Over the past 11 years, NITI Aayog has driven cooperative and fiscal federalism, enabling the Centre and states to collaborate for socioeconomic transformation and shared goals.

Federalism in the Indian Context

• Federalism refers to the division of powers between different levels of government—Union and States.

• The Indian Constitution provides a quasi-federal framework, combining:
  • Strong centre with Autonomous but coordinated states.
• Indian federalism is “dynamic” – evolving from centralised planning to cooperation, competition, and shared fiscal responsibility.

Types of Federalism

Cooperative Federalism

• Centre and States work together as partners, sharing ideas, resources, and responsibilities to achieve national goals.
• Emphasises horizontal coordination instead of top-down control.
• Constitutional Backing:
  • Article 263: Inter-State Council for coordination.
  • Concurrent List (Seventh Schedule): Joint legislation by Union and States.

Competitive Federalism

• States compete in policy efficiency, service delivery, and investment climate to attract resources and investments.
• Focus on outcome-based governance, innovation, and accountability.
• Tools and Indices by NITI Aayog: 
  • State Health Index; India Innovation Index; School Education Quality Index etc.
    • These foster healthy competition among states and UTs.
• Features:
  • Promotes best practices, decentralisation, and intra-state performance benchmarking.
  • Shifts states from passive implementers to active developers.

Fiscal Federalism

• Deals with division of revenue-raising and expenditure responsibilities between the Union and states.
• Ensures states have adequate fiscal autonomy to meet their governance obligations.
• Constitutional Provisions:
  • Article 280: Finance Commission recommends devolution of taxes.
  • Article 268–293: Deal with distribution of revenue, grants-in-aid, borrowing powers.

Key Developments to Indian Federalism

• Increased Tax Devolution: 14th Finance Commission (2014) has Increased states’ share in divisible pool of taxes from 32% to 42%, the largest-ever single increase.
  • States’ share in central taxes rose from ₹3.37 lakh crore (2014-15) to ₹12.23 lakh crore (2024-25).
• GST Council:
  • Promotes fiscal federalism through consensus-based decision-making.
  • States receive ~71% of GST revenue, Centre ~29%.
  • Centre foregoes 0.5-1% of GDP annually to ensure 14% compensation guarantee to states.
  • ₹6.52 lakh crore provided as GST compensation (2017-18 to 2024-25).
• Increased Central Transfers:
  • Gross transfers (taxes, grants, loans) to GDP ratio increased from 5.2% (2004-14) to 6.5% (2014-24).
  • Grants from Centre increased by 234%, gross loans by 992% (2014-24).
  • Union Budget 2025-26: ₹1.5 lakh crore allocated for 50-year interest-free loans to states for capital expenditure.
  • Example: Central taxes and grants as % of total revenue increased in Tamil Nadu (25% to 31%) and West Bengal (49% to 56%) from 2004-14 to 2014-24.
  • Total central transfers to states/UTs increased by ₹14.96 lakh crore (2014-24).

NITI Aayog’s Initiatives to Deepen Federalism

• Cooperative Federalism Initiatives
  • Institutional Platforms
    • Governing Council: Headed by the PM, includes all Chief Ministers and Lieutenant Governors. 
      • Acts as the apex intergovernmental forum for development planning.
    • Chief Secretaries’ Conference: Facilitates administrative-level cooperation.
    • Zonal Councils and Thematic Working Groups: Support regional coordination and policy input.
  • Aspirational Districts & Blocks Programme
    • Covers 112 backward districts and 500+ blocks.
    • Targets 49 performance indicators across five themes (health, education, agriculture, financial inclusion, infrastructure).
    • Driven by collaborative planning and monthly delta rankings.
• Competitive Federalism Initiatives
  • Index-Based State Ranking: NITI Aayog publishes several performance indices to rank states and foster competition:

• Facilitating Fiscal Federalism (Advisory Role)
• • While it does not allocate funds like the Planning Commission, NITI Aayog:
    • Evaluates and recommends rationalisation of Centrally Sponsored Schemes (CSS).
    • Advises States on better budget practices and use of untied grants.
    • Tracks reforms linked to performance-based finance (e.g., Power Sector, Urban Governance).
  • Development Monitoring and Evaluation Office (DMEO)’s outcome evaluation strengthens accountability for states in use of financial transfers.

How Central Sector (CS) and Centrally Sponsored Schemes (CSS) Empower States?

• Access to Financial Resources: CSS provide a predictable stream of funding for states in core development areas (health, rural roads, sanitation).
  • States with limited fiscal capacity benefit from these national programs, particularly EAG (Empowered Action Group) states.
• Infrastructure and Service Delivery: CSS fund large-scale state-level projects like:
  • PMGSY: Over 7.7 lakh km of rural roads built with Centre-State cooperation.
  • Jal Jeevan Mission: Over 15.44 crore households connections provided with state implementation and Centre support.
• Institutional and Technical Capacity Building: Schemes include capacity-building components like training, digital dashboards, grievance redressal mechanisms.
  • Example: National Health Mission provides funds for medical staff, infrastructure, equipment—states manage rollout.
  • Digital India initiatives (CS) offer states e-Governance platforms and IT upgradation.

