MAINS Current Affairs includes Fiscal Federalism In India & India–Switzerland Relations

Economy

1. FISCAL FEDERALISM IN INDIA

Context: Recent debates concerning tax devolution and State fiscal autonomy have renewed discussions about the distribution of financial resources between the Union and State governments.

• The issue highlights the need to balance the Union’s resource-raising capacity with the States’ expenditure responsibilities and developmental requirements.

What is Fiscal Federalism?

• Fiscal federalism is an economic framework that examines the financial relationship between different levels of government, particularly the Union, States and local bodies.
• It focuses on the distribution of taxation powers, expenditure responsibilities and financial resources among these governments.

Key Components

1. Division of expenditure responsibilities: Allocation of public service delivery and spending functions among different levels of government.
2. Revenue assignment: Distribution of taxation powers and other revenue-raising responsibilities among governments.
3. Intergovernmental transfers: Transfer of financial resources between governments to address differences between their revenue capacity and expenditure needs.

Traditional Theory of Fiscal Federalism

• Taxes on highly mobile economic entities and activities are generally considered more suitable for the central government.
• Taxes on relatively immobile entities and activities may be assigned to State or local governments.
• Grants-in-aid and intergovernmental transfers become necessary when a government’s expenditure responsibilities exceed its capacity to raise revenue independently.

What is Fiscal Imbalance?

• The Indian Constitution distributes taxation powers and expenditure responsibilities between the Union and States through the Seventh Schedule.
• However, the allocation of revenue-raising powers does not always correspond proportionately with the expenditure responsibilities of each level of government, creating fiscal imbalances.

1. Vertical Fiscal Imbalance

• Vertical fiscal imbalance refers to a mismatch between the revenue-raising capacity and expenditure responsibilities of different levels of government.

In the Indian Context

• States have significant responsibilities in areas such as health, education, agriculture and public services.
• However, their access to broad-based and buoyant taxation sources is relatively constrained compared with the Union’s revenue-raising capacity.

Role of the Finance Commission

• Article 280 provides for the establishment of the Finance Commission.
• It recommends:
  • The distribution of the divisible pool of Union taxes between the Union and the States.
  • The allocation of the States’ share among individual States.
  • Other matters concerning financial transfers referred to it under the Constitution.

The Finance Commission is therefore a key institution for addressing vertical fiscal imbalances.

2. Horizontal Fiscal Imbalance

• Horizontal fiscal imbalance refers to differences in revenue-raising capacity and expenditure requirements among governments at the same level.

Examples

• Differences in income levels and economic development among States.
• Variations in the size of State tax bases.
• Differences in demographic structures.
• Unequal geographical and climatic conditions.
• Variations in the cost of providing essential public services.

Implication

States with weaker revenue bases or greater expenditure needs may struggle to provide public services at levels comparable to those of more prosperous States.

GST as a Mechanism for Cooperative Fiscal Federalism

• The introduction of the Goods and Services Tax (GST) marked a major transformation of India’s indirect taxation system.
• It brought several Union and State indirect taxes into a common taxation framework.

Key Features of GST

1. Common Indirect Tax Framework

• GST subsumed several indirect taxes previously levied by the Union and States.
• It sought to simplify the indirect tax structure and reduce fragmentation across jurisdictions.

2. Destination-Based Taxation

• GST follows a destination-based taxation system, under which revenue generally accrues to the jurisdiction where goods or services are consumed.

3. Input Tax Credit

• The input tax credit mechanism allows eligible tax paid on inputs to be credited against tax liability on outputs.
• This helps reduce the cascading effect of taxation, in which tax is charged on an amount that already includes tax.

4. GST Council

• The GST Council, established under Article 279A, provides an institutional mechanism for cooperation between the Union and State governments.
• It enables joint participation in important GST-related decisions, including recommendations concerning tax rates, exemptions and other aspects of GST administration.

Fiscal Responsibility and Public Debt

• The sustainability of fiscal federalism also depends on the ability of governments to manage borrowing and public expenditure responsibly.

Role of Government Borrowing

• Government borrowing can support economic development when it finances productive investments that generate long-term economic and social returns.
• Investments in infrastructure and other productive assets can strengthen future economic capacity.

Concerns Associated with Excessive Borrowing

Persistent fiscal deficits may:

• Increase public debt.
• Raise debt-servicing obligations.
• Reduce the resources available for essential public expenditure.
• Constrain future fiscal flexibility.

Fiscal Responsibility and Budget Management Framework

• The Fiscal Responsibility and Budget Management (FRBM) framework, 2003 seeks to promote fiscal discipline at the Union level.
• Corresponding fiscal responsibility frameworks also operate at the State level.

Major Concerns Related to Fiscal Federalism in India

1. Persistent Vertical Fiscal Imbalance

• States have extensive expenditure responsibilities but relatively limited access to broad-based and buoyant sources of taxation.
• This creates dependence on tax devolution and transfers from the Union.
• Excessive dependence on transfers can constrain the ability of States to independently finance their developmental priorities.

