Indian Federalism: Issues & Challenges

Navigating the Complex Dynamics of Centre-State Relations in a Diverse Nation

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Introduction: The Federal Fabric of India

India's federal structure, a unique blend of unitary and federal features, is designed to accommodate its vast diversity while preserving national unity. While the Constitution meticulously delineates powers between the Centre and States (legislative, administrative, financial), this relationship is often characterized by dynamic tensions and contemporary challenges. From disputes over GST revenue sharing and the contentious role of the Governor, to issues of fiscal devolution, inter-state conflicts, and the balancing act between cooperative and competitive federalism, the Indian federal system is continually evolving. Understanding these issues is critical for comprehending the intricate governance dynamics and ensuring a harmonious Centre-State relationship for national development.

Core Challenges & Dynamics

8.1.1: Centre-State Relations: Contemporary Issues

The Indian Constitution (Part XI for legislative & administrative, Part XII for financial) lays down the framework for Centre-State relations, but their practical functioning involves constant negotiation and occasional friction.

Legislative Relations

(Articles 245-255, Seventh Schedule)

Constitutional Framework: Union List (exclusive powers of Parliament), State List (exclusive powers of State Legislatures), Concurrent List (both can legislate, with Union law prevailing in case of conflict).

Contemporary Issues:
  • Increasing Centralization: Parliament encroaching on State List.
  • Over-use of Concurrent List: Central laws curbing state autonomy.
  • Legislative Veto by Governor: Withholding assent to state bills.
  • Article 249 & 252: Parliament's power on State List matters.
  • Use of Ordinance Power: Bypassing legislative scrutiny.

Administrative Relations

(Articles 256-263)

Constitutional Framework: States must comply with Union laws. Union can give directions. All India Services (AIS) common to both.

Contemporary Issues:
  • Role of Governor: Perceived as Centre's agent. Discretionary powers, delays in assent.
  • Use of Article 356: Potential misuse (post S.R. Bommai case).
  • All India Services (AIS) Issues: Dual control, deputation policies, politicization.
  • Central Schemes: Restrictive guidelines, funding patterns issues.

Financial Relations

(Articles 268-281, 292-293)

Constitutional Framework: Delineates taxing powers. Centre has more buoyant tax bases. States rely on Central transfers. Finance Commission recommends sharing.

Contemporary Issues:
  • GST Disputes: Compensation cess ended, GST Council dominance (states outvoted), revenue predictability.
  • Increasing Reliance on Central Transfers: Limiting state autonomy.
  • Centralization of Taxation Power: Cesses/surcharges not shareable.
  • Off-budget Borrowings: Bypassing scrutiny, impacting fiscal health.
  • Conditional Grants: Limiting state flexibility.

Source: Indian Constitution (Laxmikanth), Sarkaria Commission, Punchhi Commission, GST Council proceedings, NITI Aayog.

8.1.2: Fiscal Federalism: Dynamics & Challenges

Fiscal federalism is the division of financial powers and responsibilities among different levels of government (Centre and States) in a federal system. It aims to balance vertical (Centre-State) and horizontal (among states) fiscal imbalances.

Role of Finance Commission (FC)

  • Constitutional Body: Established under Article 280.
  • Mandate: To make recommendations to the President on:
    • Vertical devolution of taxes (Union to States).
    • Horizontal devolution among States.
    • Grants-in-aid from Consolidated Fund of India.
    • Augmenting resources of Panchayats and Municipalities.
  • Significance: Crucial for fiscal equity and balance. Recommendations usually accepted.

Devolution of Funds

Vertical Devolution

Share of central taxes to states.

14th FC: 42%

15th FC: 41%

(of divisible pool)

Horizontal Devolution

Criteria for distribution among states.

