Fiscal fedralism in India : some issues

The fiscal relations between the central and the state governments represent a sensitive area in large federations, irrespective of the fact whether they are developed or developing countries. India represents a rich, though slightly complicated, case study in the realm of fiscal federalism. The Indian Finance Commission, as observed by late Prof. Lakdawala, is one of the few institutions provided for in the constitution and has no parallel in established federal constitutions. The country would be completing about fifty years of fiscal transfers through the mechanism of the Finance Commission when the recommendations of the Tenth Commission are implemented by 1995 2000 A.D.

This book examines certain issues of fiscal federalism and proposes an alternative system of fiscal transfers on both plan and non-plan. The book traces the evolution of federal finance in India in its historical perspective and proceeds to deal with the alternative system of fiscal transfers. The problems associated with introduction of value added tax (VAT) in a federal economy have been analysed and a possible VAT model is suggested for countries which have a federal structure. This may appeal not only to an Indian reader in view of the current debate on this issue but could be of interest to other federations like Australia, Canada, United States, Argentina and Brazil which have encountered serious difficulties in introducing a VAT in its true spirit.