Fiscal Relations in India: Mother of all federal battles 

Issues arising due to constitutional design: 

• Dominance of centre: Indian constitution has been designed in a manner that the Union possesses key powers on financial matters for example; Centre alone is constitutionally empowered to regulate the money supply, contract foreign loans, collect import and export duties. 
• Limited powers of states: States in comparison have been given limited taxation powers mostly in areas which are less remunerative. This is a major concern for states as they  have major expenditure responsibilities in a range of areas including education, health and law and order. 
• Fiscal imbalance: According to data, States raise about 40% of the total revenue and incur on an average 60% of the total expenditure. This vertical fiscal imbalance i.e. limited tax base with maximum expenditure responsibility is inbuilt in the constitution and remains a key reason for fiscal concerns faced by the states. 

Issues with inter – governmental Transfers: 

• Dependence on centre: Due to low fiscal base States are dependent on Inter – governmental transfers from the Centre. Most of revenues are transferred to states based on the formula devised by the Finance commission. 

• Issues with devolution: While the Finance commission approach to transfer funds is formula based the criteria governing quantum of transfers keeps on changing with new commissions. For example, Southern states like Kerala, Karnataka had strongly opposed the Centre unilaterally amending the terms referred for the consideration of the 15th Finance Commission. The centre had recommended using the 2011 census to calculate population for allocation of union tax revenue in place of the 1971 census, which was used by previous Commissions. This was opposed by some states especially those which had successfully implemented population control programmes as it would put them at a huge disadvantage and would decrease funds allotted to them.
• Increased use of cess and surcharge: Funds are shared between centre and states on the basis of formula devised by the finance commission. However, cess and surcharge imposed by the centre are outside the scope of devolution which is formulated by the finance commission i.e. centre does not share the revenue from ‘cess’ and ‘surcharge’ with the states. It has been seen that the ‘cess’ and ‘surcharges’ have been increased from 6.17% of gross tax revenue in 2014-15 to 18.4% in 2019-20 by the centre. 
• Increasing burden on the State government: 
  • Central sponsored schemes: State governments have also complained about the increasing fiscal burden on them. The centrally sponsored schemes which have a funding sharing pattern undermines the fiscal space which is available with the states. Backward states like Jharkhand and Chattisgarh have in the past expressed their inability to fulfil their part of the obligation. 
  • Fiscal decentralisation: Fiscal decentralisation commitment under 73rd and 74th constitutional amendment act adds pressure to the already overburdened State Finances. While the State is expected to delegate function and finances to the local bodies the decentralisation of economic powers from Centre to States have not taken place. 
  • GST: The Goods and services tax has subsumed almost all the indirect taxes which were a major source of revenue for the State governments. According to the recently released ‘State of State Finances’ report revenue collected from GST continues to be lower when compared with the revenue from taxes in the pre – GST regime. 
• Lack of ‘resource Federalism’: Fiscal Federalism has yet not turned into ‘resource federalism’. While natural resources such oil, gas, minerals provide huge revenue, a rational framework for the distribution of revenue between the centre and states is yet to evolve. Under the present regime Centre corners a major chunk of revenue generated and the present scheme of revenue distribution is opposed by States especially the mineral bearing states.

Challenges in Centre-State Relations: The Growing Encroachment on State Powers

• Instances of encroachment in administrative affairs: In recent times many instances have come where the centre has overstepped into the domain of states for example One nation, one ration card was opposed by the Tamil Nadu government as distribution of ration through Fair Price Shops (FPS) comes within the jurisdiction of the states. Other instances are as follows- 
  • Increasing the powers of the Border Security Force by widening its jurisdiction
  • Recently proposed National Education Policy which visions a central agency to regulate educational institutions
  • Centralisation of NEET exam
  • Goods and services tax
  • Farming laws which were brought by centre (however they were later withdrawn)

These are some of the prominent examples of steps taken by the centre which were opposed by states as they breached into the administrative domain of the states. 

• Encroachment in state list: Since the enactment of the constitution, the state list is shrinking as the subjects have been transferred to the concurrent list. The 42nd amendment act of 1976 transferred 5 subjects from state list to concurrent list. Also, Centre is criticised by the states accusing it of legislating on the subjects mentioned in the state list. For example Farm laws passed by the Parliament were opposed by the states on the ground that ‘Agriculture’ is a state subject. 
• All India Services (IAS, IPS and IFos):  The provision of All India services violates the principle of federalism. All India services officers are appointed and removed by the President of India and are posted in the states. They are responsible for carrying out administrative and policing in the states but the ultimate control over them is with the centre. Recently, IAS cadre rules notified by the centre in 2021 provide for supreme control of the centre over central deputation of IAS officers which was opposed by the states.

Centre-State Confrontation: Misuse of Power and Growing Tensions

Misuse of Governor office: Governor acts as an agent of the centre despite being executive head of a state. Since he is appointed and removed from office by the President on the recommendation of the Union cabinet, he shows loyalty towards them which leads to conflict with the state cabinet. This has led to misuse of the Governor’s office the most famous example being of the dismissal of SR Bommai government in Karnataka in 1989, more recently, in 2019 Maharashtra Governor had administered oath to chief minister in a hasty manner despite lack of majority compared to an alliance that had a majority, many instances of tussle between Governor and State government in West Bengal, Tamil Nadu, Kerala have been in news.

• Use of central agencies with partisan motives: A recent trend has emerged where states, which are ruled by parties other than the one at the centre, are seeing increasing use of law enforcement agencies like CBI, ED against their ministers. National Investigation Agency (NIA) investigation against Kerala minister in gold smuggling case in 2022. Central Bureau of Investigation (CBI) inquiry against Delhi deputy chief minister in 2022. This has led to a trust deficit between the centre and states for example nine States — West Bengal, Maharashtra, Meghalaya, Kerala, Punjab, Rajasthan, Jharkhand, Chhattisgarh and Mizoram have withdrawn general consent to the CBI for launching investigations in their territory.
• Lack of consultative mechanism: In recent times, it has been seen that states oppose various acts passed by the parliament. For example Citizenship Amendment Act, 2019, Laws related to agriculture marketing, Motor vehicle Amendment Act, 2019 were opposed by various states. Thus, there is a need to have a proper consultative mechanism where state views are taken into consideration. 
• Refusal to cooperate: A growing trend from cooperative to confrontational federalism is being seen in India for example a number of states have refused to implement centrally sponsored schemes. For example, the PM-KISAN scheme is not implemented in West Bengal. PM- JAY health insurance scheme is also not implemented in a number of states like Delhi and Rajasthan and a separate health insurance scheme is being implemented by them.