A Structural Reset for India’s Federalism: Towards Negotiated Decentralisation

India's federal architecture, often characterised as 'quasi-federal' or 'federal with a unitary bias', is currently at a critical juncture. While designed to foster national unity post-Partition and integrate diverse princely states, the inherent centralising tendencies are increasingly straining Union-State relations, particularly in legislative, administrative, and fiscal domains. This editorial argues that a genuine structural reset is imperative, moving beyond the current cooperative-competitive dichotomy towards a more robust negotiated federalism underpinned by profound fiscal decentralisation. This recalibration is not merely an academic exercise but a governance necessity, vital for enhancing democratic accountability, tailoring public services to local needs, and fostering sustainable economic growth across diverse regions, thereby addressing the core concerns of GS-II (Polity & Governance) and GS-III (Indian Economy, Fiscal Federalism).

UPSC Relevance Snapshot

• GS-II (Polity & Governance): Indian Constitution—historical underpinnings, evolution, features, amendments, significant provisions and basic structure. Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein. Centre-State relations.
• GS-III (Indian Economy): Government Budgeting. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
• Essay: Themes relating to democratic decentralisation, cooperative federalism, challenges to national integration, and governance reforms.

The Institutional Landscape of Indian Federalism

The Constitution of India, a unique amalgam influenced significantly by the Government of India Act, 1935, established a 'Union of States', deliberately avoiding the term 'federation'. This design enshrined a strong central authority through instruments like the extensive Union List, residual powers vested in Parliament, and emergency provisions. However, it also delineated clear spheres of state autonomy, creating a complex, evolving institutional framework for managing Union-State interactions.

• Constitutional Framework:
  • Article 1: Declares India as a "Union of States," emphasising indissoluble unity.
  • Seventh Schedule: Delineates legislative powers into Union, State, and Concurrent Lists.
  • Article 263: Provides for the establishment of an Inter-State Council to inquire into, discuss, and advise upon disputes and common interests.
  • Article 280: Mandates the establishment of a Finance Commission to recommend the distribution of tax revenues between the Union and States.
  • Article 356: Allows for President's Rule in states under specific conditions, a provision historically prone to misuse.
• Key Commissions and Institutions:
  • Rajamannar Committee (1971): Appointed by Tamil Nadu, advocated for greater state autonomy and limits on central intervention.
  • Sarkaria Commission (1983-1988): Recommended cooperative federalism, emphasising consultation and restraint, particularly regarding Article 356.
  • Punchhi Commission (2007-2010): Focused on redefining the Governor's role, strengthening intergovernmental mechanisms, and addressing concerns related to concurrent list legislation.
  • GST Council: Established under Article 279A, it is a unique federal institution with representation from both the Union and States, responsible for Goods and Services Tax matters.
  • NITI Aayog: Replaced the Planning Commission, positioning itself as a "think-tank" and facilitator of cooperative and competitive federalism, though its operational influence on state policy remains debated.

The Argument for Structural Reset: Centralisation and Erosion of State Autonomy

Despite the constitutional safeguards and judicial pronouncements like S.R. Bommai vs Union of India (1994), which declared federalism a part of the Basic Structure, empirical evidence suggests a persistent trend of centralisation. This is manifested in legislative overreach, the contentious role of the Governor, and, most critically, through significant fiscal imbalances, all of which progressively diminish meaningful state autonomy. The Economic Survey 2020-21 acknowledged the need for a stronger focus on states as drivers of growth, indirectly highlighting the current constraints they face.

Legislative Overreach and Concurrent List Ambiguity

The expansion of parliamentary legislation on subjects traditionally within the State domain or even shared concurrently has eroded the legislative space for states. While the Union Parliament can legislate on State List subjects under Articles 249 (national interest) and 250 (emergency), the increasing frequency and scope of such interventions, alongside the overriding nature of Union laws on Concurrent List subjects (Article 254), reduce the efficacy of state legislative bodies. For instance, Union laws related to agriculture or education, even if well-intentioned, can stifle state-specific innovation and local adaptation. The Standing Committee on Finance (2020) noted concerns about certain centrally sponsored schemes bypassing state legislatures for implementation details.

