Answer:

♤ Fiscal federalism refers to allocation of fiscal rights and responsibilities across different levels of government under the provisions of constitutional arrangement in a federal polity.

♤ The fiscal relations between the Centre and the States have been defined under the Constitutional provisions governing generation and distribution of revenues between the Union and the States as envisaged articles 268- 293 in part XII of the constitution.

♤ The 73rd and 74th constitutional amendment further stipulated a long list of functions and sources of funds for both rural and urban local bodies.

♤ Constitution clearly delineates scheme of distribution of taxing powers which constitute the major sources of revenue for both the Union and the States.

♤ In practice Fiscal federalism in India has been marked by vertical and horizontal imbalances and the recent decades have seen rising demands for greater say of states in sharing of resources, revenues, functions and responsibilities. While the resources of the States are limited, they have larger responsibilities for social, educational and economic development of the people. Further there are wide differences in the level of development of the States.

♤ In order to address the issues of this vertical and horizontal imbalance in the Centre-State and inter-State relations, the Constitution of India has provided for inter-governmental transfers through the mechanism of Finance Commission (Article 280) which is constituted once in five years to recommend transfers of central revenue to the States for a five yearly fiscal cycle.

♤ Additionally, pursuant to73rd and 74th Amendments each State was mandated to appoint a State Finance Commission for allocation of taxes and fees to local government as well as recommending the State’s tax devolution and grants.

♤ Thus, there are three main channels of Central transfers to States; the finance commission transfers, plan transfers and assistance for central sector and centrally sponsored schemes. Till recently such transfers also took place through the Planning Commission.

♤ In a major push to Fiscal federalism in the 2014 Budget the government shifted huge outlays to states by transferring large chunks of central plan outlays. Consequently state plans financed by the Centre have moved up from 26 percent of the total plan expenditure to 59 percent.