2. Horizontal Fiscal Disparities

• States differ significantly in:
  • Income levels.
  • Tax bases.
  • Demographic structures.
  • Economic development.
  • Geographical conditions.
  • Costs of delivering public services.
• Consequently, States may have unequal capacities to mobilise revenue and provide essential services.

3. Increasing Use of Tied or Conditional Transfers

• Tied transfers are funds provided for specified purposes or schemes.
• Although they can help achieve national development objectives, excessive reliance on conditional transfers may limit the flexibility of States to allocate resources according to their local needs.
• States may face difficulties in addressing region-specific priorities when a substantial portion of their available funds is earmarked for predetermined purposes.

4. Weak Fiscal Position of Local Governments

• Local governments often have limited capacity to generate their own revenue.
• Their dependence on transfers from State and Union governments remains substantial.

This can affect their ability to finance essential local services, infrastructure and development programmes.

5. Off-Budget Borrowings and Contingent Liabilities

• Off-budget borrowings and government guarantees can create financial obligations that are not immediately visible in conventional budget figures.
• Contingent liabilities may become actual expenditure obligations when the conditions underlying them materialise.

These practices can make it difficult to assess the true fiscal position and long-term financial risks of governments.

6. Poor Expenditure Outcomes

• The developmental impact of public spending depends not only on the amount allocated but also on the quality and effectiveness of expenditure.
• Weak implementation, inefficient resource allocation and inadequate monitoring can reduce the benefits generated by public expenditure.

Therefore, higher allocations do not automatically translate into better outcomes in health, education, infrastructure and livelihoods.

Way Forward

1. Strengthen State Revenue Mobilisation

• States should improve tax administration and compliance.
• Expand their revenue base through better identification of taxable activities and improved collection efficiency.
• Simplify compliance procedures to avoid imposing excessive costs on citizens and businesses.

2. Adopt Outcome-Based Budgeting

• Governments should increasingly assess public expenditure through measurable developmental outcomes, rather than focusing exclusively on financial allocations and expenditure.
• Evaluation should examine improvements in:
  • Health and education.
  • Employment and livelihoods.
  • Quality and accessibility of public services.

3. Make Fiscal Transfers More Responsive to Regional Needs

• Future fiscal transfers should better account for differences in:
  • Climate vulnerability.
  • Demographic transition.
  • Geographical constraints.
  • Regional development requirements.
  • Costs of delivering essential public services.
• This would help balance equity among States with the need to recognise their varying circumstances.

4. Strengthen Local Government Finances

• Improve the capacity of local bodies to mobilise their own-source revenues.
• Strengthen local financial management and expenditure planning.
• Improve the predictability of intergovernmental transfers to support local service delivery.

5. Improve Fiscal Transparency

• Governments should disclose off-budget borrowings, guarantees and other contingent liabilities more comprehensively.
• Transparent reporting would improve fiscal assessment, accountability and long-term debt management.

6. Balance Fiscal Discipline with Developmental Needs

• Governments should maintain fiscal discipline while protecting productive public investment.
• Borrowing should be evaluated in terms of its sustainability and contribution to long-term economic capacity.

Conclusion

Fiscal federalism is essential for balancing the Union’s revenue-raising capacity with the expenditure responsibilities of States and local governments. In India, institutions such as the Finance Commission and GST Council provide important mechanisms for resource sharing and intergovernmental cooperation.

However, persistent vertical and horizontal fiscal imbalances, limited local revenue mobilisation and weaknesses in expenditure outcomes continue to pose challenges.

A stronger fiscal federal system requires fair and responsive transfers, greater State and local revenue capacity, transparent public finances and outcome-oriented expenditure. The ultimate objective should be to combine fiscal discipline with sufficient financial autonomy for every level of government to deliver effective public services and promote balanced regional development.

International Relations

2. INDIA–SWITZERLAND RELATIONS

Context: The President of Switzerland is on a three-day state visit to India.

• During the visit, India and Switzerland signed five agreements aimed at strengthening cooperation in migration, mobility, transportation, scientific research, innovation and technology transfer.

Major Highlights of the Visit

1. MoU on Migration and Mobility Partnership (MMP)

• The agreement aims to strengthen cooperation on migration and mobility while ensuring principles of equal treatment.

Key Provisions

• Multiple-entry visas valid for up to five years.
• Stays of up to six months per visit, as provided under the agreement.
• Renewable one-year student permits.

Significance

The partnership can facilitate educational exchanges, professional mobility and people-to-people contacts between the two countries.

2. Agreement on the Exchange of Young Professionals (YPS)

• The agreement establishes a framework for the exchange of young professionals between India and Switzerland.

Key Provisions

• An annual exchange of 300 persons per country, with the possibility of increasing the number to 500.
• Verification timelines of 30 or 90 days for nationality and residency status, as applicable under the arrangement.

Significance

• It can create opportunities for young professionals to gain international work experience.
• It can strengthen professional networks and improve the exchange of skills and knowledge.

3. MoU on Transportation Technologies and Mobility Systems

• The agreement promotes cooperation in transportation technologies, mobility systems and infrastructure in identified areas.

