INTRODUCTION
Definition of Fiscal Federalism
 Fiscal Federalism refers to the division of fiscal responsibilities and resources between the central
government and the state governments in a federal system. It involves the sharing of financial resources,
taxation powers, and expenditure responsibilities between the central government and the state
governments. The aim of fiscal federalism is to ensure an efficient and equitable distribution of resources
and responsibilities, and to promote regional development and stability in a federal system.
Importance of Fiscal Federalism in India
 Fiscal Federalism is of utmost importance in India as it enables the central government and state
governments to collaborate and share resources to achieve common goals of economic growth,
development, and social welfare. It ensures that there is a balance between the need for national
integration and the preservation of regional diversity. Fiscal federalism also allows for the efficient allocation
of resources and helps to promote accountability, transparency, and good governance at all levels of
government.

EVOLUTION OF FISCAL
FEDERALISM IN INDIA
Pre-Independence Era
 Prior to India's independence in 1947, fiscal federalism did not exist in its current form. The British
government had a highly centralized system where the provinces had little control over their finances. The
Central Government had the power to levy taxes and allocate funds to the provinces
Post-Independence Era
 After India's independence, the Constitution of India was adopted in 1950, which established a federal
system of government. The Constitution defines the powers and responsibilities of both the central
government and state governments. It also provides for the sharing of financial resources between the two
levels of government. Over the years, the Indian government has implemented several reforms to
strengthen fiscal federalism, including the introduction of the Finance Commission, which recommends the
distribution of financial resources between the central and state governments.

TYPES OF FISCAL FEDERALISM IN INDIA
Vertical Fiscal Imbalance
 This refers to the imbalance in the distribution of financial resources between the central government and
state governments. In India, the central government is responsible for raising the majority of revenues
through taxes and other sources, while the state governments have limited sources of revenue. This
vertical fiscal imbalance leads to a situation where the central government has greater fiscal powers and
resources than the state governments.
Horizontal Fiscal Imbalance
 This refers to the imbalance in the distribution of financial resources among the state governments. Due to
differences in population, economic growth, and other factors, some states have higher revenue-generating
capacity than others. This leads to a situation where some states have more fiscal resources than others,
resulting in a horizontal fiscal imbalance. The Finance Commission plays a crucial role in addressing
horizontal fiscal imbalance by recommending the distribution of financial resources among the state
governments based on various criteria such as population, area, tax efforts, and socio-economic
development indicators.

CENTRAL TRANSFERS TO STATES
Overview of Central Transfers
Central transfers to states refer to the transfer of financial resources from the central government to the state
governments in a federal system. These transfers are an important component of fiscal federalism as
they help to address vertical fiscal imbalance by providing resources to the state governments to meet
their expenditure requirements. The central transfers also help in promoting fiscal discipline and ensuring
that the states have access to the necessary financial resources to undertake developmental activities.

TYPES OF CENTRAL TRANSFERS
There are two types of central transfers:
 Statutory Transfers: These are transfers that are mandated by law, such as the share of states in the
central taxes, which are distributed among the states based on the recommendations of the Finance
Commission. These transfers are based on the principles of equity and efficiency, and aim to address
vertical fiscal imbalance by ensuring that states have access to a share of the central government's
resources.
 Discretionary Transfers: These are transfers that are made at the discretion of the central government,
such as grants-in-aid, loans, and other forms of financial assistance. These transfers are made to
support specific developmental programs or to address specific issues, such as natural disasters or
infrastructure development. Discretionary transfers are used to promote horizontal fiscal balance and
ensure that states with lower revenue-generating capacity have access to the necessary financial
resources.
Overall, central transfers to states play a crucial role in promoting fiscal federalism in India by
ensuring an efficient and equitable distribution of financial resources between the central
government and the state governments.

