Vertical Fiscal Imbalance:
There is the problem of Vertical Fiscal Imbalance (VFI) in Indian fiscal federalism, where expenditure decentralization overwhelms the revenue-raising powers of the States.
- Vertical Fiscal Imbalance (VFI) is defined as the share of sub-national governments’ own spending not financed through their own revenues.
- A VFI describes a situation in which revenues do not match expenditures for different levels of government.
- VFI is the fiscal gap in the sub-national governments due to improper decentralization of public revenue and expenditure.
- This asymmetry in revenue and expenditure decentralization is called Vertical Fiscal Asymmetry (VFA).
- It is a structural issue that can be resolved if revenue and expenditure responsibilities can be reassigned.
- It can be corrected through the financial transfers from the Union to the state governments.
- The simple difference between horizontal and vertical fiscal imbalances lies in who they affect.
- With a horizontal fiscal imbalance, revenues and spending are mismatched for different regions of the country.
- In a VFI, revenue and spending are not balanced for different government levels.
