Fiscal Federalism and Centre-State Financial Relations in India

Federalism is usually taught as a question about who may legislate on what. In practice the question that decides how much autonomy a state actually enjoys is narrower: who collects the money, who spends it, and on whose terms.

A state may hold exclusive competence over public health and still be unable to run a hospital system, because the taxes attached to that competence do not yield enough and the transfers that make up the difference arrive with conditions written elsewhere. Fiscal federalism is the study of that gap, and in India it is the arena in which almost every live centre–state dispute is now fought.

The economics underneath the constitutional design

Fiscal federalism as a field asks how taxing powers, spending responsibilities and inter-governmental transfers should be divided between levels of government so that public goods are supplied efficiently without destroying either macroeconomic control or distributive justice.

Musgrave’s three functions

Richard Musgrave separated what a government does into three economic functions, each with a natural home at a different level.

• Allocation — deciding which public goods to supply and in what quantity.
• Distribution — altering the distribution of income and wealth through taxes and transfers.
• Stabilisation — managing aggregate demand, employment, inflation and the external balance.

His argument was that distribution and stabilisation belong at the centre while allocation is best performed locally. The reasoning is not a matter of taste.

• Redistribution devolved defeats itself. If one state taxes the rich heavily to fund generous transfers, mobile capital and high earners relocate and claimants migrate in, leaving a shrinking base under a growing claim.
• Stabilisation devolved is ineffective. A single state’s economy is extremely open, so a state-level stimulus leaks out through purchases from elsewhere, and no state controls money, interest rates or the exchange rate.
• Allocation devolved is efficient, because uniform national provision of a locally variable good either over-supplies it where it is not wanted or under-supplies it where it is.

Oates’s decentralisation theorem

Wallace Oates turned the third proposition into a formal claim. The decentralisation theorem holds that, for a public good whose consumption is confined to a geographical subset of the population, it is always at least as efficient — usually more so — for local governments to provide the level each locality prefers than for the centre to provide one uniform level everywhere.

• The theorem rests on assumptions that are easy to state and hard to satisfy.
  • No inter-jurisdictional spillovers. Where a state’s spending on disease control or river pollution benefits its neighbours, decentralised provision under-supplies the good, because the deciding government counts only benefits falling inside its borders.
  • No significant economies of scale, which fails for defence, currency, trunk infrastructure and data systems.
  • Administrative and fiscal capacity to deliver what is decided — in India the variable that differs most between states.
• Oates’s later work added that decentralisation delivers efficiency only where local governments face a hard budget constraint.

Tiebout’s model and why it does not travel to India

Charles Tiebout offered the sharpest defence of decentralisation. If citizens can move costlessly between jurisdictions offering different bundles of taxes and services, they will sort themselves into the bundle they prefer, and competition between jurisdictions will produce efficient supply with no central direction — “voting with your feet”.

• India fails nearly every condition.
  • Migration is overwhelmingly distress-driven and directed by labour-market opportunity; a construction worker moving from Bihar to Kerala is not expressing a preference about municipal expenditure.
  • Land, language, caste networks and the location of entitlements — ration cards, welfare registrations, domicile-linked quotas — make exit costly and often legally penalised.
  • Twenty-eight states and eight union territories is not the large number of competing jurisdictions the model assumes.
• The damaging objection is that the mechanism runs the wrong way: Tiebout sorting would worsen horizontal imbalance, since rich states would attract the taxpayers and poor states retain the claimants.
• What survives is the weaker idea of yardstick competition — voters comparing their state against neighbours — which is the intellectual basis of NITI Aayog’s rankings and indices.

Subsidiarity

• Subsidiarity holds that a function should be performed by the smallest competent authority and move upward only when the lower level demonstrably cannot discharge it.
• The Indian Constitution realises it imperfectly. The 73rd and 74th Amendments wrote it into the third tier in principle, but the Eleventh and Twelfth Schedules devolve functions without devolving finance, so subsidiarity operates on the expenditure side and stops at the revenue side.

The two imbalances the Indian system exists to correct

Every federation generates a mismatch between where revenue is raised and where it must be spent. The Indian Constitution does not treat this as a defect to be avoided: it creates the mismatch deliberately and then builds machinery to correct it. That sequence — imbalance by design, correction by institution — is the key to the whole scheme.

Vertical fiscal imbalance

• Vertical fiscal imbalance is the gap between a level of government’s revenue capacity and its expenditure responsibility. In India the Union’s capacity exceeds its own needs; the states’ responsibility exceeds their capacity.
• The design reason is the logic of a common market, not centralising instinct. Taxes with a nation-wide base — income tax, corporation tax, customs, union excise — were placed with the Union so that India would function as one common economic space rather than a set of internally tariffed provinces.
• The states were given the functions for an equally deliberate reason. Being closer to the people and more sensitive to local need, they carry the responsibilities requiring continuous administration on the ground: public order, police, public health, agriculture, irrigation, land, local government, and most of education in practice.
• The taxes left with them are low-yielding, inelastic and slow-growing; those assigned to the Union are high-yielding and buoyant, expanding faster than the economy itself.

Horizontal fiscal imbalance

• Horizontal fiscal imbalance is the difference in fiscal capacity between units at the same level. Two states with identical powers can raise vastly different revenue from them.
• Its Indian sources are historical inheritance, differential resource endowment and differing capacity to raise revenue from a given base — colonial policy that concentrated ports and industry in a few presidencies; minerals, coastline and rainfall unequally distributed and largely fixed; and a larger formal, urban economy yielding more from the same tax.
• Inter-state differences in development are sharper in India than in most federations.

The magnitudes

Dimension	Union	States
Share of general-government revenue raised	about two-thirds	about one-third
Share of general-government expenditure incurred	about 38–40%	about 60–62%
Capital expenditure on health, education, irrigation, roads	minority share	the bulk of it
State revenue receipts, 2025-26 budgets	transfers supply about 42% — devolution 28%, grants 14%	own tax 50%, own non-tax 8%
Committed expenditure — salaries, pensions, interest	—	about 50% of revenue receipts
Outstanding state debt, March 2025	—	about 27.2% of GSDP

• SGST is now roughly 44% of states’ own tax revenue, so the largest own-source handle the states possess is one whose rate they cannot set alone.

Why central dominance in tax collection is defended

• Correcting the colonial inheritance. If all resources generated within a state stayed entirely within it, the states that inherited industry and ports would compound their advantage.
• Making redistribution possible at all, for the Musgravean reason above.
• A uniform tax structure and a single national market. Divergent state taxation of inter-state trade produces cascading, check-post economies and rate wars.
• Macroeconomic stabilisation, which requires an instrument no state possesses.