PERFORMANCE BASED GRANTS
Performance-based grants are a type of discretionary transfer that is made by the central
government to the state governments based on their performance in achieving specific
developmental goals. These grants are designed to incentivize the state governments to
undertake developmental activities and achieve specific targets in a timely and effective
manner.
The criteria for performance-based grants include a range of factors, such as the state's
performance in achieving specific developmental goals, such as health and education
outcomes, poverty reduction, infrastructure development, and other indicators of social and
economic development. The criteria also take into account the state's fiscal discipline,
transparency, and accountability in the utilization of funds.
The performance-based grants are an important tool for promoting fiscal federalism in India as
they encourage the state governments to focus on specific developmental goals and achieve
them in a timely and effective manner. The grants also promote fiscal discipline and
accountability in the utilization of funds, which is essential for ensuring the effective utilization
of public resources. Overall, performance-based grants play a crucial role in promoting the
efficient and equitable distribution of financial resources in India.

M. GOVINDA RAO REPORT (2017)
M. Govinda Rao's report titled "Central Transfers to States in India: Rewarding Performance while Ensuring
Equity" was submitted to NITI Aayog in 2017. The report focused on the issue of central transfers to the
state governments and made recommendations for ensuring an efficient and equitable distribution of
financial resources.

RECOMMENDATIONS OF THE REPORT
The report made several recommendations for promoting fiscal federalism in India, including:
 Rationalization of Central Transfers: The report recommended the rationalization of central transfers to
ensure that the state governments have access to the necessary financial resources to undertake
developmental activities. The report suggested that the central government should provide grants-in-aid
and performance-based grants to the state governments based on their developmental needs and
performance.
 Strengthening of State Finance Commissions: The report recommended the strengthening of State Finance
Commissions to ensure that the state governments have a greater say in the allocation of financial
resources. The report suggested that the State Finance Commissions should be given greater autonomy
and resources to undertake their functions effectively.
 Performance-Based Grants: The report recommended the introduction of performance-based grants to
incentivize the state governments to undertake developmental activities and achieve specific targets in a
timely and effective manner.

ANALYSIS OF THE REPORT
The report by M. Govinda Rao provides valuable insights into the issue of central transfers to the state
governments in India. The recommendations made in the report are important for promoting fiscal
federalism and ensuring an efficient and equitable distribution of financial resources.
However, there are some challenges in the implementation of the recommendations. For instance, the
rationalization of central transfers may require a significant overhaul of the existing system, which may be
difficult to implement in practice. Similarly, the introduction of performance-based grants may require a
robust system of monitoring and evaluation to ensure that the state governments are achieving the
desired targets.
Overall, the report by M. Govinda Rao is an important contribution to the debate on fiscal federalism in India,
and the recommendations made in the report are relevant for policymakers and researchers working in
this area.

OVERVIEW OF 15TH
FINANCE COMMISSION
REPORT (2020-21)
The 15th Finance Commission report covers the period from 2020 to 2025 and provides recommendations
for the distribution of central tax revenues to the state governments in India. The report was submitted to
the President of India in November 2019, and its recommendations were accepted by the central
government in February 2020.

TERMS OF REFERENCE OF
THE COMMISSION
The 15th Finance Commission was appointed in November 2017 and had the following terms of
reference:
To recommend the distribution of the net proceeds of taxes between
the central and state governments.
To review the impact of the Goods and Services Tax (GST) on the
finances of the central and state governments.
To examine the impact of the 14th Finance Commission
recommendations on the fiscal position of the central government.
To recommend measures for augmenting the consolidated fund of the
states.
To examine the impact of the Finance Commission recommendations
on the finances of the local bodies in the states.

ANALYSIS OF THE REPORT
The 15th Finance Commission report has been praised for its emphasis on the principles of equity, efficiency, and
transparency. The report recommends the horizontal distribution of central tax revenues among the state
governments based on a formula that takes into account several factors, including population, area, and fiscal
capacity.
The report also recommends that the state governments should be incentivized to undertake structural reforms in
areas such as agriculture, health, and education. The report suggests the introduction of performance-based
incentives to encourage the state governments to undertake these reforms.
However, the report has also faced criticism for its recommendation to reduce the share of central tax revenues
allocated to the states from 42% to 41%. The recommendation has been criticized by some state governments,
who argue that it will lead to a reduction in their financial resources and hamper their developmental activities.
Overall, the 15th Finance Commission report is an important document for promoting fiscal federalism in India, and
its recommendations are likely to have a significant impact on the distribution of financial resources among the
state governments in the coming years.

