February 18, 2024
Threat to India's Fiscal Federalism: Central Government's Devolution Shortfall
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Threat to India’s Fiscal Federalism: Central Government’s Devolution Shortfall

Threat to India’s Fiscal Federalism: Central Government’s Devolution Shortfall

Threat to India’s Fiscal Federalism: Central Government’s Devolution Shortfall

India’s fiscal federalism faces a threat as the central government consistently devolves less tax to states than recommended by successive Finance Commissions (FC), warns a report by India Ratings and Research (Ind-Ra). In FY 2025, the government’s budgeted share is 35.5%, falling short of the 15th FC’s recommendation of 41%. States, receiving an average of 35.4% from the divisible tax pool over 2021-2025, experience strained fiscal capacities, impacting funding for priority areas. The shrinking divisible pool, highlighted by the Reserve Bank of India (RBI), calls for a balanced fiscal federalism, emphasizing adherence to FC recommendations and addressing vertical fiscal imbalances.

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