Relevance : GS Paper II
NITI Aayog can play an important role in refreshing India’s fiscal federalism.
Horizontal and vertical imbalances
- Typically, federations face vertical and horizontal imbalances.
- A vertical imbalance arises when tax revenues to the Central government are greater compared to the State governments.
- The horizontal imbalances arise because of differing levels of attainment by the States.
- In India, there are 2 types of horizontal imbalance:
- Type I deals with basic public goods and services
- Type II deals with infrastructure.
New role for NITI Aayog
- Traditionally, Finance Commissions have dealt with these imbalances.
- NITI Aayog must become the second pillar of the fiscal federal structure.
- Now with the Planning Commission disbanded, there is a vacuum as NITI Aayog is primarily a think tank with no resources to dispense.
- Finance Commission should be confined to Type I horizontal imbalance.
- NITI Ayog should focus on Type II horizontal imbalance.
- NITI Aayog should receive significant resources (say 1% to 2% of the GDP).
- NITI Aayog should also be mandated to create an independent evaluation office.
- It must be also accorded a place at the high table of decision-making.
The Third Pillar
- Decentralisation hasto be the third pillar of fiscal federal architecture.
- Seriousness has to be accorded to the 73rd and 74th constitutional amendments.
- Centre and States should contribute an equal proportion to the consolidated fund of the third tier.
- State Finance Commissions should be accorded the same status as the Finance Commission.
The Fourth Pillar
- The fourth pillar is the “flawless” GST.
- There should be a single rate GST.
- GST Council should be transparent and create its own secretariat.