  • Population, Area, Forest Cover
  • Income Distance, Demographic Performance
  • Tax Effort

Challenges in Fiscal Federalism

  • Dependency of States: High reliance on Central transfers, limiting fiscal autonomy.
  • Shrinking Divisible Pool: Increasing use of cesses and surcharges by Centre (not shareable).
  • GST Impact: Compensation cessation, concerns about fiscal space.
  • Conditionalities of Grants: Limiting states' flexibility in spending.
  • Horizontal Imbalances: Persisting disparities among states.
Off-budget Borrowings: A Fiscal Blind Spot

Concept: Borrowings by PSUs or government-owned companies for projects, repaid through the central budget or PSU resources, not explicitly part of the Union Budget's direct deficit.

Challenges: Obscures true fiscal deficit, bypasses parliamentary scrutiny, increases future debt burden, can bypass fiscal rules (e.g., FRBM Act targets).

Source: Finance Commission Reports (14th, 15th), Economic Survey, RBI reports.

8.1.3: Inter-State Relations: Cooperation & Conflict

Beyond Centre-State dynamics, relations among states themselves present a unique set of issues and mechanisms for cooperation.

Inter-State Disputes

  • River Water Disputes: Most contentious (e.g., Cauvery, Krishna). Resolved via tribunals (Inter-State Water Disputes Act, 1956) or negotiation, often face delays.
  • Border Disputes: Over territorial boundaries (e.g., Maharashtra-Karnataka, Odisha-Andhra Pradesh). Often historical.
  • Economic/Policy Disputes: Over trade, taxation, or policies affecting neighboring states.

Inter-State Cooperation Mechanisms

Inter-State Council (ISC)

Constitutional Body: Article 263. PM (Chairman), CMs of all States/UTs. Forum for inter-governmental consultation. Infrequent meetings limit effectiveness.

Sarkaria Commission recommended making ISC a powerful and active body.

Zonal Councils

Statutory Bodies: States Reorganisation Act, 1956 (5 ZCs + NE Council). Union Home Minister (Chairman). Discuss common interests (economic, social, security). Advisory recommendations.

Useful for regional cooperation, less formal than ISC.

Source: Indian Constitution (Laxmikanth), Sarkaria Commission, Water Disputes Acts, Ministry of Home Affairs.

8.1.4: Federalism: Cooperation & Competition

Indian federalism is characterized by a blend of cooperative and competitive approaches, often facilitated by institutions like NITI Aayog.

Cooperative Federalism

Concept: Centre and States cooperate to achieve common national goals, emphasizing partnership and mutual trust.

Mechanisms: Inter-State Council, National Development Council (erstwhile), Zonal Councils, NITI Aayog.

Examples:
  • Implementation of Centrally Sponsored Schemes (NHM, MGNREGA).
  • GST Council: Forum for Centre-State consensus on tax matters.
  • NITI Aayog's role in facilitating policy dialogue.

Competitive Federalism

Concept: States compete for investment, resources, and better governance outcomes, fostering a "race to the top."

Mechanisms: Rankings based on various indices, ease of doing business, fiscal performance.

Examples:
  • Ease of Doing Business Rankings for States.
  • NITI Aayog's SDG India Index, Health Index, School Education Quality Index.
  • Swachh Survekshan (Cleanliness Survey).
  • Aspirational Districts Programme.
  • Investment Summits by states.

NITI Aayog's Pivotal Role

NITI Aayog explicitly promotes both cooperative and competitive federalism. It acts as a platform for dialogue and policy formulation (cooperative) and publishes various indices fostering healthy competition among states for better governance and development outcomes (competitive). Ideally, these approaches should complement each other.

Source: NITI Aayog publications, Economic Survey, various policy documents.

8.1.5: Broader Challenges to Federalism

Beyond the immediate Centre-State and inter-state relations, several underlying factors pose persistent challenges to India's federal balance.

Regionalism

Strong regional identities, linguistic loyalties, and demands for greater autonomy or separate statehood.

  • Can lead to demands for resources, policy deviations, or secessionist tendencies.
  • Creates inter-state tensions over resources/representation.