The Contentious Role of Governors and Article 356

The Governor, as the constitutional head of a state and the representative of the Union, often becomes a flashpoint in Union-State relations. Issues include delayed assent to state bills, discretionary powers in government formation, and reporting under Article 356. Despite the S.R. Bommai judgment placing Article 356 under judicial review, instances of governors acting unilaterally or seemingly politically motivated remain a concern. Recent reports from The Hindu (Feb 2026) detailing the Tamil Nadu government's committee on Union-State relations, likely address these very frictions, indicating that judicial correctives have not fully resolved the underlying structural issues. The Punchhi Commission (2010) specifically recommended clarifying the Governor's discretionary powers and setting time limits for assent to Bills.

Acute Fiscal Imbalances and Conditional Transfers

The most significant structural challenge to Indian federalism is the enduring fiscal imbalance. States, responsible for critical public services like health, education, and law and order, bear nearly 60% of total government expenditure, while their own revenue-generating capacity is considerably less, leaving them heavily dependent on Union transfers.

• Vertical Imbalance: Major taxation powers (e.g., corporate tax, customs duty) remain with the Union, while states shoulder significant expenditure responsibilities.
• Conditional Transfers: Centrally Sponsored Schemes (CSS) often come with stringent conditions and uniform templates, limiting states' flexibility in resource allocation and policy innovation. According to CAG's 2023 audit reports, a substantial portion of state spending in several sectors was dictated by CSS guidelines, rather than local priorities.
• GST Regime Impact: While aiming for a unified market, the Goods and Services Tax (GST) has restructured state finances, consolidating a significant portion of indirect taxation under a common framework. This has undoubtedly streamlined tax administration but also led to a perceived loss of fiscal autonomy for states.

The transition to the GST regime epitomises this dual impact, aiming for national economic integration but altering the fiscal sovereignty of states.

Comparison: State Fiscal Autonomy Pre-GST vs. Post-GST

Feature	Pre-GST (Before July 2017)	Post-GST (After July 2017)
Independent Taxation Powers (Indirect)	States had autonomy over Sales Tax/VAT, Entry Tax, Luxury Tax, Entertainment Tax, etc.	Subsumed into GST; states lost independent rate-setting power for most goods/services.
Revenue Buoyancy	States' own tax revenue growth directly linked to their economic performance and tax policy decisions.	Revenue growth largely dependent on GST Council's decisions and shared pool; compensation mechanism initially, now state-specific growth a concern.
Fiscal Policy Space	Limited ability to use indirect taxes for state-specific economic incentives or disincentives.	Very restricted ability for states to use indirect taxation as a fiscal policy tool.
Inter-State Trade Taxes	Central Sales Tax (CST) added to transaction costs.	Seamless flow of goods/services across state borders, improving efficiency.
Dispute Resolution	Primarily through judicial review or inter-state negotiations.	GST Council serves as a unique federal forum for consensus-based decision making.

The Counter-Narrative: Central Strength for Unity and Efficiency

A significant counter-argument posits that India's 'federalism with a unitary bias' is not a flaw but a pragmatic necessity, particularly given its history and diverse challenges. Proponents of a strong centre emphasise that this structure is vital for maintaining national unity, especially after the tumultuous Partition and the integration of diverse princely states. A strong Union can effectively manage cross-cutting issues like national security, macroeconomic stability, disaster management, and ensure a minimum standard of public services across states. The initial phases of economic liberalisation, for instance, arguably benefited from central guidance in creating a common market and attracting foreign investment. Institutions like NITI Aayog advocate for a 'competitive federalism' where states vie for investment and performance, and a 'cooperative federalism' where states work with the Union on national priorities, both implying significant central coordination.

International Perspective: Lessons from Canadian Federalism

Examining established federal systems provides valuable comparative insights. Canada, like India, has a parliamentary system and a colonial legacy, yet its federal structure exhibits a stronger emphasis on provincial autonomy. This is particularly evident in the constitutional division of powers and fiscal arrangements, offering lessons for India's pursuit of a structural reset.