The counter-argument

• The defence justifies central collection. It does not justify central discretion over the terms on which the money returns.
• Fiscal centralisation without matching accountability is the precise charge. The Union raises the revenue, but the citizen who experiences a failing hospital or school holds the state government responsible.
• Critics call the accumulated result a “federal deficit” — not a shortfall in any one year, but a persistent gap between the states’ constitutional responsibilities and the resources placed unconditionally at their disposal.

The Constitution gave the states the functions and the Union the money, then created a commission to carry the money back. Everything else is detail.

The constitutional scheme, article by article

The financial provisions run from Article 264 to Article 293 in Part XII and are best read as four machineries: assignment of taxing powers, sharing of proceeds, grants, and borrowing.

Article 246, the Seventh Schedule and the separate-entry rule

• Article 246 distributes legislative competence across the three Lists, and taxation entries sit inside each List as distinct entries.
• The governing principle is that the power to tax is not implied from a general legislative entry. A power to regulate a subject does not carry a power to tax it; taxation must be traced to a specific taxing entry.
• The consequence is federally significant. The Concurrent List contains no taxing entry at all, so before 2016 there was no field in which both levels could tax the same base — which is why GST required a constitutional amendment rather than ordinary legislation.
• Mineral Area Development Authority v. Steel Authority of India (2024) is the most consequential recent application. A nine-judge bench held, by 8:1 on 25 July 2024, that royalty payable under the Mines and Minerals (Development and Regulation) Act, 1957 is not a tax but consideration for extraction.
  • It followed that Entry 50 of the State List, taxes on mineral rights, and Entry 49, taxes on lands and buildings including mineral-bearing land, remain live sources of state power, not extinguished by the Union’s regulatory occupation of the field under Entry 54 of the Union List.
  • The bench overruled the reading in India Cement and Kesoram Industries, restoring to Jharkhand, Odisha, Chhattisgarh, West Bengal and Rajasthan a revenue handle denied them for decades.
  • Justice B.V. Nagarathna dissented alone, warning that competing state levies would fragment the national mineral market and defeat the Union’s development-and-regulation mandate.
  • A follow-up order of 14 August 2024 made the ruling operate retrospectively to 1 April 2005, barred interest and penalties on past dues, and directed recovery in instalments over twelve years from 1 April 2026 — a rare instance of the Court managing the fiscal consequences of its own federalism ruling.

Articles 265 to 271

Article	What it does	Federal significance
265	No tax shall be levied or collected except by authority of law	Rule-of-law floor binding both levels equally
266	Consolidated Fund of India and of each State; nothing leaves without appropriation by the respective legislature	Each level has a legally separate purse
267	Contingency Fund at each level for unforeseen expenditure	Executive flexibility, regularised later by the legislature
268	Duties levied by the Union, collected and appropriated by the States	Proceeds never enter the Consolidated Fund of India
269	Taxes on inter-state trade levied and collected by the Union but assigned wholly to the States	Collection at the centre, entitlement at the states
269A	IGST on inter-state supply and imports, levied by the Union and apportioned between the levels; inserted by the 101st Amendment	Makes the destination principle operable
270	Sharing of the net proceeds of all Union taxes in the percentage the Finance Commission recommends	Creates the divisible pool
271	Parliament may impose a surcharge for the purposes of the Union, whose whole proceeds belong to the Union	The exclusion behind the sharpest live grievance

• Article 270 is the operative sharing provision, and its exclusions define the pool. What is shared is the net proceeds — gross collections less cost of collection — of Union taxes, minus taxes assigned under Articles 268 and 269, minus cesses levied for specified purposes, minus surcharges under Article 271.

The 80th Amendment and the alternative devolution scheme

Before 1996 the sharing scheme was narrow and rigid. Article 270 mandated the sharing of income tax; Article 272 permitted, but did not require, the sharing of union excise duties. Everything else the Union collected — customs, corporation tax and the rest — was the Union’s alone.

• The Tenth Finance Commission proposed the alternative devolution scheme — instead of sharing two named taxes, share a fixed percentage of the entire pool of central taxes.
• The 80th Amendment, effective 1 April 1996, recast Article 270 to cover all Union taxes and duties and omitted Article 272.
• This was a genuine and underappreciated advance for the states. It removed the Union’s incentive to manipulate the composition of its tax structure to minimise sharing; it gave the states a share in the buoyancy of the whole system, including its fastest-growing components; and it stabilised state revenue, because a broad pool is less volatile than any two taxes within it.
• It also explains why cesses and surcharges became the pressure point. Once every ordinary tax became shareable, the only route to unshared revenue left inside the Constitution was the one Articles 270 and 271 expressly keep open.

The 80th Amendment closed one escape route from sharing. The other one was written into the same two articles.

Grants: Articles 275 and 282

• Article 275 provides statutory grants-in-aid from the Consolidated Fund of India to states in need of assistance, in such sums as Parliament may by law provide, on the Finance Commission’s recommendation. It carries specific provision for tribal welfare, scheduled areas and Assam’s tribal areas.
• Article 282 provides that the Union or a State may make any grant for any public purpose, even where the purpose lies outside that government’s legislative competence.
  • What it became was the constitutional basis for the entire plan-transfer apparatus and, later, for centrally sponsored schemes: a permanent, discretionary, conditional channel operating in State List subjects, for long stretches larger than the Article 275 channel it was meant to supplement.
• The Article 282 problem stated plainly: a provision drafted as an exception has carried the main load, and because it is tied to no formula and no constitutional body, its terms are set by the Union executive alone.

Restrictions on state taxation

• Article 286 bars a state from taxing supplies taking place outside the state or in the course of import or export, and subjects state taxation of goods of special importance in inter-state trade to parliamentary restriction.

Borrowing: Articles 292 and 293

• Article 292 empowers the Union to borrow upon the security of the Consolidated Fund of India within limits Parliament may fix — a limit Parliament has never fixed by law.
• Article 293 governs state borrowing and is the most confining financial provision in the Constitution.
  • 293(1): a state may borrow within the territory of India only. States cannot borrow abroad; the Union can.
  • 293(3): a state may not raise any loan without the Union’s consent if any part of a loan made or guaranteed by the Union remains outstanding.
  • 293(4): the Union may attach any conditions it thinks fit to that consent.
• Because every state has central loans outstanding at all times, the condition in 293(3) is permanently satisfied.

