisation
- The same perspective will have to be translated below the States to the third tier of government.
- This is crucial because intra-State regional imbalances are likely to be of even greater import than inter-State ones.
- Decentralisation, in letter and spirit, has to be the third pillar of the new fiscal federal architecture.
- De jure and de facto seriousness has to be accorded to the 73rd and 74th constitutional amendments.
- One of the ways for this is through the creation of an urban local body/panchayati raj institutions consolidated fund.
- This would mean that Articles 266/268/243H/243X of our Constitution will need to be amended to ensure that relevant monies directly flow into this consolidated fund of the third tier.
- Further, the State Finance Commissions should be accorded the same status as the Finance Commission and the 3Fs of democratic decentralisation (funds, functions and functionaries) vigorously implemented. This will strengthen and deepen our foundational democratic framework.
Fine-tuning the GST
- The fourth pillar — and in a sense what is central and binding — is the “flawless” or model GST.
- We need to quickly achieve the goal of a single rate GST with suitable surcharges on “sin goods,” zero rating of exports and reforming the Integrated Goods and Services Tax (IGST) and the e-way bill.
- The GST Council should adopt transparency in its working, and create its own secretariat with independent experts also as its staff.
- This will enable it to undertake further reforms in an informed and transparent manner. Thus, India will be able to truly actualise the “grand bargain” and see the GST as an enduring glue holding the four pillars together by creating the new fiscal federal architecture and strengthening India’s unique cooperative federalism.