Dynamics of Indian Federalism and Urban Decentralisation

Introduction

India's constitutional architecture establishes a multi-tiered federal matrix designed around shared sovereignty, cooperative governance, and democratic decentralisation. However, modern intergovernmental relations continually negotiate tensions across administrative oversight, legislative competence, urban empowerment, and fiscal resource distribution.

Contemporary Challenges Confronting India's Federal Structure

India's federalism under Article 1 relies on a delicate equilibrium between the Union and the States, frequently tested by emerging operational and structural frictions.

• Fiscal Asymmetry: The rising proportion of non-shareable cesses and surcharges (accounting for approximately 14.5% of Gross Tax Revenue in FY24) bypasses the divisible pool, exacerbating state revenue deficits.
• Gubernatorial Overreach: Delays and withholding of assent to state legislation under Article 200 have caused friction between Governors and elected state executives, necessitating judicial adjudication (such as in State of Punjab vs Principal Secretary to Governor, 2023).
• Legislative and Executive Friction: Expanding central oversight into Concurrent List subjects and recurring jurisdiction disputes involving central investigative agencies have prompted multiple states to withdraw general consent to the CBI.
• Inter-State Disputes: Longstanding territorial disputes (such as the Maharashtra-Karnataka border dispute) and river water conflicts (such as the Cauvery dispute) persist despite constitutional mechanisms under Article 262.

Measures to Strengthen Cooperative Federalism

• Institutional Revival: Reinvigorate the Inter-State Council under Article 263 as a mandatory, regular deliberative forum for building consensus prior to central policymaking.
• Judicial and Commission Guardrails: Adhere to the principles laid down in S.R. Bommai (1994) and the recommendations of the Punchhi Commission regarding the discretionary powers and constitutional role of Governors.
• Fiscal Rationalisation: Impose constitutional or statutory caps on the levy of cesses and surcharges while rationalising Centrally Sponsored Schemes to match state-specific needs.

State Hesitation in Devolving Powers to Urban Local Bodies

Although the 74th Constitutional Amendment Act (1992) sought to institutionalise self-governance, the devolution of 'Functions, Funds, and Functionaries' (3Fs) under Article 243W remains incomplete due to persistent state-level reluctance.

• Erosion of Political Patronage: State legislators frequently perceive empowered mayors and municipal councils as rival power centres capable of undermining MLA authority and local patronage networks.
• Bypassing through Parastatals: State governments regularly bypass elected municipal bodies by establishing bureaucratic special purpose vehicles (SPVs) and parastatal boards (e.g., Smart City SPVs, urban development authorities, water boards) that report directly to state secretariats.
• Fiscal Strangulation: According to the 2024 RBI Municipal Finances Report, Indian municipal corporations generate own-source revenue equivalent to barely 0.6% of GDP. States also routinely delay constituting State Finance Commissions under Article 243Y and withhold recommended untied grants.
• Administrative Subjugation: Urban local bodies lack an independent municipal administrative cadre, with executive powers concentrated in state-appointed municipal commissioners rather than elected civic heads.

Measures for Municipal Empowerment

• Mandatory Devolution: Ensure the binding transfer of all 18 functional subjects listed under the Twelfth Schedule.
• Fiscal Broadening: Modernise municipal own-source revenues via GIS-mapped property tax administration, user charges, and expanded access to municipal bond markets.
• Executive Reform: Institutionalise directly elected mayors with fixed terms and executive decision-making powers to establish clear political accountability.

Evolution of Centre-State Financial Relations

Financial arrangements between the Centre and the States under Articles 268 to 293 have transformed from centralised planning mechanisms to cooperative-competitive fiscal federalism.

• Planning Commission Era (1950–2014): Resource transfer was heavily dominated by top-down, discretionary Plan grants under Article 282, rendering states primarily dependent agents executing central priorities.
• Post-Planning Transition: The dissolution of the Planning Commission and the establishment of NITI Aayog eliminated top-down financial allocations, shifting the focus towards policy coordination and competitive federal rankings.
• Finance Commission Devolution: The 14th and 15th Finance Commissions increased the vertical devolution of untied taxes to the states to 42% (readjusted to 41% following the reorganisation of Jammu and Kashmir), expanding sub-national fiscal space.

Impact of Recent Reforms on Fiscal Federalism

• The Goods and Services Tax (GST): Under Article 279A, GST established institutionalised pooled sovereignty. In Mohit Minerals (2022), the Supreme Court clarified that GST Council recommendations are persuasive rather than unreservedly binding, preserving state legislative space.
• Divisible Pool Contraction: Heavy reliance on cesses and surcharges continues to constrain the effective divisible pool shared with states despite nominally high devolution percentages.
• Enhanced Borrowing Scrutiny: Stricter Union enforcement of borrowing ceilings under Article 293(3), including the inclusion of off-budget borrowings and parastatal liabilities, has constrained state capital expenditures and triggered legal contests.

Conclusion

Realising genuine cooperative federalism requires harmonising macro-fiscal discipline with sub-national financial autonomy. Revitalising constitutional consultation forums, empowering third-tier urban institutions, and adhering to constitutional morality remain vital to safeguarding India's multi-level democracy.