Abstract:

In Indian federalism, fiscal devolution is key. A lion's share of public spending on health, school education, policing, agriculture and local services is carried by states. However, the Union controls the most buoyant and high-yielding tax bases. The differences are covered by a layered framework of transfers, constitutionally mandated distribution of central taxes, grants-in-aid recommended by the Finance Commission and a large set of discretionary, scheme-based expenditures. This paper aims to investigate the organisation of this system, its evolution through the Fifteenth Finance Commission (2021-26) and the ongoing Sixteenth Finance Commission process (2026-31), and its implications for regional inequality and democratic accountability. Using the constitution, various budget reports and other documents, this paper advances three arguments. To begin with, the Finance Commission has created a reliable, rule-bound equalisation channel. However, in the 2021-26 award, it kept the states’ share at 41%, lowered the weight of income distance from 50 to 45 per cent and placed revenue deficit grants on a tapering path, so that at the margin the redistributive core of the system is narrowing. The second factor consists of two aspects: First, the effective share of states in the total gross tax revenue of the Union is eroded through cesses and surcharges which are not part of the divisible pool. Second, the autonomy of state governments has been constrained by the design of the goods and services tax (GST) as well as the control over borrowing exercised by the Union government.

 The third effect of layered transfers is a blurring of political responsibility. Voters cannot easily tell which government is responsible for what they get. Moreover, the most contested distributional choices are settled in arenas where the Union has an effective veto. The paper proposes institutional reforms to create a protected divisible pool, a more balanced GST bargaining forum, simpler conditional transfers and stronger local finances.

Keywords:

Fiscal Devolution, Indian Federalism, Revenue Sharing, Regional Inequality, Democratic Accountability

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