📚 Fiscal Federalism in India (2025) 🏛️ | Constitution, GST, Finance Commission & Reforms 📈

🏛️ Fiscal Federalism and India's Journey to Viksit Bharat 2047

(Based on Business Standard editorial – 19 May 2025)

🌟 What’s This Article About?

This article tells how India’s states are being ranked on 7 development pillars using 50 indicators, to guide sustainable growth and support competitive federalism—as part of India’s goal to become Viksit Bharat (Developed India) by 2047.

📘 Prelims Focus – Important Terms to Know

GST (Goods and Services Tax)
Finance Commission (like 15th, 16th)
Centrally Sponsored Schemes (CSS)
FRBM Act (Fiscal Responsibility and Budget Management)
Inter-State Council
GST Council
State Finance Commission (SFC)
Status of Devolution to Panchayats Report 2024
Fiscal Health Index

🧩 Why Fiscal Federalism is Important?

India is federal – means both Centre & States have power.
States do more work – like health, roads, education, etc.
But they have less money than Centre – that's the problem.
Fiscal federalism helps solve this – by making sure money is shared fairly between Centre and States.
If done well, it leads to cooperative federalism (Centre + States work together) & competitive federalism (States compete to do better).

📜 Constitutional & Policy Provisions of Fiscal Federalism

1. Division of Tax Powers (Article 246 & 7th Schedule)

Constitution divides taxes clearly – Centre gets some, States get some.
Like, income tax, customs = Centre, state excise, land revenue = States.

2. GST and Article 246A (101st Amendment)

Both Centre and States can collect GST now.
CGST + SGST = for intra-state
IGST = for inter-state transactions

3. Revenue Sharing (Article 270)

Some Union taxes must be shared with States.
Like, income tax, corporation tax, CGST etc.

4. Grants-in-Aid (Article 275)

Centre gives extra funds to weaker States.

5. Finance Commission (Article 280)

Formed every 5 years to decide how much money States should get from Centre.

6. Discretionary Grants (Article 282)

Centre/States can give grants for any public work – but it’s discretionary, so can be unfair sometimes.

7. Borrowing Powers (Article 293)

States can borrow money, but if they already owe Centre, they need Centre’s permission.

8. Devolution to Panchayats & Urban Bodies

Articles 243G, 243H, 243X talk about giving funds and power to local self-government.

9. Exclusion of Cesses & Surcharges from Sharing Pool

Cess & surcharge money collected by Centre is not shared with States – this creates imbalance.

10. Centrally Sponsored Schemes (CSS)

Centre gives money but keeps strict control. States can’t change the schemes even if local needs are different.

🚨 Major Challenges in India’s Fiscal Federalism

1. Vertical Imbalance

Centre gets 63% of money but spends only 38%.
States get just 37% of money but spend 62% – unfair balance.

2. Loss of Tax Autonomy

States lost many taxes after GST. They now depend mostly on SGST.

3. Falling Revenue Share

States’ share in total Union tax dropped from 35% to 30% in recent years.

4. Rise in Cess & Surcharge

These increased by 133% in 5 years, but not shared with States.

5. Borrowing Limits

States can only borrow up to 3% of their GSDP – not enough during economic crisis.

6. GST Compensation Delays

After 2017, States faced shortfalls of 19–33%, but compensation was delayed.

7. Dependence on CSS

CSS schemes increased a lot. States have to give matching funds, but have no design control.

8. Decline in Grants-in-Aid

Decreased from ₹1.95 lakh crore to ₹1.65 lakh crore, hence reducing state autonomy.

9. Horizontal Imbalance

Poorer states like Bihar get more share, but richer, efficient ones like Kerala feel punished.

10. Uneven Development

Some states lag far behind in infra, finance inclusion, etc.

11. Off-Budget Borrowing

States borrow indirectly (like Kerala Infra Fund), which now included in borrowing limits.

12. Centralised Spending

Less than 22% money is untied, rest is fixed with conditions.

13. Weak Panchayat Devolution

Even after 29 subjects given under 11th Schedule, many states don't transfer full power to Panchayats.

14. PRI (Panchayati Raj Institutions) Issues

Because of rotation and ineffective planning committees, local bodies lack regular leadership, funding, and training.

15. Poor Fiscal Autonomy at Local Level

Most State Finance Commission (SFC) reports are ignored.
Panchayats can't raise revenue, so are totally dependent.

🔧 How to Improve Fiscal Federalism in India?

1. Increase States’ Share

16th Finance Commission should raise it above 41% to give more power to States.

2. Rationalise Cess

Either reduce it or add it to shared revenue pool.

3. Reform GST

Give timely compensation. Include petroleum and alcohol to increase revenue.

4. Create Composite Indices

Use scores of social, fiscal, environmental progress to rank states fairly.

5. Allow More Borrowing in Crisis

Like COVID or disasters, allow States temporary relaxation of borrowing limits.

6. Empower Panchayats

Fully implement Articles 243G, 243H, 243X. Give full funds + functions + functionaries.

7. Train Local Leaders

Expand schemes like Rashtriya Gram Swaraj Abhiyan for training & digital transparency.

8. Restructure CSS

Merge schemes into fewer, flexible, impactful ones to avoid duplication.

9. Strengthen Dialogue Platforms

Restart Inter-State Council. For more candid conversations, use the GST Council and NITI Aayog.

10. Use HDI in Resource Sharing

Don’t only use population, use Human Development Index too.

11. Transparency in Borrowing

All off-budget borrowings should be disclosed clearly.

12. Align FRBM Acts

Make a common but flexible fiscal target system for Centre and States.

13. Use Fiscal Health Index

States can use this to improve spending and manage debt wisely.

✅ Conclusion: What Needs to Be Done?

To make India a developed country by 2047, we need strong fiscal federalism.

Share more money with States.
Empower local bodies.
Let States plan freely.
Stop one-size-fits-all approach.

India must combine national goals with state-specific needs. That’s how we’ll ensure inclusive and balanced growth in this Amrit Kaal. 💪🇮🇳

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