The financial relationship between the central government (Union) and state governments is a critical aspect of federal governance in India. It involves the distribution of financial resources, revenue-sharing mechanisms, and fiscal responsibilities.
Finance Commission:
The Finance Commission is a constitutional body appointed by the President of India every five years (or earlier as required). Its primary function is to recommend the distribution of net proceeds of taxes between the center and the states, as well as among the states.
The Finance Commission considers factors like population, area, fiscal capacity, and special needs of states in making its recommendations.
Tax Revenue Distribution:
The Constitution of India defines the distribution of taxing powers between the center and states in the Seventh Schedule. The Union List includes taxes levied by the central government, while the State List includes taxes levied by state governments.
The Concurrent List allows both the center and states to levy and collect certain taxes.
Share of Central Taxes:
States receive a share of central taxes as recommended by the Finance Commission. This includes taxes like income tax, corporation tax, and others. The share is an essential component of state finances.
Grants-in-Aid:
The center provides grants-in-aid to states for various purposes, including those recommended by the Finance Commission. These grants can be specific (tied to a particular project) or general (untied).
Plan and Non-Plan Expenditure:
The financial relations also involve planning for development activities. Funds are allocated for Plan and Non-Plan expenditures. Plan expenditures are related to planned developmental activities, while Non-Plan expenditures cover routine expenditures.
Consolidated Funds:
Both the center and states maintain consolidated funds, which include all revenues received and expenditures incurred. The Public Account and Contingency Fund are also maintained to manage specific transactions and emergencies.
Borrowing Powers:
Both the center and states have the power to borrow, but there are restrictions to ensure fiscal discipline. The central government often borrows on behalf of states, and states may borrow up to a certain limit.
Deficits and Fiscal Responsibility:
The Fiscal Responsibility and Budget Management (FRBM) Act aims to ensure fiscal discipline. It sets targets for reducing revenue and fiscal deficits for both the center and states.
Goods and Services Tax (GST):
The introduction of GST is a landmark in financial relations. It replaced multiple indirect taxes levied by the center and states with a unified tax system. The GST Council, consisting of representatives from the center and states, decides on tax rates and other related matters.
Special Category States:
Special category states, often those with hilly or difficult terrain, receive special attention in financial relations. They may get additional central assistance, grants, and other financial benefits.
Finance Ministry and State Finance Departments:
The Ministry of Finance at the central level and the finance departments in state governments play pivotal roles in managing financial relations. They are responsible for budgetary planning, fiscal management, and coordination.
Disaster Management and Calamity Relief:
Financial relations are crucial during natural disasters and calamities. The National Disaster Response Fund (NDRF) and State Disaster Response Fund (SDRF) are mechanisms for providing financial assistance during such emergencies.
Centrally Sponsored Schemes (CSS):
Centrally Sponsored Schemes are programs where the center and states share the financial burden. The center provides a significant share, and states contribute the remaining amount.
Infrastructure Funding:
Funding for critical infrastructure projects often involves collaboration between the center and states. The central government may provide financial assistance or share the funding burden.
Economic Planning and Policy Coordination:
Economic planning and policy coordination involve discussions between the center and states to align financial strategies for overall development.
The financial relationship between the center and states is dynamic and influenced by economic conditions, fiscal policies, and developmental priorities. While cooperative federalism emphasizes collaboration, the financial relations also involve negotiations, discussions, and adherence to constitutional principles and guidelines. The aim is to ensure financial autonomy for states while working towards the collective development and welfare of the nation.