The net borrowing ceiling and off-budget borrowing

• The consent power is exercised annually through a Net Borrowing Ceiling communicated by the Ministry of Finance, expressed as a percentage of projected GSDP and calibrated to the Fiscal Responsibility and Budget Management framework.
• The 15th Finance Commission’s path set the ceiling at 4% of GSDP in 2021-22, tapering to 3%, with an additional 0.5% available to states undertaking power-sector reform — an early instance of a borrowing entitlement conditioned on a policy choice in a state subject.
• Off-budget borrowing — debt raised by state undertakings and special purpose vehicles, serviced from the state budget but not shown in it — became the standard route around the ceiling.
• In 2022 the Union decided to count such borrowing against the ceiling, treating debt serviced out of a state’s own revenues as the state’s debt whatever entity contracted it.
  • The accounting case is strong: a liability the budget must service is a budget liability, and the 15th Finance Commission had itself asked for full disclosure and time-bound elimination of extra-budgetary liabilities.
  • The federal objection is equally real. The change was made administratively, applied to past borrowing, and reduced states’ fiscal space in-year without any of the deliberation a constitutional transfer decision receives.

Kerala’s Article 131 suit

• Kerala filed an original suit under Article 131 — the Supreme Court’s exclusive jurisdiction over Union–state disputes — challenging the borrowing ceiling and the treatment of public-account liabilities and state-enterprise debt as state borrowing.
  • Kerala argued that the Union had exceeded Article 293(3) by regulating borrowing from sources other than the Union, that public account balances and state undertaking debt are not “loans” within Article 293, and that a ceiling of 3% of GSDP with deductions for alleged past over-borrowing had left it unable to raise sums it urgently needed.
• On 1 April 2024 a bench of Justices Surya Kant and K.V. Viswanathan referred four questions to a five-judge Constitution Bench: the interpretation of Articles 131 and 293; whether Article 293 confers on a state an enforceable right to borrow and how far the Union may regulate it; whether state-enterprise borrowings and public-account liabilities fall within 293(3); and the scope of judicial review over fiscal policy of this kind.
• This is the most important unresolved question in Indian fiscal federalism. If Article 293 confers a right, the consent power becomes reviewable and the ceiling becomes a decision that must be justified.

What the states are left with after GST

Retained by the states	Surrendered into GST
State excise on alcohol for human consumption	Sales tax and VAT, historically the largest own-tax handle
Stamp duty and registration	Entry tax and octroi
Land revenue	Luxury tax
Taxes on vehicles, tolls, goods and passengers	Entertainment tax, except that levied by local bodies
Electricity duty	Purchase tax
Professions tax, capped at ₹2,500 per person per year	Taxes on advertisements, betting and lotteries
Property tax at the local level	Central sales tax on inter-state sales
Petroleum products and real estate, still outside GST	—

• Alcohol, petroleum, stamp duty and vehicle taxes now carry a disproportionate share of state own-revenue, which explains behaviour that looks fiscally irrational from outside: the reluctance to bring petroleum into GST, the resistance to prohibition, the dependence on real-estate transaction volumes.

The Finance Commission: the balancing wheel and its bearings

The Constitution does not merely permit transfers; it creates an institution whose sole function is to determine them. That is unusual. Most federations settle inter-governmental transfers by negotiation, legislation or executive fiat; India entrusts the question to a body reconstituted every five years, quasi-judicial in method, and answerable to no government for its conclusions.

Article 280: constitution, composition and mandate

• Article 280(1): the President shall constitute a Finance Commission within two years of the commencement of the Constitution and thereafter at the expiration of every fifth year or at such earlier time as he considers necessary.
• Composition: a Chairman and four other members, appointed by the President, holding office for such period as he specifies, and eligible for reappointment.
• Article 280(2) authorises Parliament to prescribe qualifications and the manner of selection, done through the Finance Commission (Miscellaneous Provisions) Act, 1951.
• The three constitutional mandates under Article 280(3):
  1. the distribution of the net proceeds of shareable taxes between Union and States, and the allocation between the States of their respective shares — vertical and horizontal devolution;
  2. the principles governing grants-in-aid of the revenues of the States out of the Consolidated Fund of India — the quantum and principles of Article 275 grants;
  3. the measures needed to augment a State’s Consolidated Fund to supplement the resources of panchayats and municipalities, on the basis of the State Finance Commission’s recommendations — clauses (bb) and (c), added by the 73rd and 74th Amendments.
• Article 280(3)(d) adds an open-ended fourth head: any other matter referred by the President in the interests of sound finance.

Advisory in law, binding by convention — but only in part

• The recommendations are advisory. Nothing in Article 280 obliges the Union to accept them, and the explanatory memorandum exists precisely because departure is contemplated.
• Convention has hardened around the tax-devolution recommendation. No Union government has rejected a vertical or horizontal devolution figure, and doing so would be treated as a constitutional breach although it would not be one in law.
• The grants portion is treated far more freely. Sector-specific and state-specific recommendations have been partially accepted, deferred, or quietly not implemented, and the memorandum practice makes this easy.
• The classical statement of the convention came from P.V. Rajamannar, Chairman of the Fourth Finance Commission.

“Since the Finance Commission is a constitutional body, expected to be quasi-judicial, its recommendations should not be turned down by the Government of India unless there are very compelling reasons.” — P.V. Rajamannar

The structural weakness: it is entirely a Union body

• The President constitutes the Commission; the Union Cabinet selects its members; the Union Finance Ministry drafts the terms of reference. At no stage do the states, whose share is being determined, have a formal role.
• The terms of reference are the sharper problem than the appointments. A Commission is free in its reasoning but bound by the questions it is asked, and the questions are written by one of the two parties.

Feature	India — Finance Commission	Australia — Commonwealth Grants Commission	Germany — Finanzausgleich
Status	Constitutional, reconstituted every five years	Statutory, permanent	Constitutional, in the Basic Law
Who sets the terms	Union alone, under Article 280(3)(d)	Settled with the states in a ministerial council	Negotiated legislation needing Bundesrat consent
Role of the units	Representation only	Continuous engagement with a standing body	Länder are co-legislators
Guiding principle	Equity plus efficiency, weights reset each award	Full horizontal equalisation to a common standard	Equalisation of living conditions, including transfers between Länder
Institutional memory	Lost and rebuilt every five years	Continuous	Continuous

• The German contrast is the sharpest, because it includes horizontal transfers between the units themselves. Indian equalisation is entirely centre-mediated; no state transfers anything to another state.