Asymmetric Federalism

Varying degrees of autonomy and special provisions granted to certain states.

Examples: Article 371 for various states, tribal areas (Fifth/Sixth Schedules).

  • Can lead to resentment from other states.
  • Abrogation of Art 370 raised new federal questions.

Demands for New Statehood

Driven by linguistic identity, economic backwardness, regional neglect, tribal identity, or administrative convenience.

Examples: Vidarbha, Gorkhaland, Bodoland (Telangana latest).

  • Political instability, law & order issues.
  • Resource reallocation disputes.

Over-Centralization

Increasing dominance of the Centre (fiscal, legislative, administrative) remains a major challenge to federal balance.

Role of Governor

Continues to be a flashpoint, often seen as an agent of the Central Government, especially in states ruled by opposition parties.

Coalition Politics

Can make Centre-State relations more complex or, conversely, more cooperative, depending on the nature of the coalition at Centre and States.

Source: Punchhi Commission Report, various political analyses, news reports.

Conclusion & Way Forward

India's federal structure, a remarkable experiment in accommodating diversity within unity, faces perpetual challenges arising from its inherent power dynamics. While legislative, administrative, and financial relations are constitutionally defined, contemporary issues like GST disputes, the contentious role of the Governor, and regional aspirations continue to test its resilience.

The way forward demands a continuous commitment to cooperative federalism, ensuring genuine consultation and mutual respect between the Centre and States. This includes strengthening inter-state forums (Inter-State Council, Zonal Councils), enhancing fiscal autonomy of states, promoting fair devolution of funds, resolving disputes through dialogue and consensus, and fostering healthy competitive federalism for improved governance outcomes. A strong and balanced federal system is indispensable for India's national integration, effective governance, and sustainable socio-economic development.

Prelims-ready Notes

  • Legislative: Union, State, Concurrent Lists (7th Schedule).
    • Issues: Centralization, over-use of Concurrent List, Governor's veto on state bills.
  • Administrative: Union directions to states, AIS.
    • Issues: Role of Governor (Centre's agent, discretionary powers, assent to bills). Art 356 misuse. AIS issues (dual control, deputation, politicization). Central schemes' rigid guidelines.
  • Financial: Taxing powers, transfers, FC.
    • Issues: GST Disputes (compensation cess ended 2022, GST Council dominance, revenue predictability). State reliance on Centre. Cesses/surcharges. Off-budget borrowings.
  • Concept: Financial power division (Centre-States).
  • Finance Commission (Art. 280): Constitutional body. Recommends vertical (Centre to States) & horizontal (among states) devolution, grants-in-aid, augmentation of local bodies' funds.
    • 14th FC: 42% share to states. 15th FC: 41% (minus J&K).
  • Challenges: State dependency, shrinking divisible pool (cesses/surcharges), GST impact, conditional grants, Off-budget borrowings (obscures deficit, bypasses scrutiny).
  • Disputes:
    • Water: River water disputes (Cauvery, Krishna). Inter-State Water Disputes Act 1956.
    • Border: (Maha-Karnataka, Odisha-AP).
  • Inter-State Council (ISC - Art. 263): Constitutional Body. PM (Chair), CMs. Forum for inter-governmental consultation. Infrequent meetings.
  • Zonal Councils (States Reorganisation Act 1956): Statutory bodies (5 ZCs, 1 NE Council). Union Home Minister (Chair). Regional cooperation. Advisory.
  • Cooperative Federalism: Centre & States cooperate for national goals.
    • Mechanism: ISC, NITI Aayog.
    • Examples: Centrally Sponsored Schemes, GST Council.
  • Competitive Federalism: States compete for investment, better governance.
    • Mechanism: Rankings, Ease of Doing Business.
    • Examples: SDG India Index, Swachh Survekshan, Aspirational Districts Programme.
  • NITI Aayog's Role: Promotes both; platform for cooperation, publishes indices for competition.
  • Regionalism: Strong regional identities, demands for autonomy.
  • Asymmetric Federalism: Special provisions for certain states (Art 371), can cause resentment. (Abrogation of Art 370).
  • Demands for New Statehood: Linguistic/economic grievances (Vidarbha, Gorkhaland, Telangana).
  • Over-Centralization: Dominance of Centre.

