Examine the evolving pattern of Centre-State financial relations in the context of planned development in India. How far have the recent reforms impacted the fiscal federalism in India?(15 marks) 250 words

Introduction

Centre–State financial relations form the backbone of India’s fiscal federalism. The Constitution provides a framework for distribution of financial powers under Articles 268–293 and the Seventh Schedule. With the adoption of planned development after independence and recent economic reforms, the pattern of fiscal relations between the Union and the States has undergone significant transformation.

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Evolution in the Context of Planned Development

• Planning Commission Era (1950–2014): Resource allocation was largely centralized. States depended heavily on the Union for plan grants and centrally sponsored schemes.

• Role of Finance Commission: Established under Article 280, it recommends tax devolution and grants-in-aid to maintain fiscal balance between the Union and States.

• Vertical and Horizontal Imbalance: States had higher expenditure responsibilities but limited taxation powers, necessitating transfers from the Centre.

Impact of Recent Reforms on Fiscal Federalism

• Replacement of Planning Commission by NITI Aayog (2015): Shifted focus from centralized planning to cooperative and competitive federalism.

• 14th and 15th Finance Commission Recommendations: Increased States’ share in the divisible pool of taxes to 41%, enhancing fiscal autonomy.

• Goods and Services Tax (GST) – 101st Constitutional Amendment: Created a unified tax system and the GST Council, strengthening cooperative fiscal decision-making.

• Outcome-Based Transfers: Greater emphasis on performance-based grants and transparency.

Conclusion

Recent reforms have strengthened fiscal federalism by enhancing tax devolution, institutional cooperation, and policy flexibility for States. However, concerns regarding GST compensation, conditional transfers, and fiscal constraints remain, requiring continuous dialogue between the Union and States for balanced development.