02 Federal Structure

Topics

• nature of indian federalism
• centre state executive relations
• legislative relations
• Fiscal federalism
• inter state relations
• Asymmetric federalism
• local government

Centralizing tendencies

Intro

Constitution deliberately gives Union greater powers to preserve unity, integrity and national uniformity.

1. Legislative centralization
   • union list has greater importance, residuary powers
   • parl can legislate on state list in certain conditions
     • emergency, national interest, w/ consent of 2+ states
     • intl treaties, agreements
   • concurrent list
2. Executive centraliation
   • governor appointed by President
   • union can issues directions to states art 256-57
   • All India Services creates integrated administrative structure
   • intervention through central agencies
3. emergency provisions
4. Financial centralization
   • centre: greater tax raising capacity
5. Institutional integration
   • single citizenship
   • integrated judiciary
   • all india services
   • EC, CAG, UPSC
6. Constitutional asymmetry in favour of national integration

WHY centralization?:

• partition challenge
• national integration
• socio economic transformation
• territorial integrity
• administrative uniformity

Conclusion

Indian constitution centralizes where national unity requires uniformity, while federalises where diversity requires autonomy.

Governor

Intro

Constitutional head, federal link; however, partisan considerations seep into day to day actions of governor.

Problem	Consequence	Example
Appointment by Union	perception of union controlled office	Sarkaria Commission: consultation w/ CM often not genuine
Pleasure of president	governor may lack security of tenure $⟹$ perceived vulnerability to union	frequent changes after change of Union govt
Partisan appointments	neutrality gets questions	Sarkaria: avoid appointing active / partisan politicians
discretion (163)	can become parallel political authority vis-a-vis elected state government	Nabam Rebia 2016 restricted discretionary power
Govt formation	can influence who gets first opportunity to form govt in hung assembly	eg. Maharastra post election controversy
Floor test decisions	delay, premature invitation	SR Bommai: majority should ordinarily be tested on floor
Art 200 Bills	indefinity withholding / reservation can obstructe state legislation
Art 356		Historical misuse of prez rule
University chancellor role	paralysis, delayed staff hiring

Distortion of state autonomy

• executive
  • governor alternative center of authority to the elected CM
  • problematic when opposing parties in center & state
• legislative
  • reservation of bills for president consideration brings state legislation into union sphere
  • delayed action on bills
• democratic autonomy
  • governor unelected, while CM has democratic mandate

Tamil Nadu governor case

• Nov 2025, SC: rejected approach of judicially creating deemed assent merely because prescribed timeline expired

Should governor office be done away with?

NO

• ensures continuity even in case of hung assembly, local disturbances
• federal link
• neutral arbiter in exceptional circumstances
• safeguard against constitutional breakdown
• parliamentary system requires a formal head

Sarkaria Commission

Governor office has vital & multi faceted role, incl. continuity of government and functioning of constitutional apparatus.

What can be improved

• appointment - Sarkaria Commission
  • eminent person
  • from outside state
  • detached from local politics
  • not recently active in politics
  • consultation with CM
• Punchhi commission
  • institutionalized appointment mech involving PM, HM, LS Speaker & concerned CM
• Security of Tenure
  • give fixed term to allow free functioning of governor
  • removal of governor only through defined constitutional process
  • Punchhi proposed removal of doctrine of pleasure and ensuring fixed 5 year term
• Limiting discretion
  • Nabam Rebia 2016: governor doesn’t possess general discretionary power under 163
  • discretion should be constitutionally defined, narrow, reasoned, non arbitrary
• establish clear conventions for hung assembly, floor test, reservation of bills, dissolution
• Separate constitutional & extra constitutional roles
  • see if it relates with punchhi commission

SC 2018 Judgement

• LG must act on council of ministers’ aid & advice except in matters of land, police, public order
• emphasize harmonious working relationship b/w constitutional functionaries under Article 239AA
• LG cannot act as on obstructionist
• elected government represent people’s will

69th CAA 1991: Delhi a special status, with 70 member assembly

• LG tussle

Conclusion

• Governor is constitutionally intended to be bridge between union & state but partisan exercise of gubernatorial discretion can turn bridge into battleground.

Financial relations

• centre has greater revenue raising capacity
• states have larger expenditure responsibility
• different states have horizontal imbalance

GST

Introduction

reduced tax fragmentation, created common market, but curtailed independent indirect tax space of states, making federal negotiation more important than ever

Why GST is landmark

• 101CAA2016: unprecedented joint tax jurisdiction
• 246A: simultaneous GST legislative power of parliament + states
• 279A: GST Council as institutionalized center state bargaining forum
• voting:
  • 1/3 center
  • 2/3 states
  • quorum: 3/4
• GST Collection 22LCr in 2024-25, so revenue has strengthened

