{"id":69354,"date":"2025-10-17T11:36:52","date_gmt":"2025-10-17T06:06:52","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=69354"},"modified":"2025-10-17T11:36:52","modified_gmt":"2025-10-17T06:06:52","slug":"restoring-fiscal-space-in-india","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/restoring-fiscal-space-in-india\/","title":{"rendered":"Restoring Fiscal Space for the States in India &#8211; Explained"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><strong>Fiscal Space Latest News<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The growing fiscal imbalance between the Centre and States has reignited debates on restoring fiscal autonomy and equitable tax devolution to States.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Changing Fiscal Dynamics in India<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s fiscal architecture is built upon a <\/span><b>multi-tiered system of governance<\/b><span style=\"font-weight: 400;\">, where the <\/span><b>Centre and States share both taxation powers and expenditure responsibilities<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, this balance has been steadily shifting toward centralisation, particularly after the introduction of the <\/span><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/goods-and-services-tax\/\" target=\"_blank\"><b>Goods and Services Tax<\/b><\/a><b> (GST)<\/b><span style=\"font-weight: 400;\"> in 2017.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While GST simplified indirect taxation and improved tax efficiency, it also <\/span><b>altered the resource autonomy of States<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><b>abolition of the GST compensation cess<\/b><span style=\"font-weight: 400;\">, a five-year mechanism that ensured States were reimbursed for potential revenue losses, has intensified debates on the erosion of fiscal space available to States.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The restructuring of GST slabs in 2025, expected to pass on over Rs. 2 lakh crore in tax benefits to consumers, has further strained State finances.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Although it may boost consumption and tax revenue indirectly, <\/span><b>States argue that no proper estimation of revenue loss has been made<\/b><span style=\"font-weight: 400;\">, and the abolition of the compensation system leaves them fiscally vulnerable.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Fiscal Federalism and Constitutional Framework<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Fiscal relations between the Centre and the States are governed by <\/span><b>Articles 268 to 293<\/b><span style=\"font-weight: 400;\"> of the Constitution. These provisions delineate taxation powers through the <\/span><b>Union and State Lists<\/b><span style=\"font-weight: 400;\">, with the <\/span><b>residuary power<\/b><span style=\"font-weight: 400;\"> resting with Parliament.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><a href=\"https:\/\/vajiramandravi.com\/upsc-exam\/finance-commission\/\" target=\"_blank\"><b>Finance Commission<\/b><\/a><span style=\"font-weight: 400;\">, established under <\/span><b>Article 280<\/b><span style=\"font-weight: 400;\">, determines the principles of tax devolution and grants-in-aid.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Historically, India\u2019s fiscal system has evolved from <\/span><b>tax-by-tax sharing<\/b><span style=\"font-weight: 400;\"> to a <\/span><b>global sharing principle<\/b><span style=\"font-weight: 400;\">, which allocates a fixed percentage of the Centre\u2019s gross tax revenue to the States.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><b>80<\/b><b>th<\/b><b> Constitutional Amendment<\/b><span style=\"font-weight: 400;\"> (2000) initiated this system, with the <\/span><b>11<\/b><b>th<\/b><b> Finance Commission<\/b><span style=\"font-weight: 400;\"> recommending a 29.5% devolution to States.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The share was successively raised, <\/span><b>30.5% (12<\/b><b>th<\/b><b> FC)<\/b><span style=\"font-weight: 400;\">, <\/span><b>32% (13<\/b><b>th<\/b><b> FC)<\/b><span style=\"font-weight: 400;\">, and <\/span><b>42% (14<\/b><b>th<\/b><b> FC)<\/b><span style=\"font-weight: 400;\">, before being revised to <\/span><b>41%<\/b><span style=\"font-weight: 400;\"> after the reorganisation of Jammu and Kashmir.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, <\/span><b>the actual devolution has often fallen short<\/b><span style=\"font-weight: 400;\"> due to the Centre\u2019s increasing reliance on <\/span><b>cesses and surcharges<\/b><span style=\"font-weight: 400;\">, which are excluded from the divisible pool of revenue.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In FY 2025-26, cesses and surcharges are projected at <\/span><b>Rs. 4.23 lakh crore<\/b><span style=\"font-weight: 400;\">, giving the Union government additional fiscal leverage while limiting the States\u2019 shareable resources.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>The Impact of GST on States\u2019 Fiscal Autonomy<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Before GST, States had independent authority to levy taxes such as <\/span><b>Value Added Tax (VAT), octroi, and entry taxes<\/b><span style=\"font-weight: 400;\">, which provided them significant control over their own revenues.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">With GST, <\/span><b>taxation powers have been pooled into a common system<\/b><span style=\"font-weight: 400;\">, jointly managed by the <\/span><b>GST Council<\/b><span style=\"font-weight: 400;\">, where the Centre holds greater voting weight.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">GST also introduced a <\/span><b>destination-based tax model<\/b><span style=\"font-weight: 400;\">, replacing the earlier origin-based system, meaning revenues accrue to the State where goods are consumed rather than where they are produced.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This shift adversely affects <\/span><b>industrialised States<\/b><span style=\"font-weight: 400;\"> such as Maharashtra, Tamil Nadu, and Gujarat, which were traditionally net producers and major revenue contributors.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While studies show that the compensation mechanism initially benefited all States, the <\/span><b>post-compensation regime<\/b><span style=\"font-weight: 400;\"> has reignited concerns about revenue adequacy and fiscal dependence.