Significance

Cooperation can support the exchange of expertise in transport infrastructure, mobility solutions and advanced transportation technologies.

4. MoU on Scientific Research Cooperation

• The agreement seeks to promote long-term collaboration between Indian and Swiss research communities.
• It focuses on supporting exploratory scientific collaboration.

Significance

• Encourages joint research initiatives.
• Strengthens scientific exchanges.
• Creates opportunities for collaboration between research institutions and academic communities.

5. Implementation Arrangement on Innovation and Entrepreneurship

• The arrangement concerns cooperation in innovation, technology transfer and entrepreneurship.
• It involves India’s Department of Science and Technology and the Zurich University of Applied Sciences.

Significance

• Promotes collaboration between research institutions and entrepreneurs.
• Supports the transfer of technologies and research outcomes.
• Can strengthen innovation-led enterprise development.

India–Switzerland Bilateral Relations

1. Historical and Diplomatic Relations

• India and Switzerland established diplomatic relations through the Treaty of Friendship signed in 1948.
• In 2023, the two countries commemorated the 75th anniversary of the Friendship Treaty.

The relationship has gradually expanded beyond traditional diplomatic engagement into trade, investment, scientific research and technology cooperation.

2. Institutional Mechanisms

Several mechanisms facilitate bilateral engagement:

These mechanisms provide institutional channels for discussing bilateral priorities and coordinating cooperation.

3. Trade Relations

• Bilateral trade between India and Switzerland stood at approximately USD 23.27 billion in FY 2024–25.
• Switzerland was India’s 15th-largest trading partner during this period.
• Switzerland is also one of the world’s major gold-refining centres, making it relevant to India’s trade in precious metals.

India–EFTA Trade and Economic Partnership Agreement (TEPA)

• India signed the Trade and Economic Partnership Agreement with the European Free Trade Association (EFTA), comprising:

• • Iceland
  • Liechtenstein
  • Norway
  • Switzerland

• The agreement entered into force on 1 October 2025.
• The EFTA States became the first European partners to conclude a Free Trade Agreement with India, according to the source.

Significance

TEPA provides a framework for expanding trade in goods and services and strengthening economic engagement between India and the EFTA countries.

4. Foreign Direct Investment (FDI)

• Swiss FDI into India between 2000 and 2025 amounted to approximately USD 10.87 billion.
• Switzerland ranked 12th globally among sources of FDI into India, according to the source.
• Swiss investment in India increased by 53% during 2015–2023.

Significance

Swiss investment can contribute to India’s manufacturing capabilities, technology-intensive industries, services and innovation ecosystem.

5. Science and Technology Cooperation

• An intergovernmental agreement on Science and Technology cooperation was signed in 2003.
• Cooperation covers:
  • Joint research.
  • Advanced technologies.
  • Academic exchanges.

The partnership creates opportunities for knowledge sharing and collaboration between Indian and Swiss research institutions.

6. Indian Diaspora in Switzerland

• Switzerland hosts more than 29,248 Indians, including approximately 9,662 persons of Indian origin, according to the source.
• The Indian community has a presence in sectors such as:
  • Information technology.
  • Paramedical services.

The diaspora serves as an important link for professional exchanges, cultural engagement and people-to-people relations.

Significance of Switzerland for India

1. Trade and Market Access

• The India–EFTA TEPA provides India with enhanced access to EFTA markets.
• It aims to expand bilateral and regional trade in goods and services.
• The agreement can create opportunities for Indian exporters and businesses seeking greater international market access.

2. Investment and Employment Generation

• Under TEPA, the EFTA States have committed to promote USD 100 billion in investment in India over 15 years and facilitate the creation of one million direct jobs.

Significance

The commitment can support:

• Manufacturing expansion.
• Industrial development.
• Technology-intensive investment.
• Employment generation.
• Integration of Indian enterprises into global value chains.

The investment commitment is a key economic dimension of India’s engagement with the EFTA countries.

3. Technology and Innovation

Switzerland possesses expertise in areas such as:

• Precision engineering.
• Advanced manufacturing.
• Scientific research.

Cooperation with Switzerland can help India access specialised knowledge, strengthen research capabilities and develop advanced technological skills.

4. Multilateral and Diplomatic Importance

• Switzerland follows a policy of neutrality and maintains an active role in multilateral diplomacy.
• Its position as a host to several international organisations in Geneva makes it relevant to India’s diplomatic and multilateral engagement.

Significance for India

Closer engagement can facilitate dialogue on international issues and strengthen cooperation within multilateral institutions.

Conclusion

India–Switzerland relations have evolved from a traditional diplomatic friendship into a multidimensional partnership covering trade, investment, technology, research and professional mobility.

The five agreements signed during the visit provide additional avenues for cooperation, while the India–EFTA Trade and Economic Partnership Agreement (TEPA) offers a major foundation for deeper economic engagement.

Going forward, effective implementation of these agreements, stronger research collaboration, greater technology transfer and sustained investment will be important for translating bilateral commitments into economic growth, employment opportunities and technological advancement.

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