The evolution of the horizontal formula

Criterion	What it rewards	14th FC	15th FC	16th FC
Income distance	Distance of per capita GSDP from the highest — pure need	50%	45%	42.5%
Population (2011)	Size of the population to be served	10% (2011) + 17.5% (1971)	15%	17.5%
Demographic performance	Success in reducing fertility	—	12.5%	10%
Area	Cost of administering a larger territory	15%	15%	10%
Forest and ecology	Opportunity cost of conservation	7.5%	10%	10%
Tax and fiscal effort	Efficiency in collecting from one’s own base	—	2.5%	removed
Contribution to GDP	Share in national output	—	—	10% (new)

• The criteria fall into two families that pull against each other. Equity criteria — income distance, area, forest cover, population — direct money towards states with less capacity or higher cost of provision. Efficiency criteria — tax effort, demographic performance and now GDP contribution — direct money towards states that have performed well.
• The 14th Finance Commission raised the vertical share from 32% to 42%, the largest single increase in the institution’s history, on an explicit rationale — give the states untied money and let them decide, rather than routing more through conditional schemes.
• The 15th Finance Commission reduced it to 41%, the one-point adjustment reflecting the conversion of Jammu and Kashmir and Ladakh into union territories, whose needs the Union would meet directly.

The 1971 versus 2011 population question

• Why it became explosive. Commissions until the 14th used 1971 population, in deference to the political settlement that froze parliamentary seat allocation at that census. The 15th Commission’s terms of reference directed it to use 2011 population.
• The southern and western objection: states that reduced fertility fastest have the smallest gap between their 1971 and 2011 populations, so switching the base transfers weight to states whose populations grew fastest — that is, to states that did least on a policy the national government itself promoted.
• The counter-arguments are serious and must be stated.
  • The purpose of a general-purpose transfer is comparable public services at comparable tax rates, and services are consumed by people who exist now.
  • The 1971 base never functioned as a lever for family planning. Fertility fell where female literacy, health infrastructure and age at marriage changed — through state programmes, not through a devolution weight.
• The 15th Commission’s answer was the demographic performance criterion, computed from the reciprocal of the total fertility rate scaled by 1971 population, so a state with lower fertility scores higher.

The 15th Commission’s terms of reference

• The controversy went well beyond the census base. Three further terms were read by the states as structurally hostile.
  • The Commission was asked to consider whether revenue-deficit grants should be provided at all, which deficit states read as an invitation to end a channel they depend on.
  • It was asked to consider performance-based incentives, including on population control, ease of doing business and progress on flagship central schemes — converting an entitlement into a reward for aligning with Union priorities.
  • It was asked whether a separate mechanism for funding defence and internal security should be created, which the states read as carving a prior claim out of the pool before their share was computed.
• The episode established the terms of reference as a federal battleground in their own right, and every subsequent Commission has been read first through its mandate and only second through its arithmetic.

The Sixteenth Finance Commission and the 2026-31 award

The report of the Sixteenth Finance Commission, chaired by Arvind Panagariya, was tabled in Parliament on 1 February 2026 for the five years from 2026-27 to 2030-31.

Vertical devolution held at 41%

• The states’ share of the divisible pool remains 41%, unchanged from the 15th Commission’s award.
• Eighteen of the twenty-eight states formally demanded 50%; others asked for 45–48%. Not one asked for less.
• The Commission’s stated reasons: that the states’ spending needs are already substantially met through centrally sponsored schemes and other Union transfers; that the Union carries defence, internal security and national infrastructure commitments that cannot be devolved; and that a higher share would compress Union fiscal space during consolidation.
• The first reason is the most contestable. Counting conditional, scheme-tied transfers as a substitute for untied devolution concedes exactly what the states object to — that the composition of transfers, and not only their volume, is the federal question.

The horizontal formula and the new GDP criterion

• Income distance fell from 45% to 42.5%; tax and fiscal effort (2.5%) was removed entirely; population (2011) rose from 15% to 17.5%; demographic performance fell from 12.5% to 10%; area fell from 15% to 10%, with the area floor cut from 2% to 1.5%; forest and ecology held at 10%.
• A new criterion — the state’s contribution to national GDP — was introduced at 10%, computed on a square-root transformation of average GSDP over 2018-19 to 2023-24, excluding the pandemic year.
• The square-root transformation is the technically interesting part. Raw GSDP would hand the largest economies an overwhelming share; the square root compresses the range, so a state with four times another’s output scores twice, not four times.
• What the criterion does is genuinely ambiguous, and both readings are defensible. Read as an origin criterion, it rewards states that generate output — the first time where revenue is generated has counted towards where it is sent.
• The net effect on progressivity is a real reduction. Lowering income distance while raising population and origin-based weights moves the formula, at the margin, from need towards size and output.
• The redistribution was small in size and revealing in direction. Karnataka gained about 0.48 percentage points, Kerala 0.45, Gujarat 0.28, Haryana 0.27; Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh saw relative declines. Tamil Nadu moved only from about 4.079% to 4.097% — the southern grievance addressed at the margin, not in substance.

The removal of revenue-deficit grants

• The Commission recommended no post-devolution revenue-deficit grants under Article 275 for 2026-31. The 15th Commission had awarded ₹2.9 lakh crore in such grants to seventeen states.
• The stated rationale: grants that automatically fill a revenue gap soften fiscal discipline and entrench dependence, because a state expecting its deficit to be covered has weaker incentive to raise revenue or contain committed expenditure.
• The objection is that the argument proves too much. For several hill and small states the deficit reflects an unavoidably high cost of administration over difficult terrain with a small base — precisely the condition Article 275 grants were designed for.
• Fourteen states saw their tax share fall under the new formula, and for the deficit states the removal of the grant compounds it.
• Sector-specific and state-specific grants were also discontinued, on the reasoning that tied grants for a handful of sectors duplicate centrally sponsored schemes and reduce flexibility.

Local body grants and their conditionalities

• Grants to local bodies total ₹7,91,493 crore for 2026-31, against ₹4.36 lakh crore for 2021-26.
• The split is ₹4,35,236 crore rural and ₹3,56,257 crore urban — an urban share of about 45%, a marked shift towards the cities and a recognition that India’s fastest-growing service-delivery deficits are urban.
• Structure: broadly 80% basic and 20% performance-linked, with half the basic grant tied to water supply and sanitation; plus a special infrastructure grant of ₹56,100 crore for wastewater management in cities of ten to forty lakh population, and a one-time urbanisation premium of ₹10,000 crore for states managing rural-to-urban transition.
• The entry conditions are the federally significant part. A state’s local bodies receive nothing unless the state has actually held local elections, published audited accounts, and constituted its State Finance Commission on time and acted on its report.
• These conditions are simultaneously an intrusion and an overdue corrective: the Union prescribing state conduct in a state subject, and the only instrument that has ever produced movement on State Finance Commissions, neglected by most states for three decades.