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><b>cess and surcharge system<\/b><span style=\"font-weight: 400;\">, which allows the Centre to mobilise non-divisible revenue, further accentuates asymmetry in fiscal power.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Declining Fiscal Independence and Central Transfers<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Central transfers constitute around <\/span><b>44% of total State revenue receipts<\/b><span style=\"font-weight: 400;\">, varying from <\/span><b>72% for Bihar<\/b><span style=\"font-weight: 400;\"> to <\/span><b>20% for Haryana<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Wealthier and industrialised States, including <\/span><b>Maharashtra, Tamil Nadu, Karnataka, and Gujarat<\/b><span style=\"font-weight: 400;\">, receive substantially less, underscoring <\/span><b>unequal fiscal dependence<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Comparing the pre- and post-GST periods also reveals a stagnation in fiscal balance:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The Centre collected <\/span><b>67% of total tax revenue<\/b><span style=\"font-weight: 400;\">, while the States collected <\/span><b>33%<\/b><span style=\"font-weight: 400;\">, both before and after GST.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Expenditure responsibilities, however, remained skewed, with <\/span><b>States accounting for over 52%<\/b><span style=\"font-weight: 400;\"> of total public spending, primarily in areas like <\/span><b>health, education, agriculture, and local governance<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This imbalance, coupled with <\/span><b>increasing Centrally Sponsored Schemes (CSS)<\/b><span style=\"font-weight: 400;\"> that often overlap with State subjects, reduces fiscal flexibility.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">States have expressed frustration over <\/span><b>delayed fund transfers, conditional grants<\/b><span style=\"font-weight: 400;\">, and <\/span><b>political bias in allocations<\/b><span style=\"font-weight: 400;\">, particularly in opposition-ruled regions.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Rethinking Fiscal Devolution and Autonomy<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Many States and economists advocate revisiting the principles of fiscal federalism. One proposal suggests <\/span><b>sharing the personal income tax base<\/b><span style=\"font-weight: 400;\"> with States, akin to GST revenue sharing.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If States were allowed a <\/span><b>50:50 share<\/b><span style=\"font-weight: 400;\"> of the personal income tax base (estimated at Rs. 13.57 lakh crore for FY 2025-26), their fiscal dependence on central transfers could be significantly reduced.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Alternatively, States could be empowered to <\/span><b>\u2018top-up\u2019 income tax rates<\/b><span style=\"font-weight: 400;\">, allowing them to mobilise additional revenue without altering the central tax structure. Such measures would:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Strengthen States\u2019 fiscal capacity and liquidity.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Reward progressive and high-performing States for their revenue generation.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Enhance accountability by aligning tax collection with expenditure responsibilities.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Another suggested model, inspired by <\/span><b>Canada\u2019s federal structure<\/b><span style=\"font-weight: 400;\">, envisions the <\/span><b>Centre collecting 46% of total revenue and spending 40%<\/b><span style=\"font-weight: 400;\">, while <\/span><b>sub-national governments collect 54% and spend 60%<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Way Ahead<\/strong><\/h2>\n<ul>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The erosion of fiscal space for States is not merely a financial issue; it strikes at the core of <\/span><b>India\u2019s cooperative federalism<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">With <\/span><b>rising developmental aspirations<\/b><span style=\"font-weight: 400;\"> and expanding welfare responsibilities, States require greater financial autonomy to deliver efficient public services.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Going forward, reforms should focus on:<\/span>\n<ul>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"2\"><b>Incorporating cesses and surcharges<\/b><span style=\"font-weight: 400;\"> into the divisible pool.<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"2\"><b>Revising Finance Commission criteria<\/b><span style=\"font-weight: 400;\"> to balance equity with efficiency.<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"2\"><b>Strengthening GST Council deliberations<\/b><span style=\"font-weight: 400;\"> to ensure parity in decision-making.<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"2\"><b>Encouraging fiscal innovations<\/b><span style=\"font-weight: 400;\">, such as State bonds and public-private partnerships.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><b>Source:<\/b><strong> <a href=\"https:\/\/www.thehindu.com\/business\/Economy\/restoring-fiscal-space-for-the-states\/article70171047.ece#:~:text=Towards%20fiscal%20autonomy&amp;text=It%20is%20against%20this%20backdrop,is%20%E2%82%B914%2C22%2C444%20crore.\" target=\"_blank\" rel=\"nofollow noopener\">TH<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The end of GST compensation and the centralisation of taxation powers have reignited concerns among Indian States over shrinking fiscal space.<\/p>\n","protected":false},"author":21,"featured_media":69359,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[3295,60,22,59],"class_list":{"0":"post-69354","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-fiscal-space","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/69354","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/21"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=69354"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/69354\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/69359"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=69354"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=69354"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=69354"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}