Fiscal Federalism in India

Since its constitution, NITI Aayog has not made any significant efforts to advance cooperative federalism. The Indian government has been accused of actively opposing cooperative federalism, in contrast to its public claims to that effect. The following examples show unequivocally how federalism’s principles and the States’ autonomy have been compromised by federal government policy.

States’ anger over hypocrisy of the Centre

  • States are limited as the centre borrows money from the budget: The majority of corporate borrowings backed by state guarantees goes toward capital expenditures. The Center has also been borrowing money from the budget, but mostly to cover revenue expenses.
  • CAG report on supplemental financial resources Eight instances of fulfilling revenue expenditure with extra budgetary resources were noted in the Comptroller and Auditor General of India (C&AG) Report on the Compliance of FRBM Act for 2017–18 and 2018–19. (EBR).
  • Unjustified state restrictions: The amount of revenue expenditure that the Center met through EBR was 81,282 crore in 2017–18 and 1,58,107 crore in 2018–19. The central government’s budget did not account for these borrowings. Therefore, treating State corporation budget borrowings as State borrowings in the past is utterly unjustified.

Cess and Surcharge- A tool to raise revenue for Centre not available to the states

  • Increasing percentage of cess and surcharges: Because cess and surcharges are not constitutionally shareable with the States, the government has been levying them. In the Budget forecasts for 2022–23, cesses and surcharges’ percentage of the Centre’s gross tax collection climbed from 13.5% in 2014–15 to 20%.
  • States do not receive an equal part of a divvy up pool: Despite the Fifteenth Finance Commission’s recommendation that the States receive 41% of Central taxes, they actually only receive 29.6% of those taxes due to higher cesses and surcharges.
  • The C&AG noted in its Audit Report on Union Government Accounts for 2018-19 that only 1,64,322 crore of the 2,74,592 crore collected from 35 cesses in 2018-19 had been credited to the dedicated funds, with the remainder remaining in the Consolidated Fund of India. This undermines the purpose of cess. Another again, the Constitution is being violated by not giving the States their fair share.
  • Increasing centrally sponsored programmes and state burden: The Government of India has appointed numerous committees, all of which have emphasised the need to limit the number of Centrally Sponsored Schemes (CSS) and keep them to a handful of crucial national areas. However, the Government of India has grouped them under a few major categories (currently 28). Additionally, the Centre raised the States’ contribution in a number of CSS in 2015, which added to the burden on the States. The majority of CSS are run in the areas covered by the State list. States no longer have any autonomy as a result.

Recommendations from NITI Aayoge are not accepted: A decrease in the number of programmes and the introduction of optional schemes have been advocated by the Sub-Committee of Chief Ministers, which was established by NITI Aayog. These suggestions have not been implemented.


The fiscal federalism wheel is balanced by the finance commission. While the percentage of states contributing to central taxes may have increased, cess and surcharges have also gone up. Off-budget borrowing by governments may be reduced if needless freebies are cut from the state budget.

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