Revision summary
Finance Commissions devolve taxes; Planning Commission Plan grants created a discretionary second channel. Sarkaria and Punchhi criticised that discretion. NITI Aayog ended Plan cheques; 14th FC raised the States’ share of the divisible pool to 42%. GST shares tax but limits State rate power; cesses outside the pool and CSS keep Union leverage. Article 293 borrowing conditions remain a hard federal tool.
Model answer
Introduction
Fiscal federalism is who raises the rupee and who spends it. In India the Union is the great collector (income tax, now a large share of GST) and the States are the great spenders (health, education, law and order). Planned development after 1950 deepened that split: Five-Year Plans and a Planning Commission sat beside the constitutional Finance Commission. Recent reforms have changed the pipes, not the Union’s weight.
Body
The planned pattern
Article 280 Finance Commissions recommended tax devolution and grants. Article 282 allowed the Union to make grants for any public purpose — the hook for Plan grants. The Planning Commission, extra-constitutional, allocated Central assistance and approved State plans. Gadgil–Mukherjee formulae tried to be fair; in practice States bargained in the NDC. Sarkaria and later Punchhi recorded the grievance: discretionary plans made Chief Ministers lobby Delhi for what the Constitution had already divided.
Tied Centrally Sponsored Schemes proliferated. States became implementing agencies with matching shares. Vertical imbalance (Union collects more) plus horizontal imbalance (poor States need more) was managed by FC equalisation and Plan politics.
Recent reforms
NITI Aayog (2015) ended Plan grants as a Planning Commission power. It is a think tank, not a cheque-book. That cleared space for the Finance Commission — the 14th FC jumped States’ share of the divisible pool to 42% (15th FC: 41% after J&K became UTs). This was the high point of rule-based devolution.
GST (101st Amendment) fused many State taxes into a shared tax with a GST Council. Compensation for five years (cess) cushioned the shock. After compensation ended, States felt the loss of rate autonomy. Council voting (weighted toward the Union) is cooperative in form and Union-heavy in arithmetic. Cesses and surcharges still sit outside the divisible pool, which shrinks the 41% in real life — a standing federal complaint.
COVID-19 extra borrowing, FRBM paths, and conditions on State borrowing (Article 293) showed the Union as gatekeeper of State credit. Centrally Sponsored Schemes remain large. 16th Finance Commission will reset shares again.
- Impact: more automatic money via FC, less Plan patronage, more GST jointness, more Union control via cess, CSS and borrowing. Fiscal federalism is not a return to 1950s provincial autonomy. It is formula plus a strong Centre in the Council and in the bond market. Punchhi’s call for fewer CSS and cleaner devolution is only partly met.
A healthy next step is to bring a share of cess into the pool, cap CSS, and let States set more GST-like rates in a band — cooperation without a begging bowl.
Flow diagram
flowchart TD FC[Finance Commission] --> D[Tax devolution] PC[Planning Commission] --> G[Plan grants] PC -.->|ended| N[NITI] GST[GST Council] --> J[Joint tax] C[Cess CSS 293] --> U[Union leverage]
Conclusion
Planned development ran a second, discretionary treasury beside the Finance Commission. NITI and the 14th FC strengthened the constitutional channel. GST and cesses, CSS and borrowing rules have recentralised by other means. Fiscal federalism today is a larger guaranteed share inside a still Union-led system.
Quick related
Students also ask
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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.
Next question on this syllabus topic (2024 · Q13). View answer →
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Did NITI Aayog make States richer?
It stopped being a grant-giver. Richer or poorer now depends on the Finance Commission, GST yield and CSS, not on NITI cheques.
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Are cesses unconstitutional?
They are allowed, but heavy use of cess and surcharge undermines the spirit of tax sharing that the FC is meant to run.
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Q13 · UPSC Mains 2024 · GS II · 15 marks
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.
Federal Structure and Devolution
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Federal Structure and Devolution
The 101st Constitutional Amendment, 2016, introduced GST through Articles 246A, 269A and 279A. It subsumed many Union and State indirect taxes into CGST, SGST and IGST. The GST Council gives States two-thirds vote weight and the Union one-third, with a three-fourths decision rule. Five-year compensation was the federal bargain; dual GST kept States as taxing governments. Mohit Minerals held Council recommendations not strictly binding law. Accommodation is real in design and strained in revenue politics after compensation.
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