DISTRIBUTION OF FUNDS
UNDER THE 15TH
FINANCE COMMISSION
The distribution of funds under the 15th Finance Commission is based on a formula that takes into account
several factors, including population, area, and fiscal capacity. The formula is designed to ensure that the
state governments receive a fair share of the central tax revenues based on their relative need and
capacity to generate revenue.

CRITERIA FOR DISTRIBUTION OF FUNDS
The criteria for the distribution of funds under the 15th Finance Commission are as follows:
 Population - 15% weightage
 Area - 15% weightage
 Income distance - 50% weightage
 Forest and ecology - 10% weightage
 Demographic performance - 12.5% weightage
 Tax effort - 2.5% weightage
The income distance criterion takes into account the per capita income of each state and their
relative distance from the national average. The forest and ecology criterion is designed to
incentivize the state governments to undertake measures to protect and conserve their
natural resources. The demographic performance criterion takes into account the progress
made by the state governments in reducing their population growth rate. The tax effort
criterion is designed to incentivize the state governments to increase their tax collection
efforts.

ANALYSIS OF DISTRIBUTION OF FUNDS
The distribution of funds under the 15th Finance Commission has been praised for its emphasis on equity
and fairness. The formula takes into account several factors that are designed to ensure that the state
governments receive a fair share of the central tax revenues based on their relative need and capacity to
generate revenue.
However, some state governments have expressed concern that the criteria for the distribution of funds do
not adequately take into account their specific developmental needs and challenges. They have argued
that the formula should be revised to give greater weightage to factors such as infrastructure
development and poverty reduction.
Overall, the distribution of funds under the 15th Finance Commission is an important step towards promoting
fiscal federalism in India. However, there is a need to ensure that the formula for the distribution of funds
is revised periodically to take into account the changing developmental needs and challenges of the state
governments.

TAX DEVOLUTION UNDER THE 15TH FINANCE
COMMISSION
Tax devolution refers to the share of central tax revenues that is transferred to the state governments. The
15th Finance Commission has recommended an increase in the share of central tax revenues that is
devolved to the state governments from 32% to 41%.

CHANGES IN TAX DEVOLUTION FROM PREVIOUS
COMMISSIONS
The 15th Finance Commission's recommendation for an increase in tax devolution to the state governments
is a significant departure from the recommendations of previous finance commissions. The 14th Finance
Commission had recommended an increase in tax devolution from 32% to 42%, while the 13th Finance
Commission had recommended an increase from 30.5% to 32%.

ANALYSIS OF TAX DEVOLUTION
The increase in tax devolution recommended by the 15th Finance Commission is a positive step towards
promoting fiscal federalism in India. It is expected to provide the state governments with greater fiscal
autonomy and flexibility to undertake development initiatives that are tailored to their specific needs and
challenges.
However, there are concerns that the increase in tax devolution may lead to a reduction in the funds available
to the central government for important national-level initiatives. There are also concerns that the
increased devolution may not be sufficient to address the developmental needs and challenges of some
of the poorer states.
Overall, the increase in tax devolution recommended by the 15th Finance Commission is a significant step
towards promoting fiscal federalism in India. However, there is a need to ensure that the central
government continues to have adequate resources to undertake important national-level initiatives, while
also ensuring that the poorer states receive adequate support to address their developmental needs and
challenges.

GRANTS-IN-AID UNDER THE 15TH FINANCE
COMMISSION
Introduction to Grants-in-Aid under the 15th Finance Commission
Grants-in-aid are transfers from the central government to the
state governments to support specific developmental initiatives.
The 15th Finance Commission has recommended the provision of
grants-in-aid to the state governments to support the
implementation of centrally sponsored schemes and for other
specific purposes.

TYPES OF GRANTS-IN-AID
The 15th Finance Commission has recommended two types
of grants-in-aid to the state governments:
Sector-specific grants: These grants are provided to the state
governments to support specific sectors, such as health,
education, and rural development.
State-specific grants: These grants are provided to the state
governments to support specific initiatives that are tailored to the
developmental needs and challenges of individual states.