• Enhanced State Ownership Through Decentralised Implementation: States design and execute schemes within centrally defined parameters, giving them operational control and flexibility for localised innovation.
  • Example: Under PMAY–Gramin, while funding norms are centrally fixed, states identify beneficiaries and finalise housing designs and construction modalities.
• Performance Incentives and Innovation: CSS increasingly include performance-linked grants (e.g., under 15th Finance Commission).
  • Delta Ranking in Aspirational Districts Programme drives innovation at the local level.
  • Atal Innovation Mission (CS) promotes start-up ecosystems in Tier-II/III cities.
• Promoting Cooperative and Competitive Federalism: CSS ensures Centre–State coordination via platforms like Governing Council of NITI Aayog, Inter-State Council etc.
  • CS schemes foster state-level competition (e.g., Innovation Index, Export Preparedness Index).
• Capacity to Implement National Priorities Locally: CS and CSS empower states to act as execution arms for India’s national development agenda, ensuring that policy objectives reach the grassroots.
  • Example: Under the Atal Innovation Mission (a CS scheme), Atal Tinkering Labs have been set up in 10,000+ schools across all states and UTs, enabling grassroots innovation and entrepreneurship.

Challenges in Deepening Federalism in India

• Vertical Fiscal Imbalance: States collect only around 38% of total government revenues, but are responsible for over 62% of total public expenditure, particularly in critical sectors like health, education, and water.
  • In the Union Budget 2024-25, states’ share of gross tax revenue dropped to 30% from the 15th Finance Commission’s recommended 41%, due to increased cesses/surcharges. 
• Encroachment into State List via CSS and Article 282: The Centre increasingly intervenes in State List subjects through Centrally Sponsored Schemes (CSS), often designed unilaterally and tied to specific conditions.
  • In 2023-24, states like Tamil Nadu criticized the National Health Mission’s rigid funding conditions (60:40), limiting flexibility in addressing local healthcare needs.
• Weak State Finance Commissions and Local Fiscal Federalism: While Union Finance Commissions are regular and constitutional, most states fail to regularly constitute or implement the recommendations of their State Finance Commissions (SFCs), leading to weak urban and rural local body funding.
  • In 2023, Bihar’s failure to constitute its 6th SFC on time delayed fund transfers to panchayats, stalling rural sanitation projects under Swachh Bharat Mission.
• Politicisation of Intergovernmental Relations: Federal mechanisms like Inter-State Council and Zonal Councils are underutilised. 
  • States have expressed dissatisfaction over GST Council voting asymmetry and perceived bias in fund allocation and tax compensation.
    • Centre holds 1/3, states 2/3 of GST Council votes; 75% majority required for resolutions.
• Unequal Capacity for Competitive Federalism: Performance-based schemes (e.g., SDG India Index, Innovation Index) risk widening inequality as wealthier and administratively advanced states perform better, while resource-poor states struggle to compete.
  • States like Kerala, Tamil Nadu consistently top indices, while states like Bihar and Jharkhand fall behind due to structural constraints, despite performance-linked grants.
• Institutional Ambiguity Post-Planning Commission: While NITI Aayog has emerged as a think tank, it lacks the statutory authority and fund-allocating powers of the Planning Commission, limiting its capacity to enforce cooperative or consultative federalism.
  • NITI Aayog’s Governing Council and DMEO are useful platforms, but outcomes remain recommendatory, without enforceable consensus.
• Delays and Gaps in GST Compensation and Fiscal Transfers: States have reported delayed GST compensation, affecting budget planning and liquidity. Compensation provisions ended in 2022, raising concerns over revenue shortfall management.
  • ₹6.52 lakh crore was paid as compensation from 2017–2023, but delays and uncertainty caused tension between states and Centre.

Way Forward for Deepening Federalism in India

• Institutionalise the Inter-State Council and Zonal Councils: Regular meetings of the Inter-State Council (ISC) under Article 263 should be held with an independent secretariat.
  • Zonal Councils must be empowered to address regional disputes and foster policy coordination.
• Reform Centrally Sponsored Schemes (CSS): Rationalise and reduce the number of CSS.
  • Adopt a block grant approach for high-performing states to increase flexibility.
  • Encourages functional federalism by aligning CSS with local needs.
• Share Cesses and Surcharges in the Divisible Pool: Limit the use of non-divisible revenue instruments like cesses and surcharges.
  • Include them in the Finance Commission’s divisible pool to ensure equitable tax devolution.
• Strengthen State Finance Commissions (SFCs): Ensure regular constitution, autonomy, and implementation of SFC reports.
  • Empowers the third tier and operationalises the 73rd and 74th Amendments.
• Build Capacity for Competitive Federalism: Provide handholding support to lagging states for implementing reforms and meeting index targets.
  • Tailor performance-based grants to state capacity and baseline conditions.
• Institutional Reforms in NITI Aayog: Grant statutory status to NITI Aayog to formalise its role as the nodal federal planning institution.
  • Strengthen DMEO to create independent evaluation frameworks for both Centre and States.
• Restore Fiscal Dialogue on GST: Address concerns around GST compensation, voting asymmetry, and trust deficit through structured dialogue.
  • Consider constitutional mechanisms to periodically review the GST framework in a federal context.

Conclusion

NITI Aayog has transformed India’s federal landscape by fostering cooperative, competitive, and fiscal federalism, aligning with the Constitution’s quasi-federal spirit. Its initiatives, from Aspirational Districts to performance indices, empower states while addressing regional disparities, though challenges like fiscal imbalances and politicization require sustained reforms.

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