Federalism Under Strain: Centre–State Relations and Fiscal Autonomy in India

Abstract

India’s federal design pairs a centralising constitutional text with a large, decentralised spending burden on the States. This paper examines whether recent fiscal developments have widened the gap between what States are expected to spend and what they are able to raise or control. Using doctrinal analysis of constitutional provisions and descriptive analysis of Finance Commission awards, Union budget data and secondary datasets for 2010–2026, it traces three pressures on State fiscal autonomy: the growth of non-shareable cesses and surcharges, the pooling of indirect-tax sovereignty under the Goods and Services Tax (GST), and the expansion of conditional transfers and borrowing controls. The findings show a paradox. The formal States’ share of the divisible pool rose from 32% under the Thirteenth Finance Commission to 41–42% thereafter, and the Sixteenth Finance Commission retained 41% for 2026–31. Yet the divisible pool itself shrank as a proportion of gross tax revenue, because the share of cesses and surcharges roughly doubled between 2011–12 and 2020–21 before easing. The paper argues that Indian federalism is strained less by open conflict than by a quiet erosion of fiscal discretion. It proposes a negotiated ‘cess-for-share’ bargain, an institutionalised estimate of vertical fiscal imbalance, a revived Inter-State Council, and rule-based borrowing limits as routes towards a more cooperative fiscal compact.