​Vertical Fiscal Imbalance

Recently, according to the 15th Finance Commission, States incur 61% of the revenue expenditure but collect only 38% of the revenue receipts. In short, the ability of the States to incur expenditures is dependent on transfers from the Union government.

  • Consequently, this gave rise to the problem of Vertical Fiscal Imbalance (VFI) in Indian fiscal federalism where expenditure decentralisation overwhelms the revenue raising powers of the States.

What is VFI?

  • A vertical fiscal imbalance occurs when revenues do not match expenditures for different levels of government.
  • It is a structural issue that can be resolved if revenue and expenditure responsibilities can ....
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