‘Renewed Centre-State dialogue needed to strengthen India’s fiscal federalism’

India’s fiscal federalism is at a criticial juncture and for the 16th Finance Commission’s framework to effectively support both national growth priorities and development at the State level, there must be a renewed spirt of dialogue between the Centre and the States, and greater transparency and stronger institutions, renowned speakers at the high-level conference on the 16th FC Report, held here on Wednesday observed.

Former Reserve Bank of India Governor D. Subba Rao, describing India’s ‘union of States’ as a resilient federal model, pointed out that States now play a central role in managing the economy owing to their most public spending and borrowing. But observing a growing divide between the Union and the States, the limits of States’ freedom to spend, borrow and raise resources need urgent attention, he said. He described the 16th FC as ‘a textbook commission’ that largely followed the constitutional mandate.

Former Deputy Chairman of the Planning Commission Montek Singh Ahluwalia, endorsing Mr. Rao’s concerns, warned against a drift from cooperative and healthy competitive federalism towards ‘combative federalism’.

He stressed the need to confront the unchecked growth of cesses, to revisit the distribution of subjects across the Union, State and Concurrent Lists and to think more boldly about issues such as delimitation, the size of States, and genuine devolution to local governments. The Commission needs to be re-examined for fitness of purpose in a market-oriented, globally integrated India, Mr. Ahluwalia said.

The day-long conference, jointly organised by the Telangana State Finance department and Centre for Economic and Social Studies (CESS), witnessed illustrious panelists deliberate on the framework, focusing on vertical and horizontal devolution of resources between States and Centre, grants-in-aid to State governments and fiscal consolidation.

Telangana Chief Secretary K. Ramakrishna Rao, who emphasised the State’s high own-revenue share of about 80%, while advocating for reduced dependence on Union transfers, called for stronger local resource mobilisation. He observed that removing revenue deficit grants and sector and State-specific grants, which were in the 15th FC, to improve fiscal accountability was a ‘real break from the past’.

On grants-in-aid to State governments, member of the 15th FC Ajay Narayan Jha examined the constitutional design and argued that ‘needs of assistance’ must be assessed in relation to each State’s capacity. He said structurally deficit States, such as in the North-East and Jammu & Kashmir, remain insufficiently addressed, and such States must be explicitly recognised and tackled in future Finance Commission design.

Retired bureaucrat and founder of Foundation for Democratic Reforms Jayaprakash Narayan said State governments have a greater role in delivering public services and undertaking development activities. He pointed out that there are significant inter-State variations in fiscal health. Debt to GSDP ratio or the government’s total outstanding debt in comparison to the size of its economy is the highest for Andhra Pradesh at 61%, followed by Telangana (49%) and Punjab, and the least 12% of Odisha.

Several other speakers pointed to the unchanged Terms of References of the Commission, lack of transparency in cesses and surcharges, high dependency on GDP metric, underutilisation of State’s taxing powers, and the need for better expenditure efficiency metrics and fiscal discipline.

Among the panelists were K.J. Joseph (Gulati Institute of Finance and Taxation), Atri Mukherjee (Department of Economic and Policy Research, RBI), Mythili Bhusnurmath (The Economic Times), Karnam Gayatri (Fiscal Policy Institute), Manish Gupta (National Institute of Public Finance and Policy), N.R. Bhanumurthy (Madras School of Economics), Haseeb A. Drabu (former Finance Minister, J&K), Krishna Bhaskar (TGTRANSCO), Sanjaya Baru (Takshashila Institution), former Special Chief Secretary P.V. Ramesh, G.R. Reddy (founder member, CESS), and Director (CESS) E. Revathi.