Budget Special UPSC Mains Questions with Model Answers-2

 

7. “Fiscal federalism in India needs structural correction, not incremental adjustments.”

Discuss. (250 words)

Introduction

Fiscal federalism in India is constitutionally designed to balance national unity with State autonomy through tax devolution, grants-in-aid and shared responsibilities. However, recent trends indicate that incremental adjustments are no longer sufficient to address the deep structural stresses faced by States.

Structural Challenges:
First, the shrinking divisible pool due to the rising use of cesses and surcharges reduces the share of States, despite the constitutional mandate of tax sharing. This weakens the spirit of cooperative federalism.
Second, the GST regime, while improving tax harmonisation, has curtailed States’ independent taxation powers and made them increasingly dependent on compensation and market borrowings.
Third, there is a growing mismatch between expenditure responsibilities and assured revenues, pushing States towards debt-driven fiscal management.
Fourth, the dominance of Centrally Sponsored Schemes (CSS) limits State flexibility, converting them into implementers of centrally defined priorities rather than equal partners.
Finally, the retention of the vertical devolution ratio at 41% by the Sixteenth Finance Commission reflects caution but does not expand States’ fiscal space in real terms.

Why Structural Correction is Needed:
Incremental changes, such as marginal reweighting in horizontal devolution or small increases in transfers, do not resolve these systemic imbalances. What is required is a recalibration of Centre–State fiscal relations, including:

• Inclusion of cesses and surcharges in the divisible pool,
• A phased increase in vertical devolution to States,
• Greater autonomy in GST rate-setting through a more federal GST Council,
• Rationalisation of CSS with outcome-based block grants.

Conclusion:
To make federalism truly cooperative, India must move beyond piecemeal reforms and undertake structural fiscal realignment that restores trust, autonomy and accountability across all tiers of government.

 

8. “India is perfecting a growth model that expands capital faster than employment.”
Analyze  (250 Words)

India’s recent growth trajectory, especially after the pandemic, reflects a decisive shift towards a capex-led development model. While this strategy has strengthened infrastructure and boosted headline GDP, it has also revealed a growing disconnect between capital formation and employment generation.

Evidence of Capital-Heavy Growth:
Since 2020–21, public capital expenditure has become the organising principle of fiscal policy. Its share in total expenditure has risen from about 12% to over 22%, while the fiscal deficit remains elevated to sustain this investment push. Sectors benefiting most—transport, logistics, energy, semiconductors, and biopharma—are inherently capital intensive. Consequently, each unit of public investment is now generating fewer jobs than before.

Labour Market Signals:
Despite record infrastructure spending, the employment elasticity of construction has fallen from 0.59 (2011–12 to 2019–20) to 0.42 (2021–22 to 2023–24). Simultaneously, agriculture’s employment elasticity has risen sharply, indicating distress-driven reabsorption of labour rather than productive structural shift. The youth NEET rate remains around 23–25%, showing that growth is failing to absorb new entrants.

Structural Causes:
Public investment increasingly favours automation, large firms, and productivity-enhancing technologies. While net value added per worker has risen, average wages have stagnated, implying that gains accrue largely as profits. A dual economy is emerging—capital-intensive large firms drive output, while labour-intensive MSMEs remain informal, low-productivity, and unable to scale.

Conclusion:
India’s growth model is becoming capital-efficient but employment-thin. Without explicit labour-absorbing policies—such as MSME scaling, urban job creation, and skilling aligned to industry—economic growth will continue to expand assets faster than opportunities.

 

9. Assess the role of Finance Commission transfers in bridging India’s urban infrastructure deficit, especially in small and medium towns. (250 words)

India’s urban infrastructure deficit is most severe in small and medium towns (SMTs), which lack adequate water supply, sanitation, drainage, solid waste management, and public transport. With limited own-source revenues, Urban Local Governments (ULGs) depend heavily on inter-governmental transfers. In this context, Finance Commission (FC) grants have emerged as a critical fiscal lifeline.

The 16th Finance Commission (FC-16) has significantly expanded support to ULGs by allocating ₹3.5 lakh crore for 2026–31, a 230% increase over the 15th FC. It has also raised the share of local government grants going to ULGs from 36% to 45%, signalling a structural shift towards urban empowerment. According to Janaagraha, this five-year allocation equals the Centre’s total spending on urban Centrally Sponsored Schemes over the past 13 years, underlining its transformative potential.

Role in bridging the deficit:

1. First-mile infrastructure: FC grants focus on water, sanitation, and waste management, which directly improve liveability in SMTs where service gaps are widest.
2. Flexibility through untied grants: ULGs can address location-specific needs rather than uniform scheme designs.
3. Urbanisation premium grant: This incentivises planned rural–urban transitions, crucial for fast-growing peri-urban towns.
4. Reduced dependence on CSS: FC transfers enhance local autonomy and allow context-sensitive investments.

Limitations:
However, weak technical capacity, delayed releases, poor project planning, and limited revenue mobilisation constrain impact. Moreover, FC grants alone cannot meet the vast urban capital requirement.

Conclusion:
Finance Commission transfers are a foundational enabler for closing urban infrastructure gaps, especially in SMTs. Their effectiveness, however, depends on parallel reforms in municipal capacity, governance, and revenue systems to translate fiscal devolution into tangible urban transformation.