Mains-ready Analytical Notes

  • Unitary vs. Federal Balance: Perpetual debate on India's federal structure leaning towards unitary features.
  • GST Impact on Fiscal Federalism: Has GST reduced states' fiscal autonomy?
  • Role of Governor: Continuous controversy over discretion and undermining state governments.
  • AIS Neutrality: Debate on maintaining impartiality against political pressure.
  • Inter-State Water Disputes: Effectiveness of tribunals vs. political negotiation.
  • NITI Aayog's Role: Does it truly empower states or remain advisory?
  • Constituent Assembly Debates: Deliberate choice of strong Centre.
  • Nehruvian Era: Centralized planning (Planning Commission).
  • Post-1967: Rise of regional parties, coalition governments, increased Centre-State tensions.
  • Sarkaria (1983-87) & Punchhi (2007-10) Commissions: Major re-evaluations.
  • Liberalization (1990s): Increased competition among states.
  • GST Era: Major fiscal reform.
  • Abrogation of Art 370: Recent, significant constitutional change.
  • Cooperative Federalism for Development: Essential for SDGs, flagship schemes.
  • Fiscal Stability: Crucial for public finances, debt control, resource allocation.
  • Disaster Management: Effective Centre-State coordination (COVID-19).
  • National Integration: Balanced federalism manages diversity, prevents secessionism.
  • Ease of Doing Business: Streamlined Centre-State relations foster better investment climate.
  • GST Council Meetings (Ongoing): Debates on compensation cess, rate rationalization.
  • Role of Governor in State Politics: Recent instances of delays in assent to bills (Kerala, TN, Punjab).
  • Cauvery Water Dispute: Continued legal and political wrangling.
  • NITI Aayog's Role in Rankings: SDG India Index, Aspirational Districts Programme.
  • Discussions on All India Services (AIS): Debates on amendments to AIS rules (central deputation).
  • G20 Presidency and Cooperative Federalism: India's G20 Presidency highlighted collaboration.
  • Sarkaria Commission (1983-87): Landmark recommendations (strengthening ISC, limiting Art 356 misuse).
  • Punchhi Commission (2007-10): Further recommendations (Governor, financial powers).
  • S.R. Bommai case (1994): Landmark SC judgment limiting misuse of Article 356.
  • Fiscal Responsibility and Budget Management (FRBM) Act: Impact on fiscal federalism.
  • Constitutional Morality: SC often invokes this concept in federal disputes.

Current Affairs & Recent Developments (Last 1 Year)

  • Continued Debates on Governor's Role and Assent to Bills: Recent instances of friction between Governors and elected state governments over bill assent have led to Supreme Court observations on constitutional duties (e.g., Kerala, Tamil Nadu, Punjab cases in 2023-2024).
  • GST Council Meetings and Fiscal Devolution: Ongoing discussions on revenue sharing, rate rationalization, and states' demands post-GST compensation cess period (2023-2024).
  • Supreme Court's Directives on Inter-State Water Disputes: Continued hearings and directives on long-standing disputes like Cauvery, highlighting resolution challenges.
  • NITI Aayog's Role in SDG Localization: Continues efforts to promote SDG localization at state and district levels, publishing updated SDG India Index reports (2023-2024).
  • Discussions on Amendments to All India Services (AIS) Cadre Rules: Debates around proposals concerning central deputation, raising concerns about federal autonomy and AIS officer neutrality.
  • G20 Presidency and Cooperative Federalism: India's G20 Presidency (2023) highlighted the importance of 'cooperative federalism' globally, showcasing India's domestic model.

