(GIST OF YOJANA) Towards Cooperative Fiscal Federalism : MARCH-2023

(GIST OF YOJANA) Towards Cooperative Fiscal Federalism


Towards Cooperative Fiscal Federalism


  • Fiscal federalism refers to fiscal relations between Union Government and the State Governments. Both tiers of government need to possess adequate financial resources to discharge their respective responsibilities enshrined in the Constitution effectively. 
  • The announcements in the Union Budget 2023-24 and several initiatives taken in recent years depict the Union Government’s quest to promote this cooperative fiscal federalism in India.
  • The budget allocated a sum of Rs 1.3 crore for providing financial assistance to States for capital expenditure. 
  • Article 246, Article 246A and the Seventh Schedule of the Constitution delineate taxation powers between the Centre and the States. 
  • But the distribution of fiscal power has a centripetal bias with more buoyant tax areas assigned to the Union. The State governments have more expenditure responsibilities for providing core public services.
  • To achieve cooperative fiscal federalism, the government must focus on enhanced fiscal decentralisation and distribution of revenue to the state governments. 
  • In India, the Union and the States together form an organic whole for the utilisation of mobilised resources, the Constitution makers have provided a mechanism to correct the fiscal imbalances through the Finance Commission.

Trends in Fiscal Decentralisation:

  • The annual transfers from the Union to the States have increased from 4.7 per cent of the Gross Domestic Product (GDP) in the financial year 2013-14 to 6.7 per cent of GDP as per revised estimates for 2021-22. 
  • Annual total transfers have increased from Rs 5.24 lakh crore to Rs 15.74 lakh crore during this period.
  • It has been facilitated by the recommendations of the 14th and 15th Finance Commissions. The 14th Finance Commission had recommended an enhanced share of States in the central divisible pool of taxes and duties from 32 per cent to 42 per cent. 
  • The 15th Finance Commission, in its report for the period from 2021-22 to 2025-26, maintained the higher devolution proportion. 
  • After adjusting one percent to provide for the newly formed Union Territories of Jammu and Kashmir and Ladakh from the resources of the centre, the Commission has recommended the devolution of 41% of the central taxes to the States.
  • This has established a decentralised fiscal architecture and drastically altered the composition of the Union transfers to States. 
  • A bulk of tax devolution is now formula based rather than grants. The higher untied resources thus made available to the States offer them greater flexibility and autonomy in incurring expenditure based on their priorities. 
  • Changed fiscal architecture has also been accompanied by major changes in the mode of planning and design of fiscal transfers.

Steps taken towards better financial decentralisation:

  • Formation of Niti Aayog to promote cooperative federalism.
  • Rationalisation of centrally sponsored schemes.
  • Introduction of Goods and Services Tax
  • Cooperation to boost capital expenditure in states.


  • The announcements in the Union Budget 2023-24 and a bouquet of initiatives taken in recent years depict the Union Government's unwavering quest to promote cooperative fiscal federalism in India. 
  • India is likely to move faster on this path in the coming years. With greater fiscal flexibility and expanded fiscal space, States will provide multiple and faster engines for growth and transforming India in the "Amrit-Kaal.”



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Courtesy: Yojana