Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India?
Approach · directive: “examine / how far”
What it asks · Trace how Centre–State financial relations changed from the planning era to the present, and assess the effect of recent reforms (NITI Aayog, higher devolution, GST, cesses, borrowing rules) on fiscal federalism.
It asks 2 things — answer each
- Examine: the evolving pattern of Centre–State financial relations from the planning era to the present
- How far: assess the impact of recent reforms — NITI Aayog, higher devolution, GST, cesses, borrowing rules — on fiscal federalism
Open with · A paradox in data: the 15th Finance Commission kept devolution at 41 per cent, yet unshared cesses and surcharges were over 19.9 per cent of gross tax receipts in 2018-19.
Cover
- Planning era: Finance Commission (Article 280) and Planning Commission plan assistance by the Gadgil formula (1969); Article 282 grants and centrally sponsored schemes.
- Borrowing leash: Article 293(3) requires Union consent for an indebted State to borrow.
- Reforms: NITI Aayog replaced the Planning Commission (2015); devolution 32 to 42 per cent (14th FC), 41 per cent (15th FC).
- GST (101st Amendment, 2016): pooled sovereignty, compensation ended 2022; Budget 2025-26: ₹1.5 lakh crore 50-year interest-free capex loans.
- Impact: gains in untied transfers; a shrinking pool from cesses; lost tax and borrowing autonomy, Kerala's suit; cooperative in form, centralising in substance.
- Way forward: share or cap cesses, revive GST consensus, rule-bound transfers under the Sixteenth Finance Commission.
Close with · NITI Aayog's own premise that 'strong States make a strong nation': shareable, rule-bound transfers are the test of cooperative federalism.
Add value (verified)
- The 15th Finance Commission recommended keeping vertical devolution at 41 per cent, the same as in its 2020-21 report.Report of the 15th Finance Commission (2021-26), Vol I — Finance Commission of India ↗“we recommend maintaining the vertical devolution at 41 per cent – the same as in our report for 2020-21.”
- 15th Finance Commission: cesses and surcharges made up over 19.9 per cent of gross tax receipts in 2018-19, of which 4.6 per cent was GST Compensation Cess.Report of the 15th Finance Commission (2021-26), Vol I — Finance Commission of India ↗“Table 3.8 shows the trend of cesses and surcharges, which constituted over 19.9 per cent of gross tax receipts in 2018-19, of which 4.6 per cent is on account of GST Compensation Cess.”
- Article 293(3): a State may not raise a loan without the Union's consent while any loan from the Union remains outstanding.The Constitution of India (as on 1 May 2024) - Legislative Department, Article 293(3) ↗“A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government”
- Budget 2025-26: an outlay of ₹1.5 lakh crore for 50-year interest-free loans to States for capital expenditure and incentives for reforms.Budget Speech 2025-26 — Union Budget, Government of India ↗“An outlay of ` 1.5 lakh crore is proposed for the 50-year interest free loans to states for capital expenditure and incentives for reforms.”
- NITI Aayog's objectives include cooperative federalism, recognising that strong States make a strong nation.PIB: Government constitutes NITI Aayog (objectives) ↗“To foster cooperative federalism through structured support initiatives and mechanisms with the States on a continuous basis, recognizing that strong States make a strong nation.”
Question: UPSC's CS (Main) 2025, GS Paper II — paper ↗. Approach: Minimalist IAS, checked 3 Oct 2026 (how we verify) — UPSC publishes no model answers. ·
Model answer· 349words · Minimalist IAS
The 15th Finance Commission kept the States' share of the divisible pool at 41 per cent. Yet cesses and surcharges, which States do not share, made up over 19.9 per cent of gross tax receipts in 2018-19. That gap captures how Centre–State finance has evolved: more devolution on paper, more central leverage in practice.
The planning-era pattern
- Two channels: the Finance Commission (Article 280) gave statutory devolution; the Planning Commission gave plan assistance, from 1969 by the Gadgil formula.
- Discretion: Article 282 grants and centrally sponsored schemes tied State budgets to central priorities.
- Borrowing leash: under Article 293(3), a State still owing the Centre cannot borrow without its consent.
Recent reforms
- NITI Aayog (2015): it replaced the Planning Commission, ending plan grants; transfers now flow through the Finance Commission and schemes.
- Higher devolution: the 14th Finance Commission raised the States' share from 32 to 42 per cent; the 15th kept 41 per cent after J&K's reorganisation.
- GST (101st Amendment, 2016): the GST Council pooled Union and State sovereignty over indirect taxes; compensation to States ended in 2022.
- Capex support: Budget 2025-26 set ₹1.5 lakh crore for 50-year interest-free loans to States for capital expenditure and reforms.
- 1969: Gadgil formula
- 2015: NITI Aayog; 42% devolution
- 2016: 101st Amendment (GST)
- 2022: GST compensation ends
- 2025: ₹1.5 lakh crore capex loans
How far reforms have changed fiscal federalism
- Gains: larger untied transfers, formula-based devolution and joint decisions in the GST Council.
- Shrinking pool: cesses and surcharges sit outside the divisible pool, so 41 per cent applies to a smaller base.
- Lost autonomy: States gave up most indirect taxes; curbs on their borrowing, including off-budget debt, led to Kerala's suit in the Supreme Court.
- Net effect: cooperative in form, centralising in substance.
Way forward
- Share or cap cesses: fold long-running cesses into the divisible pool.
- Revive GST consensus: make the Council's dispute mechanism work.
- Rule-bound transfers: let the Sixteenth Finance Commission's award set predictable, formula-based transfers.
NITI Aayog's founding resolution rests on the premise that 'strong States make a strong nation'. Shareable, rule-bound transfers, not discretion, are the test of that cooperative federalism.
Prepared by Minimalist IAS to the answer standard of Shivam Singh (mentor, 7 years) · facts checked against official sources (how we verify) · updated 3 Oct 2026. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.
