Podcast
Questions and Answers
What is the primary purpose of the Finance Commission in India?
What is the primary purpose of the Finance Commission in India?
Which of these describes horizontal fiscal imbalance?
Which of these describes horizontal fiscal imbalance?
Which of the following is NOT a source of revenue for state governments?
Which of the following is NOT a source of revenue for state governments?
Which article of the Constitution establishes the Finance Commission?
Which article of the Constitution establishes the Finance Commission?
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What does vertical fiscal imbalance refer to?
What does vertical fiscal imbalance refer to?
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What role does the NITI Aayog play in the context of Indian fiscal federalism?
What role does the NITI Aayog play in the context of Indian fiscal federalism?
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What is the main goal of the Fiscal Responsibility and Budget Management (FRBM) Act?
What is the main goal of the Fiscal Responsibility and Budget Management (FRBM) Act?
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Which of the following is a recent development in the context of fiscal federalism?
Which of the following is a recent development in the context of fiscal federalism?
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What is one of the main objectives of financial management in the public sector?
What is one of the main objectives of financial management in the public sector?
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Which type of budgeting emphasizes justifying all expenses from scratch for each new period?
Which type of budgeting emphasizes justifying all expenses from scratch for each new period?
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What factors are considered crucial in expenditure management?
What factors are considered crucial in expenditure management?
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What significant reform was introduced in India to unify the taxation system?
What significant reform was introduced in India to unify the taxation system?
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Which of the following is a challenge faced in public finance management?
Which of the following is a challenge faced in public finance management?
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Study Notes
Indian Public Finance: Fiscal Federalism
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Definition: Fiscal federalism refers to the financial relations between central and state governments in India, addressing the distribution of revenue and expenditure responsibilities.
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Constitutional Framework:
- Article 246: Enumerates subjects under Union List, State List, and Concurrent List.
- Article 280: Establishes the Finance Commission to recommend distribution of taxes between the Union and states.
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Finance Commission:
- Constituted every five years to assess financial needs and recommend fund distribution.
- Reviews distribution of tax revenues and grants-in-aid to states.
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Revenue Sources:
- Union Government: Taxes such as income tax, GST, excise duty, customs duty.
- State Governments: Taxes like sales tax, property tax, state excise, and certain cesses.
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Vertical Fiscal Imbalance:
- Situations where states rely heavily on central transfers to meet expenditures.
- Central government collects a larger share of revenue compared to states.
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Horizontal Fiscal Imbalance:
- Unequal distribution of resources among states, leading to disparities in financial capabilities.
- Finance Commission recommends measures to address this imbalance.
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Inter-Governmental Transfers:
- Tax Devolution: Sharing of tax revenues collected by the central government with states.
- Grants-in-aid: Financial assistance for specific purposes or to support states with lower revenue capacities.
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State Budgets:
- States create their budgets, balancing their revenues and expenditures while adhering to fiscal responsibility norms.
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Role of Planning Commission/NITI Aayog:
- Formulates strategies for economic development, aligns state plans with national priorities, and assesses progress.
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Fiscal Responsibility and Budget Management (FRBM) Act:
- Aims to ensure fiscal discipline at both central and state levels by setting targets for fiscal deficits and debt levels.
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Current Challenges:
- Increasing fiscal deficit, revenue shortfalls, and reliance on borrowing.
- Need for reforms in tax structure and better resource mobilization.
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Recent Developments:
- Introduction of GST aimed at simplifying tax structure and enhancing revenue collection.
- Emphasis on cooperative federalism through initiatives like the Goods and Services Tax Council.
Definition of Fiscal Federalism
- Refers to financial relations between central and state governments in India, focusing on revenue distribution and expenditure responsibilities.
Constitutional Framework
- Article 246 defines subjects under Union List, State List, and Concurrent List, determining the allocation of powers.
- Article 280 establishes the Finance Commission, responsible for recommending tax distribution between Union and states.