ANALYSIS OF GRANTS-IN-AID
The provision of grants-in-aid is an important step towards promoting fiscal
federalism in India. It provides the state governments with the necessary
financial resources to undertake specific developmental initiatives that are
aligned with the national development agenda.
However, there are concerns that the provision of grants-in-aid may lead to a
lack of fiscal discipline on the part of the state governments. There are also
concerns that the central government may use grants-in-aid as a means of
influencing state-level politics and policies.
Overall, the provision of grants-in-aid by the 15th Finance Commission is a
positive step towards promoting fiscal federalism in India. However, there is
a need to ensure that the provision of grants-in-aid is guided by transparent
and objective criteria, and that the state governments are held accountable
for the use of these funds.

SECTORAL ALLOCATIONS UNDER THE 15TH
FINANCE COMMISSION
Overview of Sectoral Allocations under the 15th Finance
Commission
Sectoral allocations refer to the distribution of funds to specific
sectors such as health, education, agriculture, and infrastructure.
The 15th Finance Commission has recommended a sectoral
allocation formula for the distribution of funds to the state
governments to support the development of these sectors.

ANALYSIS OF SECTORAL ALLOCATIONS
The sectoral allocation formula recommended by the 15th Finance Commission is aimed at ensuring that the
state governments have the necessary resources to undertake developmental initiatives in key sectors.
This is an important step towards promoting balanced and equitable development across the country.
However, there are concerns that the sectoral allocation formula may not adequately account for the specific
developmental needs and challenges of individual states. There is also a need to ensure that the sectoral
allocation formula is transparent and objective, and that it is based on robust data and analysis.
Overall, the sectoral allocation formula recommended by the 15th Finance Commission is a positive step
towards promoting fiscal federalism in India. However, there is a need to monitor its implementation and
make necessary adjustments to ensure that it is aligned with the developmental needs and priorities of
individual states.

ALLOCATION FOR HEALTH SECTOR
The 15th Finance Commission has recommended a
significant increase in the allocation of funds for the health
sector. This is in line with the government's focus on
improving the healthcare infrastructure and services in the
country, especially in light of the COVID-19 pandemic.
The allocation for the health sector includes funds for the
creation of new healthcare facilities, the strengthening of
existing facilities, and the recruitment of healthcare
personnel. This is an important step towards improving the
accessibility and quality of healthcare services in the
country.

ALLOCATION FOR EDUCATION SECTOR
The 15th Finance Commission has also recommended an
increase in the allocation of funds for the education sector.
This is aimed at promoting inclusive and equitable
education, and improving the quality of education in the
country.
The allocation for the education sector includes funds for the
creation of new educational institutions, the improvement of
existing institutions, and the recruitment of qualified
teachers. This is an important step towards ensuring that
every child in the country has access to quality education,
regardless of their socio-economic background.

RECOMMENDATIONS OF THE
15TH FINANCE COMMISSION
Overview of Recommendations of the 15th Finance
Commission
The 15th Finance Commission has made several
recommendations aimed at promoting fiscal federalism in India.
These recommendations cover a wide range of areas, including
tax devolution, grants-in-aid, and sectoral allocations, among
others.

IMPLEMENTATION OF RECOMMENDATIONS
The implementation of the recommendations of the 15th Finance
Commission is crucial to promoting fiscal federalism in India. The
recommendations need to be implemented in a timely and effective
manner to ensure that the state governments have the necessary
resources to undertake developmental initiatives and provide essential
services to their citizens.
It is important to ensure that the implementation of the recommendations
is transparent and objective, and that it is based on robust data and
analysis. There is also a need for effective monitoring and evaluation
mechanisms to ensure that the implementation of the
recommendations is aligned with the developmental needs and
priorities of individual states.

