Decentralization, indirect tax reform and fiscal federalism in India

Abstract

It is a time honoured cliche that India is a country of immense diversity. In operational terms, a well-established and functioning federalism is a dire necessity for effective governance of the country. A fundamental requirement for this is the establishment of a relationship of trust between all principal stakeholders in India's federal set-up: the central government, states, regions and even villages and panchayats. This involves inter alia that all stakeholders be clear about their responsibilities and rights and that financial flows between these stakeholders are predictable and easily understood. This, of course, does not imply a financial straitjacket but the clear enunciation of rules and circumstances under which departures from the established norms would be undertaken. Such arrangements would require constant review, updating and recalibration of the entire gamut (and not piecemeal) of federal relations - tax, expenditure and transfers. This is particularly important at this time since there is widespread agreement that states have become the new engines of economic growth in India whence inter-state and centre-state financial relations should remain positioned on an even keel to ensure high economic growth and the consequent poverty reduction. Show more