horizontal imbalance

FISCAL SPACE FOR STATES

Fiscal relations in India define how financial powers, taxation rights, and expenditure responsibilities are shared between the Centre and the States. The introduction of GST has centralised major taxation powers, reducing States’ fiscal autonomy and increasing their dependence on Central transfers, which account for about 44% of their total revenues. Rising cesses and surcharges outside the divisible pool further limit States’ resources. To strengthen cooperative fiscal federalism, India needs reforms such as expanding States’ tax share, including cesses in the divisible pool, rationalising centrally sponsored schemes, and empowering local governments for better fiscal balance and accountability.