Centralising tendency

• states lost independent tax sources: VAT, entry tax, entertainment tax, luxury tax, cesses, surcharge
• rate setting autonomy shifted to GST council
  • states can’t alter GST rates as per their fiscal needs
• Destination principle
  • revenue accrues where consumption occurs
  • producing states lose out in face of consumer states
• Compensation
  • COVID revenue shock $⟹$ compensation gap widened, revenue growth slowed down
  • compensation financed through GST Compensation Cess
  • Ended in March 2026

GST Council

• centre + states = co-creator of tax policy
• functions
  • taxes to be subsumed
  • G&S subject to GST
  • model GST Laws
  • threshold turnover limit
  • GST rates
  • special rates
  • special provisions for specific states
  • other matters related to GST
• Recent meeting outcomes
  • 53rd Meeting
    • GST Rate adjustment on cartons, paper boxes 12%
    • GST rate on milk cans 12%
  • 54th Meeting
    • reduction of gst rate on cancer medication to 5%
  • 55th Meeting
    • reduction of rate on Fortified Rice Kernel to 5%
    • Gene therapy exempted
    • increased GST on sale of used vehicle to 18%
• Mohit Minerals 2022 SC Judgement
• strength
  • common taxation architecture
  • institutionalized dialogue
  • political bargaining forum
  • states have 2/3 voting weight
• weakness
  • 1/3 vote with center and qurom is 3/4 so center has effective veto
  • states can’t individually block decisions
  • smaller states have limited individual bargaining power
  • council recommendations depend heavily on political consensus

Reforms

• GST Council
  • greater transparency in agenda setting
  • publish detailed voting, state wise positions
  • institutional mechanism for minority / state objections
  • regular impact assessment of rate changes on individual states
  • strengthen dispute resolution mechanism under art 279A(11)
• Revenue autonomy
  • ensure predictable GST settlement
  • periodic review of state GST Buoyancy
  • avoid excessive union reliance on cess/surcharge
• GST Design
  • fewer slabs
  • minimize inverted duty structures
  • faster refunds
  • stable rate policy
  • reduce classification disputes

Cess & Surcharge

• states get share of divisible poll, but cess / surcharge not in divisible pool
• surcharges allowed in art 271

Why center uses cess/surcharge?

• finance specific national priorities
• earmark revenue for infra, edu, health, roads, agri
• provide fiscal flexibility to union
• avoid excessive distortion of broad based taxes
• fund expenditures whose benefits are national rather than state specific

Concerns with excessive use

• weakens fiscal federalism
  • state receive less money
  • states dependent on grants, discretionary transfers
• undermines finance commission role
• creates vertical imbalance
  • states have major responsibility: health, edu, agri, police
• weakens accountability

Cess vs Surcharge

Cess	Surcharge
additional levy for specific purpose	additional charge for union purposes
usually earmarked	not earmarked
Art270 excludes specific purpose cess from divisible pool	Art 271 excludes surcharge from divisible pool
eg. GST Compensation cess	eg. Surcharge on income tax

16th FC

• received concerns from multiple states about shrinking divisible pool
• noted efficiency problem with long term reliance on cess/surcharge
  • more cess $\to$ less incentive to strengthen broad based taxes $\to$ weaker divisible pool $\to$ states affected

Centrally Sponsored Schemes

• jointly funded by centre and states
• implemented by state
• focus on state/concurrent lists

Significance

• welfare delivery: MGNREGA, PMAY, NHM
• national priorities implemented on ground level
• regional equity
• cooperative federalism

Issues

• lack of transparency
  • unclear representation of CSS funds in state budget
  • inconsistent accounting, overlapping reports, weak monitoring
• unpredictable flow of funds, causing project delays
• inflexible allocation - one size fits all approach, overlooks regional disparities
• challenges in payment systems, procedural bottlenecks
• centralization bias
• increased administrative burden and implementation cost

Reforms

• unified & transparent budget headings
• mandate SDG linked budgeting
• forward looking funding - 3 year rolling fiscal framework
  • link 10-15% funds to performance indicators for result oriented implementation
• standard accounting codes
• mandatory integration with state IFMIS

PM Narendra Modi

Cooperative federalism is a necessity for India’s development.

State borrowing

• states can borrow within india against CF
• art 293(3) if state has outstanding union loans, union consent required for further borrowing
• Finance commission: state fiscal deficit ceiling: 3% of GSDP per year

Justification of state borrowing

• justified when capital expenditure
• productive assets
• prospective future GSDP / revenue

However, borrowing to meet revenue expenditure, subsidies ends up creating no assets and recurring liability.

Off budget borrowing

• state govt discom / PSU borrows with state guarantee
• escapes apparent fiscal deficit ceiling, reducing transparency
• significant issue in power sector
• 16th FC: completely discontinue OBB

Potential reforms

• integrate OBB into debt assessment
• medium term debt management strategy
• independent state level fiscal council
• counter cyclical escape clause during severe shocks
• greater transparency of state guarantee
• avoid permanent reliance on union funded borrowing schemes