Centre-State fiscal federalism and structural reform challenges
Source:The Hindu ↗
Why It Matters
Federalism is a core pillar of the Indian Constitution and a highly recurrent topic in UPSC GS Paper 2. Understanding the contemporary structural challenges in Centre-State relations—especially concerning fiscal centralization and institutional overreach—is crucial for writing analytical answers on cooperative federalism and constitutional reforms.
Summary
The article argues that India's federal structure requires a comprehensive "structural reset" to address the growing friction between the Centre and the States. It highlights centralizing tendencies in recent years, particularly in fiscal matters where the Union's increasing reliance on non-shareable cesses and surcharges has constrained the financial autonomy of states. Beyond fiscal concerns, the article points to political and administrative challenges, including the Union's use of the Concurrent List to legislate on state matters and the contentious role often played by Governors. To ensure true cooperative federalism, the piece advocates for institutional reforms, such as empowering the Inter-State Council and ensuring equitable financial devolution, which are critical for rebuilding trust and maintaining the delicate balance of powers in the Indian Constitution.
Key Points
- The article emphasizes the necessity of a structural reset in Indian federalism to address growing asymmetries and friction between the Centre and the States.
- It highlights fiscal centralization concerns, specifically the Union government's increasing reliance on non-shareable cesses and surcharges which shrink the divisible pool of taxes.
- Encroachment on state subjects through the Concurrent List and the controversial, often partisan role of Governors are identified as major pressure points in Centre-State relations.
- A structural reset requires institutional reforms, such as empowering the Inter-State Council and rethinking financial devolution mechanisms, to foster genuine cooperative federalism and rebuild trust.
Important Terms
Finance Commission
A constitutional body established under Article 280 to recommend the distribution of tax revenues between the Union and States, and among individual States, to address fiscal imbalances.
UPSC context
GS Paper II: Federal structure, fiscal devolution. Tests understanding of resource allocation and the "balancing wheel" of Indian fiscal federalism.
Inter-State Council
A constitutional forum under Article 263 designed to promote coordination between the Union and States. It investigates issues of common interest and provides recommendatory advice for policy alignment.
UPSC context
GS Paper II: Federalism, Institutional reforms. Tests knowledge of mechanisms to resolve Centre-State friction and strengthen cooperative federalism.
Goods and Services Tax (GST)
A comprehensive indirect tax on goods and services governed by the GST Council (Article 279A), which replaced multiple taxes to create a unified national market.
UPSC context
GS Paper II/III: Fiscal federalism. Evaluates the shift from state taxation autonomy to a shared-decision model in cooperative federalism.
Cesses and Surcharges
Additional taxes levied by the Union for specific (cess) or general (surcharge) purposes. Under Article 270, these proceeds are not shared with States, reducing the divisible pool.
UPSC context
GS Paper II/III: Fiscal federalism. Crucial for discussing vertical fiscal imbalances and constraints on state financial autonomy.
Concurrent List
A list of 52 subjects in the Seventh Schedule where both Parliament and States can legislate. Under Article 254, Central law prevails in case of conflict.
UPSC context
GS Paper II: Legislative distribution. Tests understanding of shared powers and centralizing tendencies within India's federal structure.
Governor
The constitutional head of a State (Article 153) who also acts as a representative of the Union. The office involves discretionary powers that frequently impact Centre-State relations.
UPSC context
GS Paper II: Federal structure, Constitutional posts. Evaluates understanding of the Governor's dual role and potential for administrative friction.
Cooperative Federalism
A concept where the Union and States act as partners rather than subordinates to address national challenges, facilitated through bodies like NITI Aayog and the GST Council.
UPSC context
GS Paper II: Federalism. Fundamental theme regarding the balance of power and evolving Union-State dynamics in India.
Prelims Trap
"Cesses and surcharges collected by the Union form part of the divisible pool shared with States."
Article 271 explicitly excludes cesses and surcharges from the divisible pool under Article 270, allowing the Centre to retain 100% of these revenues.
Static Concepts Connected
What is 'Vertical Fiscal Imbalance' in Indian Federalism?
- Structural Imbalance: States have higher expenditure responsibilities (approx 61%) but lower revenue collection powers (approx 38%) under the constitutional division of taxation.
- Finance Commission's Role: Article 280 addresses this asymmetry by mandating the Finance Commission to recommend tax devolution and grants-in-aid to States.
How do Articles 200 and 201 govern the passage of State Bills?
- Governor's Options: Under Article 200, a Governor can give assent, withhold assent, return the bill (if not a Money Bill), or reserve it.
- Mandatory Reservation: Reservation is mandatory if the bill endangers the constitutional position of the State High Court.
- Presidential Veto: Under Article 201, the President has an absolute veto over reserved State bills and faces no constitutional time limit to decide.
Cross-Topic Patterns
Governor's inaction & Judicial Review
Recent Supreme Court rulings clarifying that Governors cannot indefinitely pocket state bills link federal friction directly to the expanding judicial review of constitutional silences.
GST Harmonization + Fiscal Centralization
The end of the GST compensation period structurally strained state finances, shifting Mains focus to how indirect tax harmonization has inadvertently centralized revenue control.
Expect a 2026 Prelims question testing the interplay of Article 271 (cesses), the Finance Commission, and vertical fiscal imbalance.
Linked PYQs · 4
Linked PYQs · 4
- 2015MainsGS2
The concept of cooperative federalism has been increasingly emphasized in recent years. Highlight the drawbacks in the existing structure and the extent to which cooperative federalism would answer the shortcomings.
- 2025MainsGS2
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?
- 2024MainsGS2
What changes has the Union Government recently introduced in the domain of Centre-State relations ? Suggest measures to be adopted to build the trust between the Centre and the States and for strengthening federalism.
- 2022MainsGS2
“While the national political parties in India favour centralisation, the regional parties are in favour of State autonomy.” Comment.
