IAS Exam Essay 2017: Impact of New Economic Measures on Fiscal Ties Between the Union and States
Here, we have started approach based guidance for the IAS aspirants- how they should attempt the Essay questions of IAS Mains Exam 2017. This article will help IAS aspirants to find a better approach to attempt a topic of Essay asked in the IAS Mains Exam 2017.
Like every year, the essay paper of IAS Exam 2017 have topics which were in discussion at large during the whole year, has been asked by the UPSC. The ‘fiscal ties between the union and states in India’ was an obvious topic to be asked in UPSC IAS Mains Exam 2017. Here, we are going to provide the blueprint of the topic that should be covered while attempting the topic and hope the IAS aspirants will find it more useful in respect of the IAS Exam 2018.
Topic 2: Impact of the new economic measures on fiscal ties between the union and states in India
India has a federal form of government which means there are many states which collectively forms a ‘Union of states’. Part XI of the Indian constitution specifies the distribution of legislative, administrative and executive powers between the Union, also known as the Central government, and the States of India. But the way of working all the state governments is different from each other and the financial system of these states has also a federal form financial system.
Constitutionally, the essence of the form of federal government is that all the states and the central government will work independently and they will act according to their demarcated spheres of action only. If the respective jurisdictions and responsibilities are equally divided among them, then it is the responsibility of the Union of India to provide them with the sources of raising funds in order to discharge the function of being a state and as an alley of the Union of India. The federal character of public finance in India had been started in the 1970s but it has also been revised and improved in the later period in order to make the strong fiscal relationship between centre and states.
Fiscal Policy Reforms in India and its Performance over the years
1. Economic reforms of 1991
- The measures are taken to achieve its objectives
- To raise resources through taxation
- To restrain the unproductive and non-planned expenditure
- Set back in fiscal policy during mid-nineties after adopting Fifth Pay Commission’s recommendations of raising wages and salaries which severely impacted on the fiscal position of the economy.
2. Prudent Fiscal Policy since 2001-02
- It was to control huge fiscal deficit
- To make balanced tax structure of direct and indirect taxation with minimum exemptions
- Introduced an expenditure policy to restrict the non-planned expenditure
- Set the limit of fiscal deficit at 3% under FRBM Act, 2003-04
- The Finance Commission recommended that the share states in the Union Tax Revenue should be raised from 32% to 42%- a sharp rise of 10% from the 13th Finance Commission’s recommendation of 32%.
3. Roll out of GST- Restructure of Centre and State’s fiscal relationship
- GST- through a Constitutional Amendment Act as ‘One Nation-One Tax’.
- Reconfiguration of Centre-state fiscal relation
- Role and status of States in the newly introduced tax system- constitutionally
- Design and structure of GST- Decision-making body in GST Council
- Cooperation between Centre and States
- The spending decision should be more on the hand of States
- The States can take measures alone to attract foreign and private investment in their respective states
- After accepting recommendations of 14th Finance Commission, the Union Government has assured for the first time that public expenditure will be decisively in the jurisdiction of states to decide their own fiscal destiny by viewing its more functional responsibilities than the Centre
- Consumers are not so hopeful with the implementation of GST and not willing to accept it
- There is huge confusion on the application part of GST and its benefits
- It has raised the General Price level of Goods and Service
- There is negligence on the part of businessman to transfer the benefits to the final consumers
- GST has increased the burden of tax compliance
- Due to GST, revenue of some of the states has been reduced and compelled to share its revenue with the Centre
Losses for the States
- Revenue loss
- Stated compensation is not enough for the states
- Investors will not show up in states due to wrong cash flows, complex account practices
- Cascading effect will vanish
- Establishment of common market across the states
- Improvement in tax compliances
- More transparency in the system will establish
- Lower down the inflation because it reduces the input cost of a product
- Simplified Tax System