ANALYSIS OF RECOMMENDATIONS
Overall, the recommendations of the 15th Finance Commission are a positive step towards promoting fiscal
federalism in India. The commission has made important recommendations aimed at ensuring that the
state governments have the necessary resources to undertake developmental initiatives and provide
essential services to their citizens.
However, there are concerns that the recommendations may not adequately account for the specific
developmental needs and challenges of individual states. There is also a need to ensure that the
recommendations are aligned with the broader national development goals and priorities.
Overall, the implementation of the recommendations of the 15th Finance Commission is crucial to promoting
fiscal federalism in India. It is important to ensure that the implementation is transparent, objective, and
based on robust data and analysis, and that it is aligned with the developmental needs and priorities of
individual states.

FISCAL FEDERALISM IN INDIA: CHALLENGES AND
SOLUTIONS
Challenges faced in Fiscal Federalism
 Fiscal federalism in India faces several challenges that hinder the effective
functioning of the system. One of the primary challenges is the vertical and
horizontal imbalance in the distribution of fiscal resources between the central
and state governments. There is also a lack of clarity in the assignment of
fiscal responsibilities between the central and state governments, which leads
to overlapping and duplication of roles.
 Another challenge is the lack of coordination and cooperation between the
central and state governments, which results in the suboptimal utilization of
resources and inefficient service delivery. The absence of a comprehensive
and integrated approach to fiscal management and planning is also a
challenge that needs to be addressed.

SOLUTIONS TO OVERCOME CHALLENGES
Several solutions can be adopted to overcome the challenges faced in fiscal
federalism in India. One of the key solutions is to promote greater
decentralization of fiscal powers and responsibilities to the state and local
governments. This can be achieved by strengthening the capacity of state
governments to undertake fiscal management and planning.
Another solution is to establish clear and transparent criteria for the distribution
of fiscal resources between the central and state governments. This can
help reduce the vertical and horizontal imbalances and promote greater
equity in the distribution of resources.
A comprehensive and integrated approach to fiscal management and planning,
which involves all levels of government, can also help overcome the
challenges in fiscal federalism. This approach can ensure the efficient
utilization of resources and effective service delivery.

ANALYSIS OF SOLUTIONS
The solutions proposed to overcome the challenges in fiscal federalism in India
are a positive step towards promoting greater cooperation and coordination
between the central and state governments. However, the success of these
solutions depends on their effective implementation.
For instance, greater decentralization of fiscal powers and responsibilities can
only be effective if the state governments have the necessary capacity and
resources to undertake fiscal management and planning. Similarly, the
establishment of clear and transparent criteria for the distribution of fiscal
resources requires an objective and evidence-based approach to fiscal
management and planning.
Overall, the proposed solutions are a step in the right direction towards
promoting fiscal federalism in India. However, there is a need for continued
dialogue and collaboration between the central and state governments to
ensure the effective implementation of these solutions.

COMPARISON OF FISCAL FEDERALISM IN INDIA
WITH OTHER COUNTRIES
Introduction to Fiscal Federalism in other Countries:
Fiscal federalism is not unique to India; other countries also have
similar systems. In the United States, the federal government is
responsible for certain aspects of the economy, such as defense
and foreign policy, while the states are responsible for other
aspects, such as education and health care. Similarly, Canada
has a federal system in which the provinces have significant
autonomy in matters related to health care, education, and other
areas.

COMPARISON OF FISCAL FEDERALISM IN INDIA
WITH THE UNITED STATES:
One major difference between fiscal federalism in
India and the United States is the level of revenue-
sharing between the federal and state governments.
In the United States, the federal government
provides significant financial assistance to states in
the form of grants, which helps to reduce horizontal
fiscal imbalance. Additionally, the United States has
a well-developed system of intergovernmental
transfers that helps to reduce vertical fiscal
imbalance.

COMPARISON OF FISCAL FEDERALISM IN INDIA
WITH CANADA:
Canada has a more decentralized system of fiscal
federalism than India. The Canadian federal
government transfers a significant amount of
revenue to the provinces, which helps to reduce
horizontal fiscal imbalance. Additionally, the
provinces have significant autonomy in matters
related to health care, education, and other areas.

ANALYSIS OF COMPARISON:
Overall, it is clear that India has a unique system of fiscal
federalism that differs in important ways from other
countries. While India has made significant progress in
reducing vertical fiscal imbalance through tax devolution
and other measures, it still faces significant challenges
related to horizontal fiscal imbalance and the need to
provide adequate resources to states for important social
programs. By studying the fiscal federalism systems of other
countries, India can learn from their successes and failures
to improve its own system.

