A SEMINAR AT the Madras Institute of Development Studies (MIDS) examined the growing tensions in fiscal federalism. Professor A Kalaiyarasan, the keynote speaker, highlighted the widening regional disparities in India. For instance, states like Tamil Nadu contribute more to the central tax pool but receive far less in return, only 40 paise for every rupee, compared to Rs. 1.79 for Uttar Pradesh. While helping poorer states is necessary, such imbalance raises concerns about fairness and efficiency. Kalaiyarasan argued that merely increasing fiscal transfers to poorer states like Bihar or U.P. is not enough to reduce inequality. States with stronger human capital, better public infrastructure, and inclusive policies like Tamil Nadu are more capable of utilising financial resources effectively. Moreover, states like Gujarat now have five times the per capita income of Bihar, indicating growing disparities.
The flow of capital has also changed. Before the 1990s, public sector investment dominated, but post-liberalisation, private capital became more important. States like Tamil Nadu, Maharashtra, and Gujarat attracted more private investment, while poorer states lagged behind. Credit utilisation reflects this imbalance, with Tamil Nadu at over 100 per cent and Bihar at only 36 per cent.
On fiscal transfers, Kalaiyarasan explained how earlier allocations were guided by the Gadgil-Mukherjee formula, which considered factors like population and per capita income. This formula was weakened and eventually abandoned after the Planning Commission was replaced by NITI Aayog in 2014. Now, the Finance Commission is the main mechanism for transfers, but its structure favours the centre, revealing India’s asymmetric federalism.
Kalaiyarasan also noted that transfers are driven more by income disparities than population. While larger states like U.P. and Bihar receive substantial funds in absolute terms, their per capita transfers remain low. This suggests that current transfers are insufficient to bridge income gaps.
Professor Rathin Roy, a former advisor to the finance commission, added that fiscal federalism discussions are often too technical and ignore political and historical contexts. He emphasised the importance of understanding India’s federalism as a “Union of States” where state identities are shaped politically. For example, U.P. was once industrialised but has since declined, highlighting the need for tailored development strategies. He also noted inequalities in credit-deposit ratios between northern and southern states. Further, Roy argued for exploring solutions beyond the finance commission to address fiscal disparities effectively.
Finally, Professor M. Suresh Babu criticised the centre for collecting cesses and surcharges without sharing them with states, exacerbating vertical and horizontal imbalances. He also noted conditionalities attached to local body grants, which create friction between the centre and states. FoC