Disaster management, fiscal consolidation and state finances

• Disaster management: a State Disaster Relief and Management Fund corpus of ₹2,04,401 crore, of which the Union’s grant contribution is ₹1,55,916 crore, cost-sharing retained at 90:10 for north-eastern and Himalayan states and 75:25 for the rest, and the notified disaster list widened to include heat waves and lightning.
• Fiscal consolidation: the Union to reach a fiscal deficit of 3.5% of GDP by 2030-31, states held to 3% of GSDP, with combined debt projected to fall from 77.3% of GDP in 2026-27 to 73.1% in 2030-31.
• Structural recommendations: discontinue off-budget borrowing entirely and bring all such liabilities on-budget; standardise subsidy accounting; pursue distribution-company privatisation with debt-warehousing, linking central assistance to it; and review and close 308 inactive state public-sector enterprises.
• The DISCOM recommendation is the most federally aggressive. Linking central assistance to a state’s decision to privatise electricity distribution makes a transfer conditional on a policy choice squarely within the state’s own competence.

The rejection of a cap on cesses and surcharges

• The Commission rejected both proposals the states put to it: a ceiling on cesses and surcharges as a proportion of gross tax revenue, and their inclusion in the divisible pool.
• Its reasoning was that the Union may need such instruments for exigencies — a pandemic, a security emergency, a sudden national commitment — and that constraining them would remove flexibility the Constitution deliberately provides.
• This is the most criticised decision in the report. The Commission is the only body constitutionally positioned to comment on the size of the pool it divides; declining to do so leaves the states with a share of a quantity the other party controls.

A commission that fixes the percentage but not the base has settled only half the question, and the half it left open is the half that has been moving.

The shrinking divisible pool

The mechanism is simple, entirely constitutional, and almost invisible in the headline devolution number. Articles 270 and 271 exclude cesses and surcharges from the divisible pool, so every rupee raised that way is a rupee the states never share.

• A cess is a levy for an earmarked purpose — health and education, road and infrastructure, agriculture infrastructure and development, clean energy. A surcharge is a tax on a tax, imposed for the general purposes of the Union. Neither requires state consent, neither is time-limited by the Constitution, and neither enters the base on which the 41% is computed.
• The arithmetic of the erosion.
  • The divisible pool has fallen from about 89.1% of gross tax revenue in 2014-15 to about 81% in 2025-26.
  • Cesses and surcharges rose from roughly 9.5% of gross tax revenue in 2010-11 to a peak above 20% in 2020-21, settling in the mid-teens since.
  • A notional 41% devolution therefore delivers roughly 32-33% of gross tax revenue. The gap between recommended and effective share was about 7 percentage points under the 14th Commission and 8-9 points under the 15th.
• The states’ complaint is not that the Finance Commission has been ungenerous but that its generosity has been offset outside its remit.
• The Union’s defence has three parts, each partly true: cesses are earmarked for defined purposes, much of the spending occurring inside the states; the Union carries obligations the states do not; and some cess proceeds reach states in other forms, through schemes financed from the earmarked fund.
• The rejoinders are stronger. Earmarking is often notional, with proceeds retained in the Consolidated Fund rather than transferred to the dedicated fund, a pattern audit findings have repeatedly recorded. Transfers routed through schemes are conditional and Union-designed, which is not an untied share.
• The reform options are narrow and well understood: a statutory or constitutional cap as a share of gross tax revenue; inclusion in the divisible pool after a defined number of years; or a sunset clause requiring parliamentary re-enactment.

The planning channel and its abolition

For sixty-five years the Finance Commission was not the main channel through which money reached the states. A body created by executive resolution, with no constitutional or statutory basis, moved larger sums under a wider discretion.

The Planning Commission

• Created by a Cabinet resolution of 15 March 1950, with the Prime Minister as Chairman and members hand-picked by him. It was neither constitutional nor statutory — the first fact in any assessment of it.
• Its functions were to assess resources, formulate five-year plans, determine priorities and, through plan transfers, allocate resources to the states. The National Development Council, constituted in 1952 with the Prime Minister, Union ministers, Chief Ministers and Commission members, approved the plans.
• How it became a “super cabinet.” It did not merely advise on policy; it also determined outlays. A ministry whose programme and whose budget are both settled elsewhere is an implementing agency, and its members, hand-picked and answerable to no electorate, allocated funds to elected state governments.
• How it eclipsed the Finance Commission. Nothing in Article 280 confines that body to any category of grant, yet a division of labour with no constitutional warrant developed: the Finance Commission took the revenue grants, the Planning Commission took the development grants under Article 282. Because development spending is where expenditure growth occurs, the discretionary channel came to dwarf the formula channel.
• The conflict between the two bodies was institutional, not personal. P.V. Rajamannar identified the overlap of functions and responsibilities as a structural defect, and successive Commissions recorded the difficulty of assessing a state’s needs while a parallel body independently financed much of its expenditure.
• The Gadgil formula, adopted in 1969 and later revised as the Gadgil–Mukherjee formula, brought weights for population, per capita income, fiscal performance and special problems to part of plan assistance — reducing the uncontested component to arithmetic while discretionary grants continued alongside it.
• The plan and non-plan distinction fragmented budgets, privileged new projects over maintaining existing assets, and made outcome assessment impossible. Successive Commissions urged its abolition, and it was abolished from 2017-18.

NITI Aayog

• Established by a Cabinet resolution of 1 January 2015. It too is neither constitutional nor statutory.
• Structure: the Prime Minister as Chairperson; a Governing Council of all Chief Ministers and the Lieutenant Governors of union territories; Regional Councils convened for issues affecting more than one state; a Vice-Chairperson, full-time and ex-officio members, special invitees, and a Chief Executive Officer with the rank of Secretary.
• The decisive change is that it does not allocate money. The Finance Ministry does, on Finance Commission devolution. Removing an unelected body from resource allocation is a genuine federal improvement, and it is the strongest thing that can be said for the reform.
• What replaced the plans: a three-year action agenda, a seven-year strategy and a fifteen-year vision instead of five-year plans.
• Its declared model is “cooperative and competitive federalism” — cooperation through the Governing Council and sub-groups of Chief Ministers, competition through published rankings: the Aspirational Districts Programme, indices on SDG performance, health, school education, water and innovation, and technical support through SATH and Development Support Services to States.

