UPSC Mains 2025 GS Paper 2 Question Paper
Q. 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?
Introduction:
Centre–State financial relations in India have evolved from centralized planning-led transfers to a more decentralized, rule-based fiscal federal framework, especially after recent reforms.
- Constitutional Basis of Fiscal Federalism
- Articles 268–293 → distribution of taxation powers
- Finance Commission (Art 280) → vertical & horizontal devolution
- Seventh Schedule → Union, State, Concurrent lists
- GST Council (Art 279A) → cooperative fiscal federalism
- Pattern during Planned Development Era (1950–2014)
(a) Centralized Fiscal Architecture
- Dominance of Planning Commission
- Discretionary grants (Plan vs Non-Plan distinction)
- States dependent on Centre → vertical imbalance
(b) Transfer Mechanisms
- Finance Commission → statutory transfers
- Planning Commission → plan grants, CSS
(c) Issues
- Overlap & inefficiency (dual channels)
- Conditional transfers limiting State autonomy
- Politicization of grants
- Post-Reform Phase (Post-2014): Key Changes
(a) End of Planning Commission
- Replaced by NITI Aayog
- Shift from top-down planning → cooperative federalism
(b) Finance Commission Empowerment
- 14th Finance Commission:
- Tax devolution ↑ from 32% → 42%
- 15th Finance Commission:
- Maintained ~41% (post J&K reorganization)
→ Strengthened formula-based, predictable transfers
(c) GST Regime
- Introduced via 101st Constitutional Amendment (2016)
- Subsumed multiple taxes → harmonized indirect taxation
Features:
- GST Council → joint decision-making body
- Compensation to states for revenue loss (5 years)
(d) Rationalization of CSS
- Reduced number of Centrally Sponsored Schemes
- Increased flexibility to States
- Impact on Fiscal Federalism
Positive Outcomes
- ↑ State fiscal autonomy (higher tax devolution)
- Strengthened cooperative federalism (GST Council)
- Reduced discretionary transfers
- Improved fiscal transparency & predictability
Concerns / Limitations
- GST constraints:
- Limited taxation powers of States
- Compensation delays → fiscal stress
- Centrally Sponsored Schemes still conditional
- Rising cess & surcharge (not shareable with States) → reduces divisible pool
- Increasing off-budget borrowings
- Data / Evidence
- States’ share in central taxes ↑ significantly post-14th FC
- GST accounts for ~50% of indirect tax revenue
- Cesses & surcharges ~15–20% of gross tax revenue (reducing devolution pool)
- Overall Assessment
- Shift from:
- Centralized, discretionary model → rule-based fiscal federalism
- But evolving towards “cooperative yet controlled federalism”
- Way Forward
- Rationalize cess & surcharge usage
- Ensure timely GST compensation / reforms
- Strengthen State fiscal capacity
- Enhance role of Inter-State Council & NITI Aayog
Conclusion:
Recent reforms have significantly strengthened fiscal federalism, yet persistent structural and policy challenges require continuous calibration to ensure true cooperative and balanced Centre–State financial relations
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