Answer

Federalism in India, though not explicitly mentioned in the Constitution, has been a foundational principle guiding its governance. This unique structure, often referred to as quasi-federal  as stated by K.C. Wheare, it facilitates power-sharing between the central government and states. Recent disputes over fiscal federalism have raised concerns about equitable resource distribution and the autonomy of states in fiscal matters.

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Federalism as Integral to India’s Constitutional Framework

• Part of the Basic Structure Doctrine: Federalism, though absent in the Constitution’s text, is a part of its basic structure.
  For example: The Supreme Court restricted misuse of the President’s Rule in  S.R. Bommai vs Union of India (1994), protecting State autonomy.
• Balanced Division of Powers: The Constitution clearly delineates legislative, administrative, and financial powers between the Union and States in three distinct lists (Seventh Schedule).
  For example: States govern agriculture, law and order, and local governance, allowing regional autonomy in key sectors.
• Cooperative Federalism Framework: Governance in India emphasizes cooperative federalism, with intergovernmental institutions like the NITI Aayog and GST Council promoting collaboration.
  For example: The GST Council resolves tax-related issues through consensus between Union and State governments.
• Judicial Reinforcement of Federal Principles: India’s judiciary has strengthened federalism through landmark judgments, ensuring State autonomy while preserving the Centre-State balance.
  For example: The Government of NCT of Delhi vs Union of India (2024) decision upheld the elected Delhi government’s authority over services.
• Emergency Flexibility in Federal Structure: India’s quasi-federal framework ensures adaptability during national crises, with temporary centralization of powers under constitutional provisions.
  For example: The Centre imposed nationwide lockdowns during COVID-19 using the Disaster Management Act for uniform measures.

Challenges Posed by India’s Federal Structure in Fiscal Federalism

• Centralization of Fiscal Powers: The introduction of the Goods and Services Tax (GST) subsumed most indirect taxes, reducing States’ autonomy in raising revenue.
  For example: The delay in GST compensation payments has further strained the fiscal capacity of States, especially during crises like COVID-19.
• Revenue Imbalance Between Union and States: The Finance Commission’s allocation formula often creates disparity as resource-rich States contribute more but receive disproportionately less funding.
  For example: Southern States like Tamil Nadu and Kerala criticised receiving lower Finance commission allocations despite contributing higher revenues.
• Centrally Sponsored Schemes: Centrally Sponsored Schemes (CSS) often restrict State-level priorities, forcing States to align spending with pre-decided Central schemes.
  For example: The PMAY housing scheme faced criticism for inflexible funding patterns that fail to address unique State needs.
• Over-reliance on Borrowings: Restrictions under the Fiscal Responsibility and Budget Management (FRBM) Act limit the fiscal maneuverability of States, forcing them to rely on borrowing for capital expenditure.
• Population-based Delimitation Discontent: Upcoming delimitation exercises may marginalize States that effectively controlled population growth, reducing their representation in Parliament.
  For example: Southern States like Kerala oppose delimitation benefiting populous States like Uttar Pradesh and Bihar.
• State Borrowing Restrictions by Centre:Union government-imposed borrowing caps significantly limit State governments’ fiscal freedom to implement welfare and developmental policies.
  For example: Tamil Nadu raised objections in 2023 against restrictions impacting their welfare-driven borrowing initiatives.

Opportunities Posed by India’s Federal Structure in Fiscal Federalism

• Strengthening Cooperative Federalism: The GST Council’s structure promotes inclusivity and promotes collaboration between the Centre and States in taxation and fiscal policy decisions.
  For example: The Council successfully resolved tax rate disputes over essentials like food grains through mutual agreement.
• Localised Resource Allocation for Development: Federalism enables targeted resource allocation, allowing States to address unique developmental and economic challenges specific to their regions.
  For example: Northeastern States benefit significantly from the North East Special Infrastructure Development Scheme (NESIDS).
• Reimagining Centrally Sponsored Schemes: Providing States with greater flexibility in the implementation of CSS ensures that schemes are tailored to local needs.
• Encouraging Policy Innovation in States: Autonomy allows States to experiment with tailored, innovative policies addressing local socio-economic needs and challenges effectively.
  For example: Kerala’s Kudumbashree program empowered women through microfinance and set a national benchmark for similar programs.
• Preservation of Regional Identity and Autonomy: Fiscal federalism ensures States can maintain regional language, cultural, and historical heritage, fostering diversity within the Union.
  For example: Tamil Nadu allocates significant funds for Tamil language promotion and development in its annual State budget.
• Improved Crisis Response through Coordination: Federalism facilitates efficient coordination between Union and State governments during crises, enhancing disaster management efforts and resource sharing.
  For example: West Bengal collaborated effectively with the Centre during Cyclone Amphan (2020) for relief and rehabilitation measures.

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India’s federal structure must evolve to address the challenges posed by fiscal federalism. Strengthening inter-state cooperation, enhancing resource distribution mechanisms, and empowering local governments will ensure sustainable growth. A balanced approach to central-state relations is vital for promoting a more equitable and harmonious federal framework.

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