Fiscal federalism in India operates within the framework of the Constitution, where financial powers and responsibilities are divided between the Union and the States. The State Finance Commission (SFC) plays a crucial role in ensuring equitable distribution of financial resources between the state government and local bodies, facilitating effective fiscal federalism. In Odisha, the SFC has been instrumental in strengthening local governance and improving fiscal decentralization.
Introduction to Fiscal Federalism
Fiscal federalism refers to the division of financial responsibilities between different levels of government in a federal system. In India, this division is guided by constitutional provisions, with the Union Finance Commission (UFC) addressing the distribution of resources between the Union and States, and the SFC focusing on state-level distribution between the state government and local bodies.
Key objectives of fiscal federalism include:
Ensuring financial autonomy for states and local bodies.
Promoting equitable resource allocation.
Addressing vertical and horizontal fiscal imbalances.
Constitutional Provisions for State Finance Commission
The 73rd and 74th Constitutional Amendments mandated the establishment of SFCs in every state to:
Recommend principles for sharing taxes and fees between the state government and local bodies.
Determine grants-in-aid for local bodies.
Enhance the financial viability of Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs).
Article 243I of the Indian Constitution requires the Governor of a state to constitute the SFC every five years.
State Finance Commission in Odisha
Establishment and Objectives
The Odisha State Finance Commission (OSFC) was constituted in 1996, following the 73rd and 74th Constitutional Amendments. The primary objectives of the OSFC include:
Assessing the financial position of PRIs and ULBs.
Recommending measures for fiscal empowerment of local bodies.
Ensuring equitable distribution of resources.
Key Reports of OSFC
Since its inception, Odisha has constituted several SFCs. Each commission has brought out reports addressing specific fiscal issues and recommending measures to enhance local governance.
First OSFC (1996):
Focused on assessing the revenue-generating capacity of PRIs and ULBs.
Recommended a systematic sharing of state taxes with local bodies.
Second OSFC (2001):
Proposed the devolution of 10% of state tax revenue to local bodies.
Highlighted the need for capacity-building programs for local governance.
Third OSFC (2008):
Recommended a 15% share of state tax revenue for local bodies.
Emphasized transparency and accountability in fund utilization.
Fourth OSFC (2014):
Proposed measures to enhance the fiscal autonomy of PRIs and ULBs.
Suggested the integration of digital tools for financial management.
Fifth OSFC (2019):
Advocated for performance-linked grants to incentivize efficient governance.
Recommended specific grants for urban infrastructure and rural development.
Fiscal Federalism in Odisha
Vertical Fiscal Imbalance
Odisha relies heavily on grants and revenue from the central government to meet its expenditure needs. The vertical fiscal imbalance is addressed through:
Devolution of taxes: Odisha receives a share of central taxes, as recommended by the UFC.
Grants-in-aid: Targeted grants for specific projects and schemes.
Centrally Sponsored Schemes (CSS): Significant funding through flagship schemes like MGNREGA, PMAY, and others.
Horizontal Fiscal Imbalance
Horizontal fiscal imbalances arise due to disparities in revenue-generating capacity and development needs among states. In Odisha:
The focus is on addressing regional imbalances within the state by allocating resources to underdeveloped areas such as Kalahandi, Bolangir, and Koraput (KBK) regions.
The SFC recommends measures for equitable resource allocation among local bodies.
Challenges in Fiscal Federalism in Odisha
Low Revenue Mobilization by Local Bodies:
PRIs and ULBs in Odisha have limited capacity for generating own-source revenue (OSR).
Dependence on state and central transfers hinders financial autonomy.
Delayed SFC Constitutions:
Irregular constitution and implementation of SFC recommendations lead to delays in resource allocation.
Inefficient Fund Utilization:
Poor financial management and lack of accountability reduce the effectiveness of transferred funds.
Urbanization and Infrastructure Needs:
Rapid urbanization in cities like Bhubaneswar and Cuttack increases demand for resources, putting pressure on fiscal arrangements.
Dependence on Centrally Sponsored Schemes:
A significant portion of Odishas revenue comes from central schemes, limiting the states fiscal independence.
Steps Taken for Strengthening Fiscal Federalism
Implementation of SFC Recommendations:
Increased devolution of state taxes to local bodies, aligning with SFC recommendations.
Performance-based grants to incentivize local governance reforms.
Capacity Building of Local Bodies:
Training programs for local officials on financial management.
Use of digital platforms for fund tracking and utilization.
Resource Mobilization Efforts:
Measures to enhance OSR through property tax reforms, user charges, and fees.
Focus on Inclusive Development:
Special grants for backward regions like KBK districts to address developmental disparities.
Role of SFC in Promoting Fiscal Federalism in Odisha
The SFC acts as a bridge between the state government and local bodies, ensuring equitable distribution of financial resources. Its contributions include:
Strengthening financial autonomy and accountability of local bodies.
Promoting decentralized governance through resource devolution.
Addressing fiscal disparities within the state.
Recommendations for Future Improvements
Regular Constitution of SFCs:
Timely establishment and implementation of SFC recommendations to avoid delays in fund transfers.
Enhancing Local Revenue Generation:
Empowering PRIs and ULBs with tools and training to mobilize OSR effectively.
Improved Fiscal Management:
Adoption of digital technologies for efficient fund tracking and utilization.
Focus on Regional Equity:
Allocating resources based on regional needs to address intra-state imbalances.
Integration with National Policies:
Aligning SFC recommendations with UFC guidelines and national development priorities.
OPSC Notes brings Prelims and Mains programs for OPSC Prelims and OPSC Mains Exam preparation. Various Programs initiated by OPSC Notes are as follows:-- OPSC Mains Tests and Notes Program
- OPSC Prelims Exam 2020- Test Series and Notes Program
- OPSC Prelims and Mains Tests Series and Notes Program
- OPSC Detailed Complete Prelims Notes