Q14. Examine the evolving pattern of Centre–State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India?
Possible Introductions
Contextual:
Fiscal federalism in India has always been asymmetrical, with the Centre enjoying more taxation powers and States being expenditure-heavy. Planned development since 1951 further shaped Centre–State financial relations.
Fact-based:
The Constitution (Articles 268–293) provides for division of taxation powers, Finance Commission transfers, and Planning Commission/NITI Aayog recommendations — all influencing Centre–State financial dynamics.
Philosophical:
As K.C. Wheare described India’s Constitution as “quasi-federal,” financial relations illustrate this balance of central dominance with state dependence, evolving over time.
Main Body
1. Centre–State Financial Relations during Planned Development
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- Initial Years (1951–65): Heavy centralisation via Planning Commission (1950) controlling plan grants. Finance Commissions covered non-plan revenue deficits; plan funds discretionary. States became dependent on Centre for development financing.
- Green Revolution & 1970s: Central schemes dominated agricultural, rural development. States had limited say in resource allocation.
- Post-1991 Liberalisation: De-licensing, privatisation reduced state control over industries. Fiscal reforms (FRBM Act 2003) restrained borrowing flexibility of States. Central Sponsored Schemes (CSS) multiplied, often bypassing States’ priorities.
- 2000s–2014: Demand for greater fiscal autonomy intensified (e.g., opposition to centrally designed schemes). Regional parties pressed for financial devolution.
2. Recent Reforms & Their Impact on Fiscal Federalism
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- Fourteenth Finance Commission (2015): Raised States’ share of divisible tax pool from 32% → 42%. Empowered states with greater untied funds. Reduced discretionary plan grants. Impact: States got fiscal space but also more responsibility for social sector spending.
- Abolition of Planning Commission & Creation of NITI Aayog (2015): Shift from top-down allocation to cooperative & competitive federalism. However, NITI lacks statutory status & resource-allocation powers, limiting states’ leverage.
- Introduction of GST (2017): Subsumed indirect taxes into one national tax. GST Council institutionalised cooperative fiscal federalism. But centralised collection eroded states’ fiscal autonomy; compensation disputes during COVID-19 exposed tensions.
- FRBM Framework & Borrowing Norms: Fiscal deficit targets constrain states’ flexibility. COVID relaxation (0.5–1% additional borrowing tied to reforms) showed Centre’s control.
- Recent Trends (15th Finance Commission & beyond): Continuation of 41% devolution but increased tied grants for health, infrastructure. Debate on changing population base year for devolution — southern states fear disadvantage.
3. Assessment: Impact on Fiscal Federalism
Positive:
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- Greater devolution (14th FC).
- GST Council as a model of cooperative decision-making.
- States incentivised to compete in reforms (ease of doing business, SDG performance).
Concerns:
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- Centralisation via GST, cess & surcharges (not shareable with states).
- Centre retaining discretion in CSS design & tied grants.
- GST compensation delay created mistrust.
- Regional disparities in revenue capacity widening.
Sweet Spot – Table
| Phase | Nature of Fiscal Federalism | Key Feature |
|---|---|---|
| 1950s–70s | Centralised, plan-driven | Planning Commission dominance |
| 1980s–90s | Mixed but still central-heavy | Liberalisation, CSS expansion |
| 2014 onwards | Shift towards cooperative federalism | 14th FC devolution, GST Council |
Possible Conclusions:
Balanced:
Centre–State fiscal relations have evolved from central dominance during planned development to a model of cooperative but contested federalism in recent years.
Policy-linked:
Strengthening the Finance Commission, GST Council, and NITI Aayog’s federal character is crucial for healthy fiscal balance.
Philosophical:
As Ambedkar noted, India’s federalism must adapt to circumstances — true fiscal federalism lies in ensuring both national integration and state autonomy.
Forward-looking:
For India@2047, fiscal federalism must evolve into a trust-based partnership, where states have genuine fiscal capacity to deliver development tailored to their needs.
