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The Dynamics of Fiscal Federalism in India and the Global Financial crises

Aziz, Ghazala and Khan, Mohd Saeed (2010): The Dynamics of Fiscal Federalism in India and the Global Financial crises.

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Abstract

India's fiscal federalism, though asymmetric in nature has so far worked well to keep the federation going. The asymmetry is both vertical as well as horizontal. Former is in terms of the disproportionate allocations of revenue sources and the responsibilities to be discharged to the Central and State governments and the latter, in terms of fiscal capacity of the States themselves. In order to make up for the inadequacy of revenue there is well elaborate mechanism of fiscal transfers from Centre to States. The channels of these transfers are statutory as well as non-statutory. This creates a problem that while States might be getting resources but are deprived of the fiscal instruments to pursue public policies. But the division of fiscal function is well in tune with the principles suggested by Musgrave in late fifties according to which 'economic stabilization' and 'distribution' to be assigned to Centre government while 'allocation' to the States. On and off there have been the conflicts but political economic factors always played a role in their resolutions. Problem gets compounded by the fact that since monetary initiatives are with the Centre it can - in fact it does - use them to counter balance any fiscal profligacy committed on account of political expediency (fiscal measures are politically more sensitive). There is empirical evidence that fiscal transfers could not succeed in bringing about revenue equalization or augmenting the fiscal capacity of States while there have been instances of Centre transgressing into the fiscal space of the States. Responding to the global financial crises and resultant economic slow down Centre came out with stimulus packages by putting a pause on the requirements of Fiscal Responsibility Act. While States were also permitted to defer the same to meet the challenges only a handful of States could come out with any package. Proposed study seeks to analyze the dynamics of federalism during the recent crises.

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