(a) "The role of State Finance Commission in distribution of finances between state and local governments is vital." Discuss. (20…

(a) Role of State Finance Commission (SFC)

Mandated under Articles 243-I and 243-Y to be constituted every five years, the State Finance Commission is the linchpin of sub-state fiscal federalism. While the Union Finance Commission under Article 280 determines vertical devolution from Centre to States and recommends measures to augment state Consolidated Funds under Article 280(3)(bb) and (c), the SFC performs this constitutional function between the state government and local bodies. It determines the principles governing the distribution of net tax proceeds, assigns specific taxes and duties to Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs), and recommends grants-in-aid from the state's Consolidated Fund.

However, SFCs face acute structural hurdles. Unlike the Union Finance Commission, SFCs suffer from irregular constitution, inadequate data machinery, and limited technical capacity. States often delay tabling SFC reports in legislatures, shelving vertical and horizontal devolution recommendations. Many states constitute SFCs years late or leave action-taken reports pending, and the RBI’s 2022 report on municipal finances found local bodies’ own revenues to be a very small and stagnant share of GDP. Recognising this, the 15th Finance Commission made the constitution of SFCs and the tabling of action-taken reports on their recommendations a condition for releasing local body grants from 2024-25. Where SFCs work well, as in Kerala, which devolves a fixed share of the state’s plan funds, local governments plan with predictable resources. Without robust SFC-led resource transfers, local self-government remains administrative deconcentration rather than genuine democratic decentralization.

(b) Transformations in Centre-State Relations

Centre-state relations have shifted from cooperative federalism toward competitive and asymmetric dynamics. Institutional redesign is marked by the replacement of the Planning Commission with NITI Aayog (2015), the 14th Finance Commission’s increase of the states’ share of divisible taxes to 42% (41% under the 15th, retained by the 16th Finance Commission for 2026–31), and the creation of the GST Council as a shared-sovereignty fiscal body. Critics also point to centralising trends, citing the uniform enforcement of the Disaster Management Act during COVID-19, the proliferation of Centrally Sponsored Schemes with rigid conditionalities, and the rising share of cesses and surcharges that are outside the divisible pool. At the same time, the use of Article 356 has declined sharply since S.R. Bommai (1994), a change in the opposite direction.

Political asymmetry has intensified frictions, particularly in opposition-ruled states. States express serious grievances over the erosion of fiscal autonomy, delays in GST compensation cess transfers, and stringent net borrowing ceilings that now count off-budget borrowings, a dispute Kerala took to the Supreme Court in 2024. Furthermore, perceived politicization via central investigative agencies like the CBI and Enforcement Directorate (ED), along with historical and modern deployments of central power, has led states to allege an erosion of constitutional space, demanding greater autonomy within the federal compact.

(c) Governor-State Friction

The constitutional office of the Governor under Articles 153 to 167 is central to these federal tensions. While conceived as a bridge between the Union and the States, the Governor's discretionary scope under Article 163(2) has frequently generated institutional conflict. Recent episodes in Maharashtra regarding government formation and floor tests (the Supreme Court in Subhash Desai, 2023, held the Governor’s call for a floor test unjustified), as well as in Tamil Nadu, Kerala, and West Bengal concerning indefinite delays in granting assent to legislative bills or reserving state bills for Presidential consideration under Article 200, have challenged constitutional norms. In State of Tamil Nadu v. Governor of Tamil Nadu (April 2025) the Supreme Court set timelines for gubernatorial action, but its advisory opinion on the Presidential reference in November 2025 held that courts cannot impose fixed timelines or deemed assent, while Governors cannot indefinitely sit on bills. The strain is thus real, and the constitutional settlement is still evolving.

Both the Sarkaria Commission (1988) and the Punchhi Commission (2010) emphasized that the Governor must remain a detached constitutional umpire. They recommended institutional safeguards, including mandatory consultation with the state Chief Minister prior to appointment, a guaranteed five-year tenure, and an objective procedure for removal analogous to impeachment, rather than dismissal at the Union's sole pleasure.