IMPACT OF FISCAL FEDERALISM ON INDIAN
ECONOMY
Overview of Impact of Fiscal Federalism
Fiscal federalism has a significant impact on the economy of any
country, including India. It determines the distribution of financial
resources and responsibilities between the central and state
governments.
The impact of fiscal federalism can be both positive and negative,
depending on how it is implemented.

POSITIVE IMPACT OF FISCAL FEDERALISM
Fiscal federalism promotes decentralization, which enables local
governments to make decisions that are more responsive to the
needs of the citizens.
It enhances the efficiency of public service delivery by enabling local
governments to tailor services to local needs.
It encourages healthy competition between states and leads to better
economic outcomes by incentivizing them to improve their tax
systems, investment climate, and public services.
It fosters greater accountability and transparency in government, as local
governments are more accountable to their citizens.

NEGATIVE IMPACT OF FISCAL FEDERALISM
• Fiscal federalism can lead to vertical and horizontal imbalances,
where certain states may have greater access to financial resources
than others.
• It can also lead to duplication of efforts and inefficiencies in public
service delivery, as different levels of government may have
overlapping responsibilities.
• It may lead to increased administrative and coordination costs as local
governments require technical expertise and support from the central
government.
• It may also lead to political tensions between the central and state
governments, especially in cases where they have different political
orientations.

ANALYSIS OF IMPACT
• The impact of fiscal federalism on the Indian economy has
been mixed. While it has led to greater decentralization and
accountability, it has also led to imbalances and
inefficiencies in public service delivery.
• The recent reforms in fiscal federalism, such as the
recommendations of the 15th Finance Commission, have
attempted to address some of these challenges.
• Further reforms are needed to ensure that fiscal federalism
promotes economic growth, social equity, and good
governance.

ROLE OF NITI AAYOG IN FISCAL FEDERALISM
Introduction to NITI Aayog
NITI Aayog, short for National Institution for Transforming India
Aayog, is a policy think-tank established by the Indian
government in 2015 to replace the Planning Commission. Its main
objective is to provide strategic and technical advice to the central
and state governments on various policy matters, including
economic and social development, healthcare, education, and
infrastructure. NITI Aayog also plays a crucial role in promoting
cooperative federalism in India, which includes ensuring that
states have greater autonomy and more resources at their
disposal.

ROLE OF NITI AAYOG IN FISCAL FEDERALISM
NITI Aayog has played a crucial role in the evolution of fiscal federalism in
India. It has been actively involved in the formulation and implementation of
policies and programs related to intergovernmental fiscal relations. Some of
its key responsibilities in this area include:
 Advising the central and state governments on issues related to fiscal
federalism, such as tax devolution, grants-in-aid, and sectoral allocations.
 Developing models and tools to assess the performance of states on various
fiscal parameters, such as revenue generation, expenditure efficiency, and
debt sustainability.
 Providing technical assistance to states in enhancing their revenue-raising
capacity and improving the efficiency of public expenditure.
 Developing a framework for cooperative federalism that promotes greater
coordination and collaboration between the central and state governments.

ANALYSIS OF NITI AAYOG'S ROLE
NITI Aayog has made significant contributions to the promotion of fiscal
federalism in India. Its role in developing a performance-based grant system
and in recommending changes to tax devolution and grants-in-aid has
helped to create a more equitable and efficient system of intergovernmental
fiscal relations. Moreover, its emphasis on greater coordination and
collaboration between the central and state governments has helped to
strengthen cooperative federalism in the country.
However, some experts have criticized NITI Aayog for not doing enough to
address the vertical and horizontal imbalances in fiscal federalism,
particularly in terms of resource allocation and distribution. There have also
been concerns about the lack of representation of states in NITI Aayog's
decision-making process, which could undermine the principle of
cooperative federalism. Overall, while NITI Aayog's role in fiscal federalism
is important, there is a need for continuous evaluation and improvement to
ensure that it meets the evolving needs and challenges of Indian federalism.

