Finance Commission – Issues related to devolution of resources

Needed, greater decentralisation of power


From UPSC perspective, the following things are important :

Prelims level: Federal system.

Mains level: Paper 2-Why it is said that there is a paradox in the federal system of India? Covid-19 has highlighted the need for decentralisation in India.


Even as States have taken up positions of leadership in the pandemic response, federal limitations are becoming hurdles.

State governments at the position of leadership

  • In the fight against the pandemic, one of the striking features of governance has been the signal role played by State Chief Ministers across India.
  • Proactive measures: Even before the Union government invoked the Disaster Management Act, 2005, many State governments triggered the Epidemic Diseases Act, 1897, and installed a series of measures to combat what was then an oncoming onslaught of COVID-19.
  • These actions have not always been perfect. Some of them have even disproportionately trenched upon basic civil liberties.
  • But, by and large, they have been tailored to the reality faced on the ground by the respective governments.
  • Policies to address local concerns: States such as Maharashtra, Kerala, Tamil Nadu, Rajasthan, and Karnataka have shaped their policies to address their direct, local concerns.
  • They have communicated these decisions to the public with clarity and consideration, helping, in the process, to lay out a broad framework for the nation.
  • Not just the laboratories of democracy: In doing so, they have acted not merely as “laboratories of democracy”, to paraphrase the former U.S. Supreme Court Justice Louis Brandeis, but also as founts of reasoned authority.

Federal arrangements placing limitations on the states

  • Equally, though, as much as State governments have taken up positions of leadership, they have repeatedly found themselves throttled by the limitations of the extant federal arrangement.
  • The Centre for Policy Research has pointed out at least three specific limitations.
  • Funds and structuring own package: The inability of States to access funds and thereby structure their own welfare packages.
  • Curbs imposed by PFMS: The curbs imposed by a public finance management system (PFMS) that is mired in officialdom.
  • This has prevented States from easily and swiftly making payments for the purchase of health-care apparatus such as ventilators and personal protective equipment.
  • Disruption of supply chains: Three, the colossal disruption of supply chains not only of essential goods and services but also of other systems of production and distribution, which has placed States in a position of grave economic uncertainty.
  • Need to decentralise: As these limitations demonstrate an urgent need to decentralise administration, where States — and local bodies acting through such governments — are allowed greater managerial freedom.
  • Under such a model, the Union government will command less but coordinate more.

Indian federalism-two distinct levels

  • There are varying accounts of what Indian federalism truly demands.
  • Two levels: What is manifest from a reading of the Constitution is that it creates two distinct levels of government: one at the Centre and the other at each of the States.
  • The Seventh Schedule to the Constitution divides responsibilities between these two layers.
  • The Union government is tasked with matters of national importance, such as foreign affairs, defence, and airways.
  • But the responsibilities vested with the States are no less important. Issues concerning public health and sanitation, agriculture, public order, and police, among other things, have each been assigned to State governments.
  • In these domains, the States’ power is plenary.
  • This federal architecture is fortified by a bicameral Parliament.
  • Significantly, this bicameralism is not achieved through a simple demarcation of two separate houses, but through a creation of two distinct chambers that choose their members differently-
  • A House of the People [Lok Sabha] comprising directly elected representatives and a Council of States [Rajya Sabha] comprising members elected by the legislatures of the States.

Financial autonomy of the states

  • Ensuring financial autonomy: In formulating this scheme of equal partnership, the framers were also conscious of a need to make States financially autonomous.
  • No overlap: To that end, when they divided the power to tax between the two layers of government they took care to ensure that the authority of the Union and the States did not overlap.
  • Therefore, while the Centre, for example, was accorded the power to tax all income other than agricultural income and to levy indirect taxes in the form of customs and excise duties, the sole power to tax the sale of goods and the entry of goods into a State was vested in the State governments.
  • The underlying rationale was simple: States had to be guaranteed fiscal dominion to enable them to mould their policies according to the needs of their people.

History of paradox in federal system of India

  • Despite this plainly drawn arrangement, the history of our constitutional practice has been something of a paradox.
  • It is invariably at the level of the States that real development has fructified.
  • But the Union has repeatedly displayed a desire to treat States, as the Supreme Court said in R. Bommai v. Union of India, as mere “appendages of the Centre”.
  • Time and again, efforts have been made to centralise financial and administrative power, to take away from the States their ability to act independently and freely.
  • Following five examples demonstrated that the point made here.

1 Matters of finance-what was expected in theory did not realise

  • Consider the widely hailed decision to accept the 14th Finance Commission’s recommendation for an increase in the share of the States in total tax revenues from 32% to 42%.
  • While, in theory, this ought to have enabled the States to significantly increase their own spending, in reality, as a paper authored by Amar Nath H.K. and Alka Singh of the National Institute of Public Finance and Policy suggests, this has not happened.
  • What went wrong? Gains made by the States, as the paper underlines, have been entirely offset by a simultaneous decline in share of grants and by a concomitant increase in the States’ own contribution towards expenditures on centrally sponsored schemes.

2. Goods and Service Tax

  • The decline in the sovereignty of the states: Notably, the creation of a Goods and Services Tax regime, which far from achieving its core purpose of uniformity has rendered nugatory the internal sovereignty vested in the States.
  • By striking at the Constitution’s federal edifice, it has made the very survival of the States dependent on the grace of the Union.
  • The tension today is so palpable that a number of the States are reported to have written to the Union Finance Ministry.
  • More than four months’ worth of Goods and Services Tax compensation to the States — reportedly totalling about a sum of ₹40,000 crore — remains unreleased.

3. Passing a bill as a money bill

  • The Union government’s centralising instinct, though, has not been restricted to matters of finance.
  • It has also introduced a slew of legislation as money bills, in a bid to bypass the Rajya Sabha’s sanction, even though these laws scarcely fit the constitutional definition.

4. Role of the Governors

  • Similarly, the role of the Governors has been weaponised to consolidate political power.

5. Article 370

  • But perhaps most egregious among the moves made is the gutting of Article 370 and the division of Jammu and Kashmir into two Union Territories.
  • It was done without securing consent from the State Legislative Assembly.


Perhaps a crisis of the kind that COVID-19 has wrought will show us that India needs greater decentralisation of power; that administration through a single central executive unit is unsuited to its diverse and heterogeneous polity. We cannot continue to regard the intricate niceties of our federal structure as a nettlesome trifle. In seeing it thus, we are reducing the promise of Article 1 of the Constitution, of an India that is a Union of States, to an illusory dream.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Notify of
Inline Feedbacks
View all comments


Join us across Social Media platforms.

💥Mentorship New Batch Launch
💥Mentorship New Batch Launch