THE IMMINENT TRANSITION TO COMPETITIVE FEDERALISM

THE recent Union Budget indicated a swing in the framework of intergovernmental fiscal relations from cooperative federalism to competitive federalism.

- LEKHA CHAKRABORTY

The FM announced the significance of competitive federalism to achieve optimum 'total factor productivity' by initiating structural reforms on all the factors of production-land, labour, capital and investment-by urging states to do heavy lifting on these reforms.

This is in addition to the budget's emphasis on capital expenditure-in the sense that high fiscal deficit and debt is closely tied to strengthening capital formation at the Central and state levels, and to reduce the 'output gaps'. This also includes transfers to the states of around ₹1 lakh crore for capital infrastructure investment.

Cooperative federalism primarily works through intergovernmental tax transfers, which is unconditional in nature. In India, the transfer is designed on a scientific formula. The criterions incorporated are population, income distance, area, climate change, demographic transition and tax effort. The transfers happen through the Finance Commission, a constitutional body.

Bihar and Andhra Pradesh asked for a special category status based on socio-economic backwardness, propensity to natural calamities and a constrained fiscal space. However, given the available fiscal space, it will be difficult for the government to fulfil their demand. It can also create a bandwagon effect others including Odisha might strengthen their demand for such a status too. There was a shadow of these concerns in the budget.