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?

• Articles 268 to 293 in Part XII frame the distribution of revenue, taxation powers and grants between Centre and States.

Constitutional & Institutional Framework

• Art. 268-269A — taxes levied by Union but collected/appropriated by States, or assigned to them
• Art. 270 — sharing of net proceeds of taxes between Union and States
• Art. 275 — need-based, discretionary grants-in-aid to States
• Art. 280 — Finance Commission constituted every five years for vertical and horizontal devolution
• Art. 282 — discretionary grants for "public purpose," criticised for bypassing the Finance Commission mechanism

Evolution Through the Planning Era

• Planning Commission (1950–2014) — Gadgil-Mukherjee formula guided plan transfers alongside Finance Commission's non-plan transfers, creating an overlapping dual system
• NITI Aayog (since 2015) — a purely advisory body with no fund-allocating power, ending the Centre's direct plan-transfer role
• Post-2015, greater responsibility for both plan and non-plan transfers shifted onto the Finance Commission mechanism

Recent Reforms & Their Impact

• 101st Constitutional Amendment (2016) — introduced GST; created the GST Council (Art. 279A) as a cooperative-federal body
• 14th Finance Commission — raised States' share in the divisible pool from 32% to 42%
• 15th Finance Commission — retained share at ~41%, but use of 2011 population data (instead of 1971) triggered friction with southern States
• GST compensation crisis (2020–22) — exposed vertical fiscal imbalance; Centre had to borrow on States' behalf to meet the guaranteed 14% compensation
• CAG reports flagged the rising share of cess and surcharge (outside the divisible pool), structurally reducing States' effective share

Persisting Challenges to Fiscal Federalism

• States derive 40–50% of revenue, on average, from central transfers, indicating continuing dependence
• Conditional/tied grants and centrally sponsored schemes restrict State spending autonomy
• Off-budget borrowing by the Centre distorts transparency of fiscal transfers
• ToR of the 15th Finance Commission (population criteria, defence/internal security fund) reflected underlying federal tension

Way Forward

• Institutionalise a predictable, rule-based GST compensation mechanism beyond the initial five-year guarantee
• Strengthen the GST Council as the primary forum for cooperative fiscal federalism
• Review growing reliance on cess/surcharge to protect the sanctity of the divisible pool
• Balance equity (support for backward States) with efficiency (incentives for fiscally prudent States) in future Finance Commission awards
• Conclusion: Fiscal federalism remains a work in progress — reforms like GST have deepened cooperative federalism, but structural vertical imbalance and Centre-State trust deficits continue to need resolution.