Finance Commission
- Constituted every five years to assess financial needs and recommend fund allocations.
- Evaluates distribution of tax revenues and grants-in-aid to the states to ensure equitable financial support.
Revenue Sources
- Union Government: Major taxes include income tax, Goods and Services Tax (GST), excise duty, and customs duty.
- State Governments: Rely on taxes such as sales tax, property tax, state excise, and specific cesses.
Vertical Fiscal Imbalance
- Arises when states depend heavily on central transfers for expenditure.
- Central government collects a larger portion of the overall revenue, creating funding discrepancies.
Horizontal Fiscal Imbalance
- Occurs due to unequal resource distribution among states, leading to financial capability disparities.
- Finance Commission offers recommendations to mitigate these imbalances.
Inter-Governmental Transfers
- Tax Devolution: Involves the sharing of tax revenues collected by the central government with the states.
- Grants-in-aid: Financial support provided for specific initiatives or to aid states with lower revenue capabilities.
State Budgets
- Each state prepares its own budget, aiming to balance revenues and expenditures while complying with fiscal responsibility norms.
Role of Planning Commission/NITI Aayog
- Develops strategies for economic development, ensuring state plans align with national priorities.
- Assesses progress on various initiatives across states to promote overall economic growth.
Fiscal Responsibility and Budget Management (FRBM) Act
- Designed to promote fiscal discipline at both central and state levels by setting targets for fiscal deficits and debt management.
Current Challenges
- Rising fiscal deficits, revenue shortfalls, and increased borrowing pressures facing both levels of government.
- Need for comprehensive reforms in the tax structure and enhanced resource mobilization strategies.
Recent Developments
- Introduction of GST aimed to streamline the tax structure and boost revenue collection across states.
- Focus on enhancing cooperative federalism through frameworks like the Goods and Services Tax Council.
Definition and Objectives
- Financial management in the public sector encompasses planning, organizing, directing, and controlling financial activities within government institutions.
- Goals include efficient resource allocation, fiscal stability, economic growth, and fostering transparency and accountability in public spending.
Components of Financial Management
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Budgeting:
- Involves both centralized and decentralized processes.
- Types of budgets include annual, performance, and zero-based budgets.
- The Fiscal Responsibility and Budget Management Act (FRBMA) plays a crucial role in budgetary discipline.
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Revenue Management:
- Revenue sources comprise taxation (both direct and indirect), non-tax revenues, grants, and loans.
- Tax structure distinguishes between direct taxes (e.g., income tax) and indirect taxes (e.g., Goods and Services Tax (GST)).
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Expenditure Management:
- Expenditure classification includes plan versus non-plan and capital versus revenue expenditures.
- Control mechanisms include appropriation accounts and expenditure review committees.
Financial Accountability
- Auditing in India is primarily overseen by the Comptroller and Auditor General (CAG), ensuring the accountability of public finances.
- Public financial management systems are designed to improve accountability and transparency in expenditure.
Fiscal Policy
- Fiscal policy is pivotal for maintaining economic stability and fostering growth.
- It interacts dynamically with monetary policy to manage inflation and stimulate economic activity.
Public Debt Management
- Public debt is categorized into internal and external types.
- High public debt can significantly impede economic development and sustainability.
Recent Reforms
- The introduction of the GST aimed to create a more cohesive and efficient tax system across India.
- Increased emphasis on e-governance and digitalization has been implemented to enhance the efficacy of financial management practices.
Challenges in Public Finance
- Key challenges include ensuring an equitable distribution of resources among different sectors.
- Ongoing management of inflation and fiscal deficits poses significant obstacles.
- Adapting to rapid changes in economic conditions and global trends requires flexible financial management strategies.
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Description
This quiz explores the concept of fiscal federalism in India, focusing on the financial relations between central and state governments. It covers key articles of the Constitution, the role of the Finance Commission, revenue sources, and vertical fiscal imbalance. Test your understanding of these essential components of Indian public finance!
