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UPSC MainsGeneral Studies Paper IIIndian PolityPractice question

Federal Structure and Local Government Devolution in India

Discuss the functions and responsibilities of the Union and States, highlighting the issues and challenges pertaining to the federal structure, and examine the devolution of powers and finances to local governments.

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Introduce India's constitutional federal framework and the division of powers under Article 246 and the Seventh Schedule. Examine the key executive, institutional, and fiscal challenges in Union-State relations, supported by judicial pronouncements and committee recommendations. Analyze the structural and financial impediments in the devolution of powers to local self-governments, concluding with a forward-looking roadmap for cooperative federalism.

Model answer

423 words

Introduction

India's federal architecture, enshrined in Article 246 and the Seventh Schedule of the Constitution, balances national integrity with regional autonomy across a three-tier governance system. While the framework provides distinct legislative, administrative, and financial jurisdictions, operational frictions continually test the equilibrium among the Union, States, and local bodies.

Union-State Relations: Key Issues and Challenges

The operational balance between the Centre and the States encounters several constitutional, administrative, and fiscal strains:

  • Executive Friction and the Role of Governors: Discretionary powers exercised by Governors during government formation, hung assemblies, and the reservation of state bills for presidential assent have frequently strained intergovernmental trust. The Supreme Court in S.R. Bommai v. Union of India (mandating floor tests to verify legislative majority) and B.P. Singhal v. Union of India (prohibiting arbitrary removal of Governors) placed critical judicial checks on executive overreach.
  • Institutional Deficit: Intergovernmental dispute resolution mechanisms under Article 263 remain underutilised. The Punchhi Commission recommended revitalising the Inter-State Council (ISC) by making it a vibrant forum for consensus-building and proposing the transfer of its secretariat to the Rajya Sabha to ensure institutional neutrality.
  • Fiscal Asymmetry: A structural vertical imbalance exists, wherein States incur approximately 60% of total developmental expenditure while generating only about 40% of public revenue. This imbalance is compounded by the Centre's increasing reliance on cesses and surcharges—accounting for nearly 14% of Gross Tax Revenue in FY 2024-25—which are excluded from the divisible tax pool and diminish the effective tax devolution mandated at 41% by the Fifteenth Finance Commission.

Devolution of Power and Finance to Local Governments

Despite constitutional status conferred by the 73rd and 74th Constitutional Amendment Acts, decentralised governance faces systemic bottlenecks:

  • Functional and Administrative Stagnation: State governments have been hesitant to devolve all 29 subjects under the Eleventh Schedule and 18 subjects under the Twelfth Schedule. Moreover, parallel bureaucratic structures and state parastatal bodies often supersede Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs), weakening grassroots self-governance.
  • Financial Paralysis and Dependency: According to the Reserve Bank of India's Report on Municipal and Local Finances, own-source revenue mobilization remains critically low, with PRIs depending on upper-tier grants for roughly 95% of their total revenue. Weak property tax collection and irregular constitution of State Finance Commissions (SFCs) further deprive local bodies of predictable and autonomous financial resources.

Conclusion

Strengthening cooperative federalism requires operationalising constitutional consultative forums like an empowered Inter-State Council, rationalising the proliferation of non-shareable cesses, and enforcing regular State Finance Commission recommendations. Only by pairing functional devolution with robust local financial autonomy can India realise an effective bottom-up democratic governance model.

Key facts to remember

statistic

Panchayati Raj Institutions depend on transfers and grants from upper tiers of government for approximately 95% of their total revenues, severely undermining local fiscal autonomy.

— RBI Report on Municipal and Local Finances (2024)
case study
S.R. Bommai v. Union of India (1994)

The Supreme Court established that federalism is part of the basic structure of the Constitution and ruled that a floor test in the legislative assembly is the sole legitimate method to assess executive majority, curbing the misuse of Article 356.

definition
Divisible Tax Pool

The portion of gross central tax revenue that is shared with the States under Article 270 of the Constitution, excluding cesses, surcharges, and costs of collection.

Frequently asked questions

Why does the proliferation of cesses impact fiscal federalism?

Under Article 270, revenues collected through cesses and surcharges do not form part of the net proceeds distributed among States, effectively reducing the actual share of central tax revenues transferred to state governments.

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