In his last speech, in 1949, to the Constituent Assembly, B.R. Ambedkar sounded a note of caution about the Indian republic entering a life of contradictions. “In politics we will have equality and in social and economic life we will have inequality. These conflicts demanded attention: fail to do so, and those denied will blow up the structure of political democracy”, he warned, though Jawaharlal Nehru truly believed that inequities could be addressed through his tryst with the planning process. A degree of centralisation in fiscal power was required to address the concerns of socio-economic and regional disparities, he felt. This asymmetric federalism, inherent to the Constitution, was only accelerated and mutually reinforced with political centralisation since 2014, making the Union Government extractive rather than enabling. While States lost their capacity to generate revenue by surrendering their rights in the wake of the Goods and Services Tax (GST) regime, their expenditure pattern too was distorted by the Union’s intrusion, particularly through its centrally sponsored schemes .
A politicised institution
Historically, India’s fiscal transfer worked through two pillars, i.e., the Planning Commission and the Finance Commission. But the waning of planning since the 1990s, and its abolition in 2014, led to the Finance Commission becoming a major means of fiscal transfer as the commission itself broadened its scope of sharing all taxes since 2000 from its original design of just two taxes — income tax and Union excise duties. Today, the Finance Commission became a politicised institution with arbitrariness and inherent bias towards the Union government. The original intention of addressing inequities, a lofty idea, indeed, was turned on its head as it metamorphosed into one of the world’s most regressive taxation systems due to a centralised fiscal policy.