Canadian federalism is often characterised by strong provincial powers, particularly in areas like healthcare, education, and natural resources, reflecting the diverse linguistic and cultural identities of its provinces. This robust provincial autonomy allows for policy experimentation and responsiveness to local needs, a concept India could further explore.

India vs. Canada: A Comparative Glance at Federalism Metrics

Metric	India	Canada
Constitutional Basis	"Union of States"; strong central bias (Articles 249, 250, 356)	Clear division of powers (Sections 91 & 92 of Constitution Act, 1867); strong provincial autonomy.
Residual Powers	Vested with the Union Parliament.	Vested with the Union Parliament, but provinces have expanded their jurisdiction over time through judicial interpretation.
Healthcare & Education	Concurrent List; Union plays significant role through funding and policy.	Exclusively provincial jurisdiction; provinces largely design and deliver these services.
Fiscal Autonomy of Sub-national Units	Significant vertical imbalance; states reliant on Union transfers and GST Council decisions.	Provinces have significant own-source revenue (e.g., income tax, sales tax, resource royalties); equalization payments.
Amending the Constitution	Primarily by Union Parliament (simple/special majority); some provisions require state ratification.	Requires consent of specific number of provinces (e.g., 7 provinces representing 50% population for major changes).
Inter-Governmental Relations	Inter-State Council, GST Council, NITI Aayog; often perceived as top-down.	Premier's Conferences, Council of the Federation; more peer-to-peer negotiation.

Structured Assessment for a Federal Reset

A meaningful structural reset for Indian federalism requires a multi-pronged approach, focusing on enhancing policy design, strengthening governance capacity, and addressing underlying behavioural and structural factors.

Policy Design Adequacy

• Reinvigorate the Inter-State Council (ISC): Transform the ISC from a merely advisory body into a robust platform for genuine negotiation and consensus-building on crucial legislative and policy matters, as envisioned by Article 263. The recommendations of the Sarkaria Commission on regular and effective ISC meetings must be strictly implemented.
• Rationalise the Concurrent List: A comprehensive review of the Concurrent List is essential to identify subjects that can be exclusively devolved to states or where Union intervention should be minimal and consultative. The Punchhi Commission (2010) suggested greater consultation with states before legislating on Concurrent subjects.
• Codify the Governor's Powers: Establish clear, legally binding guidelines and timeframes for the Governor's assent to bills, role in government formation, and reporting under Article 356, drawing lessons from past judicial pronouncements and commission recommendations.
• Strengthen Finance Commission's Mandate: Empower the Finance Commission to recommend not just vertical and horizontal devolution, but also address conditionalities of Union transfers and provide explicit frameworks for compensating states for policy shifts impacting their revenues, like the GST compensation cess. The 15th Finance Commission itself highlighted the need for greater fiscal flexibility for states.

Governance Capacity

• Enhance State Institutional Capacities: Invest in capacity building for state legislatures, bureaucratic machinery, and policy research institutions to enable more effective policy formulation, implementation, and independent fiscal management.
• Data-Driven Federalism: Promote the generation and sharing of robust, disaggregated data by both Union and states to facilitate evidence-based policy dialogue and performance benchmarking, moving beyond anecdotal arguments.
• Streamline GST Council Operations: While the GST Council is a landmark federal institution, its decision-making process needs to become more transparent and deliberative, ensuring that states' concerns regarding revenue buoyancy and rate structures are genuinely addressed, not merely outvoted.

Behavioural and Structural Factors

• Foster a Culture of Respect: Encourage a political culture of mutual respect and genuine consultation between the Union and states, moving away from perceived 'high command' dynamics, especially when different political parties govern at the Centre and in states.
• Empower Local Self-Governments: Real federalism extends beyond Union-State relations to genuine decentralisation to Panchayati Raj Institutions and Municipalities, as enshrined in the 73rd and 74th Amendments, providing them with functional autonomy and fiscal resources. The Report of the 14th Finance Commission underscored the importance of transferring funds directly to local bodies.
• Judicial Vigilance: The judiciary must continue its robust role in safeguarding the constitutional scheme of federalism, intervening decisively when federal principles are undermined by either executive or legislative overreach.

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