Introduction 

Fiscal federalism refers to the division of financial powers and responsibilities between different levels of government to ensure both autonomy and coordination. In India, fiscal federalism has evolved from centralised planning to greater devolution, shaped by the Constitution, Finance Commissions, GST, and recent reforms in resource transfers.

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Evolving Pattern of Centre-State Financial Relations

• Planned Development Era: Central Planning (NITI Aayog earlier Planning Commission) shaped state priorities through plan transfers.
• Finance Commissions: Periodic devolution of taxes and grants improved states’ fiscal autonomy.
• Shift to GST Regime (2017): Brought uniformity but reduced states’ independent taxation powers.
• Centrally Sponsored Schemes (CSS): Increased role of conditional grants, aligning states with national objectives.
• Post-14th & 15th Finance Commissions: Higher share of central taxes (42%, later 41%) devolved to states.

Challenge in Evolving pattern 

• Vertical Imbalance: States often rely heavily on central transfers due to limited own-revenue sources, leading to dependency and reduced fiscal autonomy.
  • Eg: For over a decade now, States’ own tax revenue as a share of their total revenue has remained considerably below the 50% mark.
• Horizontal Imbalance: Unequal resource distribution among states creates disparities in development and service delivery.
• Conditional Transfers: Centrally sponsored schemes often come with strict conditions, limiting states’ flexibility in using funds according to local priorities.
• Delay in Fund Release: Slow or irregular transfer of central funds hampers timely execution of development projects.
  • Eg: Several states flagged delays in GST compensation payments (post-2017), affecting their fiscal stability during the pandemic
• Overlapping Responsibilities: Ambiguity in fiscal responsibilities between Centre and States can lead to duplication, inefficiency, and intergovernmental disputes.

Impact of Recent Reforms on Fiscal Federalism in India

Positive

• Higher Devolution: 14th Finance Commission raised states’ share in central taxes to 42% (41% after J&K reorganisation), giving them greater fiscal space.
• Institutionalised Cooperative Federalism: GST Council ensures joint decision-making between Centre and states on indirect taxes.
• Predictability & Equity: Formula-based transfers and focus on fiscal responsibility improved transparency and accountability.

Concerns

• Erosion of Autonomy: GST subsumed many state taxes, making states reliant on compensation from the Centre.
• Shrinking Divisible Pool: Rising cesses and surcharges, which are non-sharable, reduce states’ actual share.
• Delays & Trust Deficit: GST compensation delays and conditional grants created friction, especially during COVID-19.

Conclusion

Centre–State financial relations have advanced but still face autonomy and equity gaps. Strengthening fiscal federalism requires predictable transfers, flexible State spending, and empowered institutions like the GST Council to balance national goals with regional needs.

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