UPSC Previous Year Questions (PYQs)

(UPSC CSE Prelims 2017) Right to the City' is an agreed human right in the Habitat III Agenda. Which of the following statements correctly describes this right?

  • (a) Every occupant of the city has the right to reclaim public services and spaces from the State.
  • (b) Urban poor have the right to occupy any building or land for shelter.
  • (c) The inhabitants of the city have the right to form associations and unions.
  • (d) The inhabitants of the city and its rural hinterland have a right to live a decent life, access urban spaces, and reshape the city.

Hint: While general, urban governance and resource distribution often involve Centre-State and inter-state relations.

(UPSC CSE Prelims 2018) With reference to the 'Zonal Councils', which of the following statements is/are correct?

  1. They are constitutional bodies.
  2. They aim to promote cooperative federalism among states in a particular zone.
  3. The Union Home Minister is the common chairman of all Zonal Councils.
  • (a) 1 only
  • (b) 2 and 3 only
  • (c) 1 and 3 only
  • (d) 1, 2 and 3

Hint: Directly tests knowledge of Zonal Councils, a key mechanism for inter-state relations and cooperative federalism. Statement 1 is incorrect (statutory bodies).

(UPSC CSE Prelims 2020) The term 'Cooperative Federalism' is most closely associated with the functioning of:

  • (a) The Finance Commission
  • (b) The Inter-State Council
  • (c) The Planning Commission (now NITI Aayog)
  • (d) The National Development Council

Hint: While all options relate to federalism, NITI Aayog explicitly promotes and embodies cooperative federalism.

(UPSC CSE Mains GS-II 2019) "The role of the Governor is crucial for the smooth functioning of the state administration. However, his discretionary powers have often been a source of friction between the Centre and the States. Discuss."

Direction: This is a direct question on a contentious issue in Centre-State administrative relations, central to challenges to federalism.

(UPSC CSE Mains GS-II 2020) "Critically examine the effectiveness of the Goods and Services Tax (GST) regime in ensuring fiscal federalism in India."

Direction: This is a direct question on a contemporary issue in Centre-State financial relations, requiring a critical analysis of GST's impact on fiscal federalism.

(UPSC CSE Mains GS-II 2017) "The concept of collaborative governance model, with greater citizen participation, has gained currency across the world. Analyze the opportunities and challenges of this model in the Indian context."

Direction: While broader, this can be linked to cooperative federalism. Collaborative governance involves cooperation among different levels of government and non-state actors, which is the essence of cooperative federalism.

Trend Analysis (UPSC Questions)

UPSC's questioning on 'Issues and Challenges Pertaining to the Federal Structure' has consistently been a high-priority and highly analytical area, reflecting the dynamic nature of Indian federalism.

Prelims Trends:

  • Earlier Trend (Pre-2015): Focused on basic facts about constitutional provisions, structure of bodies (FC, ISC, ZCs).
  • Recent Trend (Post-2015): More conceptual and contemporary focus on:
    • Specific issues: GST, role of Governor, Art 356, AIS issues.
    • Concepts: Cooperative vs. Competitive Federalism (NITI Aayog's role).
    • Key bodies: Finance Commission (devolution percentages), ISC, Zonal Councils.
    • Recent developments: Implications of abrogation of Art 370.

Mains Trends:

  • Earlier Trend (Pre-2015): Direct questions on "Centre-State relations" or "Role of Finance Commission."
  • Recent Trend (Post-2015): Shift to:
    • Critical Analysis: "Critically examine," "discuss implications," "analyze effectiveness."
    • Contemporary Issues: Strong emphasis on current flashpoints (Governor's role, GST, AIS, disputes).
    • Conceptual Depth: Debates around federalism types, fiscal federalism, unitary vs. federal balance.
    • Problem-Solution Approach: Frequently asking for 'way forward,' policy recommendations.
    • Judicial Pronouncements: Expectation to incorporate landmark SC judgments (e.g., S.R. Bommai).

