How can NITI Aayog enhance fiscal federalism in India? Explain with suitable examples.

The role of NITI Aayog in rejuvenating fiscal federalism in India is decisive, given the persistent horizontal and vertical imbalances in the country’s economic structure. Fiscal federalism refers to the financial relations between units of government in a federal system. In India, vertical imbalance arises when the central government collects a higher share of tax revenues compared to state governments, which bear greater responsibilities for public service delivery. This disparity necessitates a robust mechanism for equitable resource distribution. To address these imbalances, NITI Aayog can adopt several strategies:

1. Resource Allocation: NITI Aayog should have the authority to allocate resources more effectively, ensuring that states with lower fiscal capacities receive adequate funding. For example, states like Bihar and Odisha could benefit from targeted financial support to improve their infrastructure and services.
2. Performance-Based Grants: Implementing a system of performance-based grants can incentivise states to improve their revenue generation and service delivery. For instance, states that achieve certain health or education metrics could receive additional funding.
3. Capacity Building: NITI Aayog can facilitate training programs for state officials to enhance their financial management skills, enabling better utilisation of funds.

Moreover, the establishment of an independent office within NITI Aayog to oversee the efficacy of grants would ensure accountability and transparency. This office could evaluate the impact of financial assistance on states’ development, thereby promoting a culture of cooperative federalism. Thus, by empowering NITI Aayog with adequate resources and decision-making authority, India can encourage a more equitable fiscal federalism that addresses the unique challenges faced by its diverse states, ultimately leading to balanced national development.