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Federalism and related issues | UPSC

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UPSC Syllabus: GS Paper II- Indian Polity and Governance

Context: This Article highlights the impact of growing centralisation which in a way is impeding state’s arena of working and overall leading to disputes between centre and states. Thus, let us understand about federal structure as envisaged in the Indian Constitution and also the points highlighted in the Article impacting federal relations between states and central government.


Federalism is a system of government in which the power is divided between a central authority and various constituent units of the country. Usually, a federation has two levels of government. One is the government for the entire country that is usually responsible for a few subjects of common national interest. The others are governments at the level of provinces or states that look after much of the day-to-day administering of their state. Both these levels of governments enjoy their power independent of the other.

Indian Federalism

  • Article 1 of the Constitution mentions that India that is Bharat shall be a Union of States. It means that states do not have power or right to secede away from the Union of India. Also unlike USA, in India, different states have not formed because of an agreement among the states.
  • Article 3 of the Constitution empowers Parliament to create new States. It allows the federation to evolve, grow and respond to regional aspirations.
  • When a new state is formed, Schedule I and Schedule IV of the Constitution shall be amended.
  • Schedule I – contains list of States and Union Territories
  • Schedule IV – provides for allocation of seats in Rajya Sabha. The allocation of seats in Rajya Sabha is made on the basis of the population of each State.
  • Constitution of India effectively establishes a system where the Union Government functions at the Centre and respective State governments functions at the provinces.
  • The Constitution has demarcated each level of government by devising an elaborate scheme of distribution of legislative, administrative and financial powers between the Centre and the States.
  • In this respect, Article 246 of the Indian Constitution clearly enumerates the Federal character of the Indian Constitution. It empowers
  • Parliament to make law under Union List
  • States to make law under State List and
  • both the Parliament and States to make law under Concurrent List.
  • Independent judiciary is another essential feature of Indian Constitution.
  • B.R. Ambedkar responded to the question as to why India is a “Union” and not a “Federation of States”: “The Drafting Committee wanted to make it clear that though India was to be a federation, the federation was not the result of an agreement by the States to join in a federation and that the federation not being the result of an agreement no State has the right to secede from it. The Federation is a Union because it is indestructible.”

Area of Friction Between Centre & States (Increasing Centralisation)


One Fundamental aspect of our Governance is the fiscal federalism which provides the autonomy of the states to raise revenue and undertake expenditure according to their priorities and needs. Such a form of fiscal federalism has been formulated keeping in mind the diverse needs and aspirations of the states across India and hence considered critical for balanced and holistic development of the entire country. However, in recent years, the fiscal federalism has become skewed towards the Centre in certain aspects and the same has been opposed by a number of states. In this regard, let us understand  some important issues which have arisen in the Centre State Fiscal Relations.

Higher Share of Cess and surcharge: Cess and surcharge imposed and collected by the Centre do not form part of the Central Divisible pool of taxes. They are not distributable among the States and hence continue to remain with the centre. Over a period of time, the Centre has been imposing a large number of surcharge and Cess to mobilise revenue. A Case in point is the recent introduction of the Agri Infrastructure Cess in the Union Budget 2021-22.

The share of Cess and Surcharge as a percentage of Gross Tax Revenue(GTR) of the centre has increased sharply from 2.3% in 1980-81 to 15% in 2019-20. The States see this as an illegitimate way of depriving resources that are rightfully due to them.

GST compensation: States agreed to give up the power to impose indirect taxes and adopt GST on the basis of a guaranteed 14 per cent growth in GST revenues per annum. The Centre committed to pay the states for the shortfall in their GST revenue through the imposition of GST Compensation Cess for a period of 5 years.

However, on account of CoVID-19 pandemic, there was a GST shortfall of almost around Rs 3 lakh crores. However, money collected under GST compensation Fund was hardly around Rs 65,000 crores. Hence, there was an obligation on the Centre to pay a compensation amount of almost Rs 2.35 lakh crores. Initially, the Centre asked the States to borrow this amount from the market. Later on, due to strong opposition, the Centre decided to borrow on behalf of the states and compensate them. This recent issue over GST compensation has led to erosion of trust in fiscal federalism.

