India's Fiscal Federalism Faces Mounting Pressure
India's fiscal federalism system, which manages resource sharing between the Union and states, is encountering significant challenges. This issue came into sharp focus during a session at the Jaipur Literature Festival on Thursday. Former chief economic advisor Arvind Subramanian and academic Devesh Kapur discussed their book, 'A Sixth of Humanity: Independent India's Development Odyssey'. They warned that the country's federal unity is under strain due to widening regional disparities and contentious fiscal transfers.
Redistribution: Necessary but Politically Sensitive
Arvind Subramanian emphasized that redistribution forms an inevitable part of any federal system. He stated clearly that some degree of redistribution between richer and poorer states contributes directly to nation-building. However, he issued a strong caution about the current trajectory. Subramanian believes the pattern of transfers must maintain political viability to prevent system breakdown.
"If richer states feel perpetually penalized and poorer states feel perpetually dependent, the federal compact will fray," Subramanian warned during the discussion. He argued that while redistribution remains necessary, it must come with reforms that incentivize performance. The perception that transfers reward underperformance in beneficiary states while penalizing overperformance in donor states creates perverse incentives that need urgent fixing.
Trust Deficit Threatens Nation-Building
Devesh Kapur echoed these concerns with particular emphasis on trust issues. He stressed that India's fiscal system has historically relied on central transfers to balance uneven development across regions. Kapur described federalism and fiscal federalism as crucial instruments for building the nation together.
"For that, of course, you require trust between the Centre and the states. That trust, we argue, is now stressed, and that can pose much more severe development challenges," Kapur explained. He cautioned that without proper transparency and accountability, fiscal transfers risk becoming politically divisive rather than unifying. Kapur warned directly that mistrust between the center and states weakens the entire nation-building course.
Southern States Voice Growing Frustration
The debate around fiscal federalism has intensified significantly in recent years. Southern states, which contribute disproportionately to national revenues, have expressed mounting frustration over allocation patterns. They argue that current systems favor poorer northern states, creating resentment among high-performing regions.
This regional tension highlights the delicate balance India must maintain. The fiscal transfer system needs to address development gaps without alienating states that drive economic growth. Both experts agree that finding this balance has become increasingly difficult as regional disparities widen and political tensions rise.
The discussion at Jaipur Literature Festival revealed deep concerns about India's federal future. While fiscal redistribution remains essential for national cohesion, its implementation requires careful recalibration. Experts warn that maintaining political sustainability while addressing regional imbalances presents one of India's most pressing governance challenges today.