Candidates need a comprehensive and up-to-date understanding of all facets of Indian federalism to excel in this topic.

Test Your Understanding: Original MCQs

1. Which of the following bodies is a constitutional body established under Article 263 of the Indian Constitution, chaired by the Prime Minister, and acts as a forum for inter-governmental consultation and coordination?

  • (a) National Development Council
  • (b) Inter-State Council
  • (c) Zonal Council
  • (d) NITI Aayog

Explanation: The Inter-State Council is established under Article 263, chaired by the PM, and serves as a consultative forum for Centre-State and inter-state issues. Zonal Councils are statutory, NDC is not constitutional, and NITI Aayog is extra-constitutional.

2. Consider the following statements regarding the Goods and Services Tax (GST) regime in India:

  1. The GST Council is a constitutional body, and its decisions require a three-fourths majority of the weighted votes of members present and voting.
  2. Compensation to states for revenue loss arising from GST implementation was guaranteed for a period of ten years.
  3. Cesses and surcharges levied by the Central Government are part of the divisible pool of taxes shareable with states under GST.

Which of the statements given above is/are correct?

  • (a) 1 only
  • (b) 1 and 2 only
  • (c) 2 and 3 only
  • (d) 1, 2 and 3

Explanation: Statement 1 is correct (Art. 279A). Statement 2 is incorrect; GST compensation was for a period of five years (until June 2022). Statement 3 is incorrect; Cesses and surcharges are not part of the divisible pool and are retained exclusively by the Centre, which is a point of contention for states.

Practice Questions for Mains

1. "India's federal structure, while robust, faces inherent tensions arising from the legislative, administrative, and financial relations between the Centre and States. Critically examine the contemporary issues that challenge the harmonious functioning of Indian federalism and suggest measures to strengthen cooperative federalism." (15 Marks, 250 Words)

Key Points/Structure:

  • Introduction: Define India's federal structure (unitary-federal blend), mention inherent tensions.
  • Contemporary Challenges/Issues: Legislative (centralization, Governor's veto), Administrative (Governor's role, Art 356, AIS issues), Financial (GST disputes, shrinking divisible pool, dependency, off-budget borrowings), Inter-State Disputes, Regionalism/Demands for Statehood.
  • Measures to Strengthen Cooperative Federalism: Strengthen Inter-State Council, enhance fiscal autonomy, reform Governor's office, depoliticize AIS, promote consensus-building (GST Council), effective dispute resolution, NITI Aayog's facilitative role.
  • Conclusion: Stress vital role of strong federal system for national integration and development; emphasize continuous commitment to cooperation, respect for autonomy, transparent dialogue.

2. "Fiscal federalism is a critical pillar of India's federal structure, but it faces persistent challenges related to revenue sharing and states' fiscal autonomy. Discuss the role of the Finance Commission in mitigating fiscal imbalances and analyze the challenges posed by the increasing reliance on 'off-budget borrowings' in contemporary Indian fiscal federalism." (10 Marks, 150 Words)

Key Points/Structure:

  • Introduction: Define fiscal federalism and its importance.
  • Role of Finance Commission (Art. 280): Constitutional body, recommends vertical and horizontal devolution, grants-in-aid; crucial for balancing imbalances.
  • Challenges in Fiscal Federalism: State dependency, shrinking divisible pool (cesses/surcharges), GST impact, conditional grants.
  • Challenges of Off-Budget Borrowings: Concept (borrowings by PSUs/entities, repayment through budget); Impact (obscures true deficit, bypasses scrutiny, increases hidden debt, bypasses FRBM).
  • Conclusion: Acknowledge FC's vital role, but emphasize need to address off-budget borrowings and enhance states' fiscal autonomy for transparent and sustainable fiscal federalism.