The verdicts on the change

• Balveer Arora’s judgment is the most quoted, and it is a criticism of institutional form rather than of function.

“An imperfect clone of the institution it aimed to abolish.” — Balveer Arora

• M.P. Singh’s charge is sharper and fiscal: abolishing a formula-based approach enhanced the Union’s discretionary bargaining power and introduced a “spoils system”, in which what a state receives depends increasingly on its relations with the Union rather than on any published rule.
• The counter-case must be put fairly. A formula-bound Planning Commission was not more federal, only differently unaccountable: the Gadgil formula covered only part of plan assistance, discretionary grants ran alongside it, and the body applying the formula was still unelected.
• What was genuinely lost: nothing now performs medium-term resource planning or inter-sectoral coordination; abolishing the plan category removed a protected capital-expenditure head; and an advisory body cannot compel implementation. The Governing Council is not the National Development Council — the NDC’s approval of plans was a real requirement, while the Council binds no one.
• The trajectory of planning itself runs from centralised planning, where the state set both priorities and allocations; to indicative planning after 1991, where the state signalled priorities and left allocation to the market; to a position in which even indicative planning has been given up, leaving missions, targets and indices with no plan behind them.

GST: the largest change to Indian fiscal federalism since 1950

What the 101st Amendment did

• The Constitution (One Hundred and First Amendment) Act, 2016 inserted Articles 246A, 269A and 279A and the definition in Article 366(12A), and recast the entries carrying the old indirect taxes.
• Article 246A is the structural innovation. It confers on Parliament and every state legislature concurrent power to legislate on the supply of goods and services, with the Union alone competent on inter-state supply. This is the only concurrent taxing power in the Constitution, and it was created outside the Concurrent List rather than within it.
• The three-part architecture: CGST and SGST/UTGST levied simultaneously on intra-state supply, splitting the rate between the levels; IGST levied by the Union on inter-state supply and imports and apportioned under Article 269A.
• The destination principle: tax accrues to the state where goods or services are consumed, not where they are produced.
• Why it took thirteen years. The idea came from the Kelkar Task Force; the design was negotiated through the Empowered Committee of State Finance Ministers; the 115th Amendment Bill (2011) lapsed and the 122nd Amendment Bill (2014) became the 101st Amendment.

The GST Council and its voting arithmetic

• Article 279A required the President to constitute the Goods and Services Tax Council within sixty days of the amendment’s commencement.
• Composition: the Union Finance Minister as Chairperson; the Union Minister of State for Finance or Revenue; and a minister nominated by each state, with a Vice-Chairperson chosen from among the states.
• Quorum is one-half of the members. Decisions need three-fourths of the weighted votes of members present and voting, in which the Union’s vote carries one-third of the votes cast and all states together carry two-thirds.
• Work the arithmetic out and the design becomes clear.
  • The Union cannot pass anything alone: one-third is far below three-quarters, so it needs a large majority of states with it.
  • No combination of states can pass anything without the Union: even unanimous state support delivers only two-thirds. The Union therefore holds an absolute veto.
  • The Union alone can block anything, since one-third exceeds the quarter needed to defeat a motion.
• This is a genuinely shared veto, and it is the only fiscal institution in India that gives the states a collective one. Before the Finance Commission the states are petitioners; under Article 282 they are recipients; in the Council they are a bloc that must be assembled.
• The “three-legged race” characterisation captures the consequence: states must cooperate with one another, the Union must cooperate with the states, and no leg moves independently.

Mohit Minerals and the status of the Council’s recommendations

• Union of India v. Mohit Minerals (2022) decided the question the amendment left open — are the Council’s recommendations binding?
• The holdings: the recommendations are persuasive, not binding; both Parliament and state legislatures have simultaneous power to legislate on GST; and Article 246A is an independent source of power for each, so the states’ competence is not derived from the Union’s.

“Indian federalism is a dialogue in which the States and the Centre always engage in a dialogue.” — Supreme Court, Union of India v. Mohit Minerals

• The practical qualification matters as much as the holding. The Council still functions as though its recommendations bind — no state has legislated against one, and doing so would fracture the uniform rate structure. The judgment restored a constitutional position without changing a practice: a safeguard in reserve, or a dead letter, depending on whether a state ever uses it.

Compensation: the guarantee and the cliff

• The GST (Compensation to States) Act, 2017 guaranteed each state 14% annual growth in protected revenue from a 2015-16 base for five years from 1 July 2017, funded by a compensation cess on demerit and luxury goods.
• The pandemic broke the mechanism. Collections collapsed while the guarantee remained legally owed, and cess proceeds fell far short of the liability.
• The 2020 standoff was the most serious federal confrontation over money since 1950. The Union offered the states two borrowing options rather than borrowing itself, arguing the shortfall was an act of God outside the guarantee; several states refused; the impasse ended with the Union raising back-to-back loans and passing them to the states.
• Compensation ended in June 2022 and was not extended, despite sustained demands. The cess continued — not to compensate states, but to service the pandemic borrowing until those loans were discharged.
• The structural significance of the cliff: states surrendered a permanent taxing power in exchange for a temporary guarantee, and when the guarantee lapsed the power did not return.

GST 2.0 and the position in 2026

• The 56th GST Council meeting on 3 September 2025 carried out the largest restructuring since 2017. The four slabs of 5, 12, 18 and 28 per cent collapsed into two — 5% and 18% — with a 40% demerit rate on tobacco, pan masala, aerated and caffeinated drinks, high-end vehicles, yachts and gaming.
• Most changes took effect on 22 September 2025, with tobacco held at the old rate pending settlement of the compensation liability.
• The rate changes ran overwhelmingly downward: cement 28% to 18%; small cars and motorcycles 28% to 18%; farm machinery and irrigation equipment 12% to 5%; hotels 12% to 5%; hair oil and toothpaste 18% to 5%; health and life insurance exempted; life-saving drugs at nil or 5%.
• The states’ demand was not for higher rates but for protection against the consequence of lower ones: a five-year extension of compensation. It was not met. Kerala estimated its annual loss at ₹8,000-10,000 crore, and other consumption-heavy states made comparable claims.
• The revenue outcome so far has been better than the states feared. Gross GST collections for 2025-26 reached ₹22,27,096 crore, up 8.3% on the previous year’s ₹20,55,515 crore, with March 2026 collections of ₹2,00,064 crore and buoyant imports offsetting slower domestic growth.
• The compensation cess was recommended for discontinuation on specified goods from 1 February 2026, with the residual questions — migration of accumulated cess credits, the treatment of tobacco, and a roadmap for bringing petroleum products into GST — carried to the 57th Council meeting in 2026.
• Petroleum and alcohol remain outside GST, and their inclusion is the unfinished business. Bringing them in would complete the single market and simultaneously remove the last large tax base the states control alone, which is why they have not agreed and will not without a new guarantee.

