DR.Y.V.REDDY

Indian Fiscal Federalism by Dr.Y.V.Reddy and Dr.G.R.Reddy ; Published by Oxford ; Pages 274; Price Rs. 695/-

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Y V Reddy was Chairman, Fourteenth Finance Commission  and Governor, Reserve Bank of India . He belongs to the Indian Administrative Services  and was Secretary ,Finance and Planning in the Government of Andhra Pradesh and Secretary in the Union Ministry of Finance.

 The co-author Dr.G R Reddy is Adviser (Finance) to the Government of Telangana and belongs to the Indian Economic Service . He served the Government of India and the Government of Andhra Pradesh mainly in the area of public finance and Union-State relations. He was Adviser to the Thirteenth Finance Commission.

According to the authors fiscal federalism can be viewed as a game in politics, economics and public finance played by the Union and the States. It can also be seen as an interplay of ideologies, beliefs, intentions or objectives, institutions and instruments. This study attempts to show where fiscal federalism stands now in India.

Our Constitution mandates the appointment of a Finance Commission once every five years by the President to resolve the vertical and horizontal imbalances in the economy. The Government has been exercising its freedom to transfer beyond what is recommended by the Finance Commission.

Over the years there has been increasing attempts  to influence the recommendations of the Finance Commissions  with directives  nudging it towards adopting asymmetric approaches in the treatment of the centre and the States.

A large part of the book deals with the working of  the various Finance Commissions and their recommendations. A separate chapter is devoted to the controversial “Terms of Reference” of the Fifteenth Finance Commission.

There are a number of instruments available to manage the vertical and horizontal imbalances—and these include Tax Devolution, Grants on the recommendations of the Finance Commission and Loans and Grants by the Union to the States.

The most significant institutional innovation in the History of Fiscal Federalism in India is the  Goods and Services Tax Council( GSTC)—a wholly new constitutional body.

The authors declare,  “We have every reason to be proud of our success in the practice of fiscal federalism as it has evolved over the years. But in recent years there are some developments of what they describe as “ fiscal federalism being at the crossroads.”

Decisions regarding the major indirect taxes are now decided jointly by the Union and the States through the mechanism of GSTC, where the Union has a de-facto vote. This marks a significant erosion of the fiscal autonomy of States. The Planning Commission which played a crucial role has been wound up in  2014 and replaced by the Niti-Aayog. The NDC has been replaced. The distinction between Plan and non-Plan  has been abolished. The Terms of Reference of the Fifteenth Finance Commission not only reverse the recommendations of the earlier Finance Commissions but give greater discretion than ever before to the Union Government. States have resented these measures which they perceive as intrusion of the Centre into their domain. It is felt that a co-operative and competitive federalism is being replaced with coercive federalism.

Indian fiscal federalism is continuously evolving and changing. The book explores how India has coped with these changes, how institutions such as the Finance Commission have adapted to these changes and how Indian fiscal federalism has stood the test of time. The authors present the broad contours of a way forward that could simultaneously address institutional as well as policy challenges.

The Government of India Act 1919 and 1935 formalised the tenet of fiscal federalism and revenue sharing between the Centre and the states, aimed at enhancing political, economic and administrative efficiency, and granting increased autonomy to the provinces of India.

There have been several changes and evolution in India’s fiscal federalism since then. The 14th Finance Commission chaired by Dr. Y V Reddy, recommended a historic 42% devolution of revenue to the states, the highest ever till date. Goods and Services Tax was introduced in 2017 to streamline India’s indirect tax structure as a measure to promote cooperative federalism in India, giving the States an enhanced role in formulating and implementing the overhauled taxation system. The NITI Aayog established in 2015 was expected to address new realities of macroeconomic management that were missed by the Planning Commission.

A set of events over the last few years have changed the balance of power between the Central and State Governments. These developments, when taken together, suggest that ‘Fiscal Federalism’ is at a crossroad in India. This book discusses various dimensions of Indian fiscal federalism, focusing on the current fiscal imbalances – both vertical and horizontal – and their correction.

   Recent initiatives in fostering co-operative federalism have opened new chapters of co-operation between Centre and States. The GST Council is functioning on the principle of shared sovereignty. As the authors  point out  the sacrifice of fiscal autonomy at both levels of government in favour of the Council needs to be seen as a ‘trade-off’  so as to reap the benefits of tax harmonisation. The Indian model of GST preserves the essence of Indian federalism. India is, however, a Union of States in which both the Union and the States have to be fiscally strong. While this issue has to be addressed by the Finance Commission, the challenge for the GST Council now is to realise the full potential of GST for enhancing tax-GDP ratio and work on other areas of our economy to enhance its competitiveness.

  There is now general agreement in the country about the importance of fiscal consolidation road map both at national and sub-national levels. While adhering to fiscal deficit targets and debt to GDP ratios, it is equally important to undertake robust expenditure planning based on a ‘commonly agreed expenditure code’ to address the socio-economic challenges without diluting the goals of fiscal consolidation.

According to the authors, the instruments available to the Finance Commission are often inadequate to cater to the tasks and considerations assigned to it. There is a need to redefine objectives and restrict the scope of its work appropriate to the instruments available to it. The Union Government has a dominant role in this regard.

The Niti Aayog suffers from a wide mandate and diffused focus. The organisation should ideally be the focal point for all transfers from the Centre to the States outside the Finance Commission’s  recommendations. It requires significant technical support from experts, and at the same time, substantial political support. 

The book presents an integrated view of all major developments in the area of fiscal federalism with a historical perspective  in  particular the interplay and overlap of institutional mechanisms. It examines persistent as well as immediate concerns, and offers a way forward. A contemporary, timely, and comprehensive analysis of fiscal federalism in India, this practitioners’ perspective is a must-read for all those interested in the subject.

 The book is replete with a number of tables giving a wealth of data. The volume will be of great interest to research scholars and policy makers alike.  Without doubt the book is a valuable addition to the literature on Fiscal Federalism.

P.P.Ramachandran.

31/03/2019.