🟦 IAS Mains 2017 — Essay 6
“Impact of the new economic measures on fiscal ties between the Union and States in India.”
Domain: Polity · Federalism · Economy
Tagline: From Command Federalism to Negotiated Federalism
🟧 1. Fodder Seeds — Strategic Brainstorm Points 💡
“New economic measures” post-1991 & post-2014:
- Liberalisation, GST, FRBM, DBT
- Aayog replacing Planning Commission
Fiscal ties = revenue + expenditure + autonomy
Shift from plan funding → tax devolution
GST:
- one nation, one tax
- cooperative yet contested federalism
Centrally Sponsored Schemes (CSS):
- fewer but bigger
- conditional autonomy
Fiscal centralisation vs policy decentralisation
Union’s dominance in:
- taxation powers
- borrowing space
- emergency fiscal tools
States’ dependency remains structurally high
🟦 2. Constitutional & Federal Foundations 🇮🇳
Seventh Schedule:
- Union, State, Concurrent Lists
Finance Commission:
- vertical & horizontal devolution
14th & 15th FC:
- higher tax share
- performance criteria
GST Council:
- constitutionalized federal body
Fiscal federalism ≠ political federalism
Debate: autonomy vs uniformity
🟥 3. Political Economy & Intellectual Seeds 🌍
Fiscal federalism theory:
- efficiency vs equity
Market reforms centralise revenue flows
Competitive federalism narrative
Centre as redistributor
Global trend:
- monetary centralisation
- fiscal constraints on sub-national units
Risk of “soft federalism”
🟩 4. Governance, Economy & GS Dimensions 🏛️
GST impact:
- initial revenue instability for states
- compensation debates
Borrowing limits under FRBM
COVID era:
- expanded Centre role
- states fiscal stress exposed
DBT bypassing states:
Aayog:
- advisory, not allocative body
Infrastructure funding skew
🟪 5. Snapshot UPSC Revision Seeds 📌
More tax share ≠ more autonomy
GST is cooperative yet constraining
States spend more, tax less
Fiscal federalism is dynamic
Centre–State trust is central variable
🌳 ESSAY TREE — UPSC STRUCTURE MAP
I. Introduction
Evolution of fiscal federalism in reform era.
II. Meaning of Fiscal Ties
Revenue, expenditure, borrowing powers.
III. Pre-Reform Structure
Planning Commission & control model.
IV. New Economic Measures
GST, FCs, Aayog, DBT.
V. Positive Impacts
Transparency, tax base, coordination.
VI. Areas of Strain
Autonomy loss, compensation delays.
VII. State-Level Experience
Rich vs poor states.
VIII. Crisis Stress Test
Pandemic & fiscal resilience.
IX. Way Forward
Trust-based cooperative federalism.
X. Conclusion
From centralisation vs decentralisation to partnership.
🟦 IAS MAINS 2017 — ESSAY–6
“Impact of the new economic measures on fiscal ties between the Union and States in India.”
Introduction
Fiscal relations between the Union and the States form the backbone of India’s federal structure. While political federalism defines authority, fiscal federalism determines autonomy in practice. Since the economic reforms of 1991—and more sharply after the mid-2010s—a series of new economic measures have altered how revenues are raised, shared, and spent. These changes have reshaped Centre–State fiscal ties, moving India from a command-based model toward a more negotiated, though contested, form of federalism.
Understanding Fiscal Ties in Indian Federalism
Fiscal ties encompass three core elements: revenue-raising powers, expenditure responsibilities, and borrowing authority. The Constitution assigns ample expenditure obligations to the States—health, education, agriculture, law and order—while the Union retains stronger taxation and borrowing powers. This structural imbalance makes intergovernmental transfers essential.
Historically, mechanisms such as the Finance Commission, Planning Commission, and centrally sponsored schemes mediated these ties. New economic measures have significantly reconfigured this mediating architecture.
Pre-Reform Fiscal Structure
Before liberalisation, India followed a highly centralised fiscal model. The Planning Commission allocated plan grants and loans, often attached with conditions, reducing state discretion. Revenue sharing was modest, and discretionary transfers were common. While this model ensured national planning coherence, it constrained state autonomy and fostered fiscal dependence.
Economic reforms questioned this arrangement by emphasising efficiency, transparency, and market integration.
Key New Economic Measures
The most transformative reform has been the introduction of the Goods and Services Tax (GST). By subsuming multiple indirect taxes into a unified framework, GST fundamentally altered states’ taxation powers. While it broadened the tax base and reduced inefficiencies, it also required states to surrender independent fiscal instruments.
Complementing GST, the 14th and 15th Finance Commissions increased states’ share in divisible taxes, signalling a move toward greater fiscal devolution. The replacement of the Planning Commission with NITI Aayog ended plan-based transfers, shifting the Centre’s role from allocator to advisor.
Direct Benefit Transfers (DBT), FRBM discipline, and rationalisation of centrally sponsored schemes further reshaped fiscal governance.
Positive Impacts on Fiscal Federalism
These reforms introduced greater transparency, predictability, and efficiency. Higher tax devolution enhanced states’ untied resources, allowing flexibility in expenditure priorities. GST institutionalised cooperative federalism through the GST Council—a constitutional body enabling collective decision-making.
Market-friendly reforms improved compliance, reduced tax cascading, and strengthened macroeconomic stability. States benefited from a larger, integrated national market and improved long-term revenue prospects.
Areas of Strain and Contestation
Despite these benefits, the new measures have also generated tensions. GST constrained states’ fiscal autonomy by limiting independent tax levers. Delays in GST compensation exposed states to revenue shocks, especially during economic downturns.