Centrally Sponsored Schemes (CSS): The Centrally Sponsored schemes are the schemes which are financed by both Centre and States in a defined proportion (70:30 or 60:40 or 50:50 etc), but implemented by the respective State Governments. Some of these schemes include MGNREGA, Ayushman Bharat, National Education Mission etc.

The Centre lays down elaborate rules and guidelines with respect to implementation of these schemes. It also lays down purposes for which the funds can be utilised for. The State governments claim that such rules and guidelines do not provide them with enough financial and operational autonomy in executing the schemes.

These Centrally sponsored schemes have also faced political controversy. For instance, some of the States such as West Bengal, Telangana etc. have decided not to implement Ayushman Bharat Scheme. These states claim that their own health insurance schemes are better than the centre’s Ayushman Bharat Scheme.

Borrowing powers of the States: Under Article 293, the States are allowed to raise loans from the Centre or market. However, a State cannot raise a public loan without the consent of the Centre if there is still outstanding any part of a loan. Since all the State Governments have been and continue to be indebted to the Centre, the Centre effectively controls the amount of public debt raised by State Governments. Presently, the fiscal deficit of a State cannot exceed 3% of GSDP.

Hence, in recent times, particularly in the aftermath of CoVID-19 pandemic, Frictions have risen over the Centre’s attempt to perpetually control borrowings by the States. The recent 50-year interest free loan announced by the Centre for the states is a case in point. Any State which avails this facility will need to take Centre’s permission for all future borrowing at least for the next 50 years.



Interference in Central Institutions – The second challenge is in the use of executive and legislative aggression. Central institutions are increasingly weakening the policy levers of State institutions. Institutions such as the Income Tax Department, the Enforcement Directorate and the National Investigation Agency are being used to intimidate opponents. Even appointments to head of important institutions such as CBI, NHRC, ED, CIC, Universities etc. are being interfered by the centre.

Ignoring Elected State Governments – Centre is increasingly ignoring elected representatives of State governments, holding meetings with State secretaries and district collectors on issues that are primarily under State control. Such transgressions, often with the help of Governors, allow the central government to actively control administrative decisions including faculty recruitments to align with a majoritarian agenda. Governors perform active administrative roles instead of their signatory roles.

Interferences in Health & Education – Importantly, such moves are also meant to ensure national uniformity in educational institutions. One such example is NEET, or the National Eligibility cum Entrance Test in medical education, which subverts the affirmative action policies developed at the regional level in response to local political demands. This is evident in the domain of health as well. Apart from imposing a national lockdown during the first wave of the novel coronavirus pandemic without consulting State governments, the Centre has now put State governments at a disadvantage in vaccine usage by fixing differential pricing for procuring vaccines for them. This forces State governments to pay more even as they are deprived of their revenue shares.


The third and crucial challenge lies in the social-cultural foundations of federalism. Beside the legal-constitutional aspects of federalism, it is diversity in cultural foundation of regions that sustains Indian federalism. This is also supported by Article 29 and 30 of the Indian Constitution which preserves cultural and educational rights.

Article 29 – Protection of interests of minorities

(1) Any section of the citizens residing in the territory of India or any part thereof having a distinct language, script or culture of its own shall have the right to conserve the same.

(2) No citizen shall be denied admission into any educational institution maintained by the State or receiving aid out of State funds on grounds only of religion, race, caste, language or any of them.

Article 30 – Right of minorities to establish and administer educational institutions —

(1) All minorities, whether based on religion or language, shall have the right to establish and administer educational institutions of their choice.


Constitutional powers including fiscal relations are inherently biased towards the Centre. Vesting of all residuary powers with the Centre and giving over-ruling powers to the Centre on matters in the Concurrent list are the primary sources of this bias. What is seldom recognised is that the degree of federalism in India has depended largely on two variables: the nature of political coalitions at the Centre and role of States in such coalitions (the period 1996 to 2014 for example), and the cultural diversity of regions. Hence, what is needed is a federal coalition that looks beyond the legal-constitutional aspects of federalism to preserve the idea of a plural India in terms of both culture and politics.


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