Transition to Market and Normative Framework of Fiscal Federalism

This paper deals with the challenges of fiscal federalism in planned economies. Planned economies through their various policy instruments to control the resource allocation introduce several sources of distortion and inequity by way the budgets are determined, the determination of administered prices, impediments to internal trade and movement of labour and capital, closed nature of the economy and commanding heights role assigned to the public sector. Thus, fiscal federalism in these countries ceases to be an efficient institutional arrangement. On the policy side reforms in fiscal federalism in developing countries are inextricably intertwined with privatistion, planning and budgeting, reforms in administered price mechanism, various regulations relating to the movement of factors and products, besides the issues discussed in fiscal federalism. Any attempt to look at the issues in isolation will make the reforms less potent and ineffective.