Fiscal Federalism in India

Abstract

Abstract In an ideal federation, each level of government should have its own revenue resources to sufficiently finance its own expenditures. In most of the federal countries, due to overlapping revenue and expenditure assignments warranted by their constitution, the fiscal balance is elusive. Vertical fiscal imbalance (VFI) arises when the own-revenue potential of regional governments is inadequate to meet their own expenditure. As noted in the literature, VFI adversely affects the fiscal performance of the regional government. This study examines the VFI for India from 2005 to 2021 and provides evidence that it is rising over the period, and suggests a feasible solution rests in the reassignment of commodity taxation powers to the states.