The federalism argument, both ways

The case that GST weakened federalism	The case that GST is compatible with, or advances, it
Federalism is unity without uniformity. A single nationwide tax on the same base at the same rate negates unit-level fiscal choice	GST compels the units to cooperate, converting an adversarial relationship into a joint one — turning tangles into a tango
The United States, the most advanced market economy in the world, has no GST, so a single market plainly does not require one	A single market raises the long-run revenue base; cascading taxes and check-posts were a deadweight loss borne largely by the states
Sales tax was the states’ most important revenue handle, and Ambedkar — who otherwise favoured a strong centre — argued that states should have complete autonomy in fixing the sales-tax rate, with no constitutional ceiling	The states gained the power to tax services, which they never previously had, in the fastest-growing sector of the economy
Sales tax was a policy instrument. A state banning liquor, promoting manufacturing, or taxing to fund health and education was making a legitimate federal choice the uniform rate forecloses	The Council’s voting design gives the states a collective veto that no other fiscal institution in India provides
Manufacturing states lose under a destination-based tax, because revenue follows consumption rather than production	Mohit Minerals restored the constitutional position: recommendations are persuasive, and Article 246A is an independent source of state power
The compensation cliff removed the guarantee while the surrender of the taxing power remained permanent	Compensation was expressly a five-year transition; a permanent guarantee would have removed any incentive to raise revenue

• The honest judgment divides by dimension rather than resolving into a verdict.
  • On autonomy, GST unambiguously reduced the states’ room for manoeuvre. A state can no longer use the rate of its largest tax as a policy instrument, and no amount of Council representation restores that.
  • On capacity, the states are not worse off and are probably better off. They acquired services, the base has grown, and collections have been buoyant.
  • On the quality of the federal relationship, GST is the most genuinely federal institution India has built since 1950, because it is the only forum in which the Union must assemble state consent to act at all.
• The right formulation is that GST traded autonomy for voice — deciding alone, surrendered for a seat where decisions cannot be taken without the states. Whether that was a good trade turns on whether the Council is deliberative or a formality, and since 2022, with meetings six months apart and decisions arriving pre-negotiated, it has been closer to the second.

NEET and the education argument

• Education sits on the Concurrent List, moved there from the State List by the 42nd Amendment in 1976 — itself an act of centralisation during the Emergency.
• The National Eligibility cum Entrance Test made a single national examination the sole route to undergraduate medical admission, superseding state examinations and state admission criteria.
• Why it was read as a federal encroachment: it overrode selection processes in institutions the states fund, build and staff; it disadvantaged state-board and rural candidates relative to those coached for a national syllabus, as a Tamil Nadu state committee documented; and it narrowed a state’s capacity to design admissions around its own social-justice policy.
• Tamil Nadu’s response was legislative — bills seeking exemption from NEET, passed by the Assembly, reserved by the Governor for the President’s consideration and refused assent.
• The common structure of the GST and NEET objections makes them one argument: a uniform national instrument applied to a field where states had exercised differentiated choice, justified by efficiency, extinguishing the ability to choose otherwise. Whether that is cooperative federalism or centralisation turns on whether the uniformity was negotiated — and the Council was, while NEET was not.

Centrally sponsored schemes and the conditional-transfer problem

• Centrally sponsored schemes are Article 282 transfers: Union-designed programmes, implemented by states in State and Concurrent List subjects, financed by a matching contribution from both levels.
• The structure after rationalisation. A Sub-Group of Chief Ministers convened under NITI Aayog reported in November 2015, and the schemes were consolidated into umbrella schemes in three classes — core of the core (social protection, highest central share); core (60:40 for most states, 90:10 for north-eastern and Himalayan states, fully central for union territories); and optional (50:50, or 80:20 for north-eastern and Himalayan states). A flexi-fund of 25% of each scheme’s allocation was to be left to the state — the most federal element of the design, and the least consistently honoured.
• The federal objections are cumulative.
  • Matching shares pre-commit state budgets. A state that declines forfeits the central share; a state that accepts must find the matching money out of what it would otherwise have spent on its own priorities. The choice is nominal.
  • The schemes operate in State List subjects — health, agriculture, water, rural development, urban local government — under a provision drafted for exceptional grants.
  • Branding and naming conditions require the Union’s programme identity to be displayed, breaking the link between the government that spends and the government held responsible.
  • The states become implementing agencies for Union priorities — the identical charge once levelled at the Planning Commission, reappearing through a different channel.
• The 14th Finance Commission episode must be reported honestly. The devolution increase from 32% to 42% was meant to give states untied money, but it came with a revision of the CSS sharing pattern — several schemes moving to 60:40, others delinked altogether — so the gain was partly offset by additional matching obligations and was far smaller than ten percentage points implied.
• Single Nodal Agency accounts and the Public Financial Management System are the administrative half: one designated account per scheme, tracked centrally, releases triggered by documented expenditure. The efficiency case is genuine — it ended float and diversion — but the Union now sees, and can time, every rupee, and a release can be delayed without any formal decision being taken.
• The 2025-26 education disputes show conditionality used as leverage. Central shares under Samagra Shiksha were withheld from Tamil Nadu, Kerala and West Bengal in 2024-25, the operative condition being their refusal to sign a memorandum tied to the PM SHRI scheme and through it to the National Education Policy.
  • The structural point holds independently of the merits. Money owed under one scheme was conditioned on a state’s acceptance of an unrelated policy in a Concurrent List subject. That is not a funding dispute; it is a fiscal instrument used to settle a disagreement the Constitution assigns to legislative competence.

