Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the…

Centre-State financial relations in India have transitioned from the Planning Commission era—characterized by discretionary Plan grants under Article 282 and Gadgil-Mukherjee formulas—to constitutional, rule-based transfers following the replacement of the Planning Commission with the purely advisory NITI Aayog in 2015.

Impact of Recent Fiscal Reforms

Statutory Devolution and the Divisible Pool: The 14th and 15th Finance Commissions structurally enhanced unconditional tax devolution to 42% and 41% respectively, expanding the fiscal autonomy of states; the 16th Finance Commission has retained the States' share at 41% for 2026–31. However, this expansion has been diluted by the Centre’s growing reliance on non-shareable cesses and surcharges (under Article 271), which now account for nearly 15–18% of Gross Tax Revenue, effectively shrinking the divisible pool.

The GST Architecture: The introduction of the Goods and Services Tax (GST) in 2017 institutionalized cooperative federalism through the GST Council. Yet, it curtailed states’ sovereign taxation powers over sales tax and VAT. The expiry of the mandatory five-year GST compensation mechanism in June 2022 has severely aggravated fiscal stress across major states, and the September 2025 rate rationalisation (with 5% and 18% as the main slabs) has renewed States' concerns over revenue.

Conditionalities and Centralized Spending: The expansion of Centrally Sponsored Schemes (CSS) like the Jal Jeevan Mission—with rigid matching grants and implementation conditionalities—alongside direct cash transfers like PM-KISAN, has restricted state-level expenditure flexibility. Stricter enforcement of borrowing limits under Article 293(3), including the inclusion of off-budget borrowings in state fiscal deficit caps, has provoked widespread representations from states.

Verdict

Recent reforms present a distinct duality: while statutory devolution and the GST Council have reinforced institutional federalism, operational centralization—driven by expanding non-divisible cesses, CSS conditionalities, and borrowing curbs—has constrained sub-national fiscal space. True fiscal federalism now hinges on shrinking the cess footprint and rationalizing CSS architecture.