FISCAL FEDERALISM AND GOOD GOVERNANCE
Fiscal federalism plays an important role in good governance
by promoting democratic values, ensuring accountability,
and encouraging competition among states. The
decentralization of power through fiscal federalism
enhances public participation and transparency, leading to
better governance. It allows for greater flexibility and
responsiveness to local needs, resulting in the efficient
utilization of resources and effective delivery of public
services.

ROLE OF FISCAL FEDERALISM IN GOOD GOVERNANCE
The role of fiscal federalism in good governance can be seen in various
areas such as education, health, infrastructure, and public services.
The decentralized approach through fiscal federalism ensures that
resources are allocated and utilized in a more equitable and efficient
manner, which promotes social welfare.
However, it is essential to note that the effectiveness of fiscal federalism
in promoting good governance depends on the proper implementation
of policies and the efficient management of resources. The
government needs to ensure the effective implementation of policies
at the local level, address regional disparities, and promote inter-state
cooperation to realize the full potential of fiscal federalism in
promoting good governance.

ANALYSIS OF ROLE OF FISCAL FEDERALISM IN
GOOD GOVERNANCE
However, the success of fiscal federalism in promoting good governance
depends on the effective implementation of policies, proper
coordination among different levels of government, and the capacity of
local governments to manage resources. Therefore, there is a need to
strengthen institutional capacity, improve governance frameworks,
and build trust among different levels of government to realize the
potential of fiscal federalism in promoting good governance in India.
In conclusion, fiscal federalism is crucial in promoting good governance
in India. By providing a framework for decentralization, promoting
transparency and accountability, and encouraging competition among
states, fiscal federalism can ensure efficient resource utilization,
effective service delivery, and overall welfare.

FUTURE OF FISCAL FEDERALISM IN INDIA
Overview of Future of Fiscal Federalism
Fiscal Federalism in India has come a long way since its inception
and has evolved with time. It has undergone significant changes
and has been shaped by various factors such as economic
policies, political environment, and social development.
The future of fiscal federalism in India looks promising, as the
country is witnessing a shift towards greater devolution of powers
and resources to the states.

CHALLENGES IN FUTURE
Despite the progress made, there are still several challenges that need to be
addressed to ensure the success of fiscal federalism in India. Some of the
major challenges include:
 Vertical and horizontal imbalances in the distribution of funds and resources
between the central government and the states.
 Lack of coordination and cooperation between the central government and
the states.
 Need for more transparency and accountability in the management of public
finances.
 Growing demands of the states for more autonomy and greater control over
their resources.
 Ensuring that the benefits of fiscal federalism reach all sections of society,
especially the marginalized and disadvantaged.

ANALYSIS OF FUTURE OF FISCAL FEDERALISM
• To ensure the success of fiscal federalism in India, there is a need for a
more collaborative approach between the central government and the
states. The central government needs to work closely with the states to
identify and address the challenges and find sustainable solutions.
• The focus should be on building capacity at the state level to improve the
management of public finances, increase transparency and accountability,
and enhance the delivery of public services.
• There is a need to strike a balance between devolution of powers and
resources to the states and maintaining the integrity of the country as a
whole.
• Overall, the future of fiscal federalism in India looks promising, but it will
require sustained efforts and commitment from all stakeholders to ensure its
success.

CONCLUSION
• In conclusion, fiscal federalism is an important aspect of the Indian political and economic landscape.
• Over the years, there have been significant changes in the way fiscal federalism is structured in India,
with a focus on increasing the autonomy of the states.
• The M. Govinda Rao Report (2017) and the 15th Finance Commission Report (2020-21) have provided
valuable insights into the challenges and opportunities of fiscal federalism in India.
• While there are still challenges to be overcome, such as vertical and horizontal imbalances, the
implementation of performance-based grants, and improving tax devolution, there are also solutions to
address these challenges.
• Looking to the future, fiscal federalism is expected to play a significant role in India's development, as it
can enhance the efficiency and effectiveness of public expenditure.
• In conclusion, it is important to continue to monitor and evaluate the progress of fiscal federalism in India
to ensure that it promotes good governance and contributes to the overall growth and development of the
country.