Centrally sponsored schemes, though rationalised, still impose conditionalities. DBT mechanisms often bypass state governments, weakening their intermediary role. Borrowing limits under the FRBM Act restrict states’ fiscal space, even as states shoulder expanding welfare and infrastructure responsibilities.
Thus, while devolution increased in form, autonomy has faced functional constraints.
Uneven State-Level Experiences
Fiscal impact has varied across states. Manufacturing and consumption-heavy states have fared better under GST, while others experienced volatility. Richer states often contest redistribution formulas, whereas poorer states remain dependent on central transfers.
This unevenness underscores the complexity of balancing equity and efficiency within fiscal federalism.
Crisis as a Stress Test: The Pandemic Experience
The COVID-19 pandemic revealed structural vulnerabilities in Centre–State fiscal relations. States bore the brunt of health and welfare spending, while revenues collapsed. Emergency borrowing arrangements and special transfers highlighted the Centre’s decisive role—but also exposed the limited fiscal resilience of states.
Crisis management reaffirmed the need for trust-based cooperation rather than hierarchical control.
Way Forward: Strengthening Cooperative Federalism
Sustainable fiscal federalism requires recalibrating Centre–State relations. Key priorities include:
- Ensuring timely and transparent compensation mechanisms
- Expanding states’ borrowing flexibility during downturns
- Reducing conditionalities on central transfers
- Strengthening intergovernmental institutions for dialogue
Fiscal coordination must respect diversity while preserving national macroeconomic stability.
Conclusion
New economic measures have transformed India’s fiscal landscape—introducing efficiency and integration while reviving debates on autonomy and control. The impact on Centre–State ties has been neither uniformly centralising nor wholly decentralising; it has been dynamic and contested.
The future of Indian federalism depends on converting procedural cooperation into genuine partnership. Fiscal ties must evolve from transactional arrangements into trust-based collaboration, ensuring that economic reform strengthens—not strains—the federal spirit enshrined in the Constitution.
🟨SPIN-OFF ESSAY
Rebalancing the Fiscal Compact: How Economic Reforms Have Redefined Centre–State Relations
India’s federal structure is constitutionally strong, but fiscally asymmetrical. While States shoulder the bulk of developmental and welfare responsibilities, the Union retains superior revenue-raising and borrowing powers. New economic measures introduced since liberalisation—and intensified in recent years—have profoundly altered this fiscal compact. The result has been a redefinition of Centre–State fiscal ties, marked by both deeper cooperation and sharper contestation.
Fiscal Federalism: The Operating System of Indian Federalism
Federalism is not sustained by constitutional text alone; it is operationalised through fiscal flows. States depend on predictable revenue streams to fund public services such as health, education, agriculture, and infrastructure. Any reform that restructures taxation, expenditure, or transfers therefore reshapes federal balance in practice.
Economic reforms were introduced to improve efficiency, transparency, and national integration—but their federal implications have been far-reaching.
From Plan Control to Market Coordination
Prior to reforms, fiscal relations were mediated through the Planning Commission, which exercised discretionary control over plan grants. This model ensured national priorities but constrained state autonomy.
The shift toward market-oriented reforms diluted discretionary planning but also transferred greater responsibility to states. The abolition of the Planning Commission and the rise of NITI Aayog symbolised this transition—from command federalism to consultative federalism—though without corresponding financial authority at the state level.
GST and the New Architecture of Shared Sovereignty
The Goods and Services Tax marked the most significant transformation in Centre–State fiscal relations. By subsuming state indirect taxes, GST created a unified national market and improved compliance. At the same time, it required states to surrender long-standing taxation powers.
The GST Council exemplifies cooperative federalism in design, yet tensions over rate-setting, compensation, and revenue certainty reveal the difficulties of shared sovereignty. Cooperation works best in stable times; stress exposes institutional fragility.
Finance Commissions and Devolution Paradox
Higher tax devolution recommended by recent Finance Commissions has increased untied funds for states. However, this numerical increase masks functional constraints. Borrowing limits under FRBM, conditional central schemes, and sector-specific mandates restrict real fiscal freedom.
Thus, states enjoy greater responsibility but limited flexibility—a paradox that complicates governance outcomes.
Crisis and the Limits of Fiscal Autonomy
Economic shocks such as the COVID-19 pandemic tested the robustness of reformed fiscal relations. States faced collapsing revenues alongside rising expenditure demands. Emergency borrowing arrangements underscored the Union’s indispensability—but also revealed states’ structural fiscal vulnerability.
Crisis situations reaffirm the importance of cooperative trust rather than rule-based rigidity.
Unequal Outcomes Across States
The impact of reforms has varied. Economically stronger states contest redistribution formulas, while weaker states remain dependent on transfers. This diversity highlights a central challenge of fiscal federalism: balancing national equity with regional competitiveness.
Reforms that ignore asymmetry risk destabilising consensus.
Toward a Mature Fiscal Partnership
The future of Indian fiscal federalism lies in institutional maturity rather than unilateral control. Strengthening fiscal ties requires:
- Predictable compensation and transfer mechanisms
- Greater borrowing flexibility during downturns
- Reduced conditionality in central schemes
- Empowered intergovernmental dialogue forums
Economic efficiency must rest on political trust.
Conclusion
New economic measures have neither dismantled nor perfected India’s federal fiscal structure. They have transformed it—introducing efficiency, transparency, and integration, while illuminating unresolved tensions over autonomy and accountability.
Ultimately, fiscal ties can serve as instruments of either control or collaboration. The durability of India’s federal system will depend on whether economic reforms are guided by partnership and mutual trust—or constrained by central dominance at the cost of cooperative federalism.