Civil Services Prep

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?

Model answer

India has a vertical fiscal imbalance: the Union controls major taxes, while States fund many public services. Articles 268–281, especially the Finance Commission under Article 280, seek to bridge this gap. During planned development, fiscal relations passed through four broad stages: **Dual transfers:** From 1950, the Finance Commission handled tax shares and grants, while the Planning Commission allocated plan assistance. **Centralised planning:** Five-Year Plans and Central schemes let the Union shape State priorities through tied funds. **Formula-based assistance:** Gadgil formulas added objectivity, but the plan–non-plan division distorted budgets and encouraged bargaining. **Post-1991 phase:** Expanding Central schemes and Article 293 borrowing controls increased State dependence. Since 2015, reforms have made transfers more rule-based, but State autonomy remains limited: **Greater untied funds:** The Fourteenth Finance Commission raised States’ share in the divisible tax pool from **32% to 42%** for 2015–20, improving spending choice.

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