Contemporary structural issues

Delimitation: fiscal federalism’s political twin

• Article 82 requires readjustment of Lok Sabha seats after each census. The 42nd Amendment (1976) froze allocation at 1971 population and the 84th Amendment (2001) extended the freeze to the first census taken after 2026.
• The symmetry with the devolution argument is exact. A state that reduced fertility fastest sees its share of the national population fall, and therefore — on a pure population basis — both its seats in Parliament and its weight in the devolution formula.
• The projections drive the politics. An expanded house on pure population could take Uttar Pradesh from 80 to roughly 131 seats and Tamil Nadu from 39 to about 64, widening the north–south seat gap from 41 to nearly 94.
• A Joint Action Committee of southern and allied states — Tamil Nadu, Kerala, Karnataka, Telangana, Punjab, West Bengal and others — formed in March 2025, demanding that the freeze be extended a further 25 years and that fiscal devolution not penalise demographic performance.
• The question reached Parliament in April 2026 and failed there. The Constitution (131st Amendment) Bill, 2026 proposed to raise the Lok Sabha ceiling from 550 to 850 members, transfer to Parliament the decision on when delimitation happens and which census it uses, and de-link women’s reservation from the first post-2026 census. Introduced on 16 April 2026, it was negatived the next day, 17 April 2026, falling short of the two-thirds majority an amendment requires; the accompanying Delimitation Bill, 2026 and Union Territories Laws (Amendment) Bill, 2026 fell with it.
• The defeat matters for fiscal federalism as much as for representation. It is a rare instance of a Union government unable to carry a constitutional amendment on a federal question, and it demonstrates that on territorially defined issues a cross-party bloc of state interests can hold where individual state bargaining cannot.
• The argument recurred at the 31st Southern Zonal Council in August 2026, where the southern states pressed for the Lok Sabha to be frozen at 543 seats for a further 25 years and for devolution not to penalise demographic transition — the two demands made together, as a single case.

The southern and western grievance, and the reply

• The contribution ratio is real and large. The southern states account for roughly 31% of national output with about 20% of the population, and the high-income states receive substantially less from the divisible pool than they contribute to it.
• The reply is that this is not a defect of the system; it is the system. Equalisation is the entire purpose of a federal transfer mechanism — a scheme in which each state received what it contributed would be an accounting exercise, not a federation. Income distance is a redistributive criterion by design, so objecting that a redistributive formula redistributes is an argument against having one.
• The serious version of the southern argument is narrower and stronger — not that redistribution is wrong, but that it should not be open-ended, should be paired with accountability for outcomes in recipient states, and should not simultaneously cost the contributing states political representation.

State debt, pensions and the freebies argument

• Outstanding state debt stood at about 27.2% of GSDP in March 2025, with committed expenditure absorbing about half of revenue receipts and interest payments about 11.8%.
• The revival of the Old Pension Scheme in Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh is the largest self-inflicted fiscal risk on the horizon. The Reserve Bank of India estimated a general reversion would carry a cumulative burden 4.5 times the NPS outgo — states saving about 0.1% of GDP a year until 2040 and then paying an additional 0.5% a year, an extra 0.9% of GDP annually by 2060.
• Farm-loan waivers and unconditional cash transfers raise the same structure in compressed form: an immediate, visible transfer financed from a budget already half pre-committed, with the adjustment falling on capital expenditure.
• The Supreme Court has commented sharply and repeatedly, asking in February 2025 whether pre-election promises were “creating a class of parasites”, and earlier directing that the Finance Commission’s views on regulating such promises be obtained.
• The counter-argument deserves statement rather than dismissal. Distinguishing a freebie from a welfare entitlement is a political judgment, not a technical one; free electricity, subsidised food and cash transfers to women have documented effects on nutrition, school attendance and labour-force participation; and a court is not obviously the body to draw the line.

The third tier

• Article 280(3)(bb) and (c) require every Finance Commission to recommend measures to augment a state’s Consolidated Fund to supplement panchayats and municipalities, on the basis of the State Finance Commission’s recommendations.
• The chain is broken at the state link.
• The consequence is a tier with functions but no finance. Panchayats raise only about 1.1% of their total revenue from their own taxes and fees, the rest arriving from above. A tier that raises nothing it spends cannot be held accountable for how it spends it — the states’ own complaint against the Union, reproduced one level down.

Directions of reform

• A permanent Finance Commission, or at minimum a standing secretariat. The present arrangement dissolves the institution after each award and rebuilds it, losing methodology, data series and institutional memory, and leaving states without a continuous interlocutor.
• A state role in the terms of reference — the most achievable reform of all: settling the terms after consultation through the Inter-State Council rather than drafting them in the Union Finance Ministry.
• A cap on cesses and surcharges, or their inclusion in the divisible pool after a defined period. This would change the most and is least likely to be conceded.
• A statutory role for the Inter-State Council in fiscal matters. The Council exists under Article 263 and has met about eleven times in thirty-five years; a defined pre-legislative role on transfers would convert an unused forum into a standing one.
• The Fiscal Council recommended by the 15th Finance Commission — an independent body with advisory powers and access to the records of both levels, publishing assessments of fiscal forecasts and compliance. It has not been established.
• Operationalising GST Council dispute resolution. Article 279A(11) requires the Council to establish a mechanism to adjudicate disputes between the Union and states, between states, or arising out of its own recommendations. It has never been constituted, so the one forum with genuine shared authority has no way of resolving a disagreement except by not deciding.

Conclusion

India’s fiscal constitution rests on a coherent bargain: the Union collects the taxes only a national government can collect efficiently, the states carry the responsibilities only a proximate government can discharge responsively, and a constitutional commission moves the money between them on published principles.

The bargain has not been repudiated; it has been eroded from the edges, through instruments that are individually lawful and cumulatively decisive — cesses and surcharges that shrink the base while the percentage holds, conditional schemes occupying State List subjects, borrowing consent exercised as an annual ceiling, and terms of reference written by one party.

What has changed is not the constitutional text but the location of the argument. The dismissal of state governments is no longer the instrument of central power; the design of transfers is. That shift is itself evidence that the judicial floor built after Bommai is holding, and that pressure has migrated to the one area the courts have so far declined to enter.

The two institutions that could correct the drift point in opposite directions. The GST Council is the most genuinely federal fiscal body India has created, because it cannot act without assembling state consent — and it is used sparingly, at long intervals, with its own dispute-resolution mechanism unbuilt. The Finance Commission is the constitutionally stronger institution and the structurally weaker one, because it is entirely a creature of one of the two parties whose claims it adjudicates.

The reform that matters most is therefore not a higher number but a fixed base and a shared process. A devolution share means little when the quantity it applies to can be reduced administratively, and a commission’s independence means little when its questions are written for it. Indian fiscal federalism does not need to be redesigned; it needs the rules it already has to be made unavoidable.