Grewal, Bhajan ORCID: 0000-0003-2977-1071 (1996) Federalism and fiscal equalisation: Should India follow the Australian path? Working Paper. Victoria University, Melbourne, Australia.

Abstract

In most federations, the distribution of intergovernmental financial transfers is based on the principle that relatively weaker jurisdictions (in fiscal terms) receive more resources per capita than the other jurisdictions, although not every country has put in place a systematic approach to the application of this principle, and the practice differs from one case to another. In Australia, Canada and Germany, relatively more formal and systematic approaches are adopted for this purpose, even though there are important differences in each country's coverage of fiscal equalisation and the associated institutional arrangements. In India too, there is a strong redistributive element in the distribution of central government grants to the States, but the approach is again different from that in the other countries. Not only do Australia and India share the objective of geographic redistribution, but in recent years suggestions have been made to modify some features of India's approach to grant distribution, which, if implemented, would bring the two countries' approaches closer. In particular, this would be the case if the work of the Finance Commission were to cover the entire revenue budget of the States, not just the non-plan revenue budgets, and if the Finance Commisioner were to be either made a permanent body or serviced by a permanent secretariat. The Finance Commision could then becomes an organisation similar to the Commonwealth Grants Commision in Australia in terms of its coverage and tenure. The main question posed in this paper arises because even then important differences will remain in what each commision is required to do and how it approaches its brief. Focusing on these substantive differences, the paper considers whether or not they should be maintained in future.

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