July 20, 2024

Lukmaan IAS

A Blog for IAS Examination


THE CONTEXT: The resurgence of coalition politics at the Union level marks a significant shift in India’s political landscape, with the Bharatiya Janata Party (BJP) now reliant on regional allies like the Janata Dal (United) and the Telugu Desam Party for its parliamentary majority. This contrasts sharply with the single-party dominance seen in 2014 and 2019, bringing state-specific discretionary grants, or ‘special packages,’ back into public discourse.


  • Impact of Coalition Politics on Federalism: The resurgence of coalition politics at the Union level has significant implications for federalism in India. Unlike the single-party dominance seen in 2014 and 2019, the current political scenario necessitates dependence on regional parties, which can act as a check against centralizing tendencies. Depending on how it is managed, this dynamic can either strengthen or weaken federalism.
  • Discretionary Grants and Fiscal Federalism: Discretionary grants under Article 282 have surged, often driven by the bargaining power of state-level political parties essential for maintaining parliamentary majorities. This practice undermines the principles of fiscal federalism by diverting resources based on political exigencies rather than objective needs, thereby weakening the foundation of a balanced federal structure.
  • Role of the Finance Commission: The Finance Commission, constituted every five years under Article 280, recommends the distribution of tax revenues between the Union and the States. However, the increasing reliance on discretionary grants bypasses the Commission’s recommendations, which are meant to ensure a fair and transparent allocation of resources based on objective criteria.
  • Quasi-Federal Nature of the Constitution: India’s Constitution is described as quasi-federal, with the ability to assume both unitary and federal characteristics depending on the situation. The Supreme Court has noted that the political environment is crucial in determining whether federal tendencies bloom or wilt. This flexibility can be both a strength and a weakness, depending on how it is leveraged by those in power.
  • Need for Transparent and Stable Fiscal Policies: For a healthy federal structure, fiscal boundaries, principles of tax assignment, and the basis for grants must be transparent and objective. The current practice of granting special packages based on political bargaining rather than need undermines this transparency and stability, leading to potential imbalances and regional discontent.


  • Strengthening the Role of the Finance Commission: Empower the Finance Commission to have a more decisive role in allocating grants and resources to states, ensuring that the distribution is based on objective criteria rather than political bargaining. The 16th Finance Commission, headed by Arvind Panagariya, has been given more freedom to determine the scope of its recommendations, providing it with more room to strengthen fiscal federalism.
  • Establishing an Independent Fiscal Council: Create an independent fiscal council to oversee and evaluate the distribution of discretionary grants and special packages, ensuring they are based on transparent and objective criteria. The NITI Aayog should create an independent evaluation office to monitor and evaluate the efficacy of revenue and capital grants utilization.
  • Enhancing the Role of NITI Aayog in Addressing Regional Disparities: Allocate significant resources to the NITI Aayog to address regional and subregional disparities, focusing on infrastructure and development deficits. NITI Aayog should receive significant resources (1% to 2% of GDP) to reduce development imbalances and remove regional and subregional disparities among states.
  • Institutionalizing a Transparent Mechanism for Special Packages: Develop a constitutional framework for the allocation of special packages to states, ensuring that the process is transparent and based on objective criteria. Article 282 allows the Union or a State to make grants for any public purpose, but the process should be regulated to ensure transparency and objectivity.
  • Decentralizing Fiscal Powers to Local Governments: Strengthen local finances by creating a consolidated fund for urban local bodies and Panchayati Raj institutions, with contributions from both the Centre and the States. The creation of an urban local body/Panchayati Raj institutions consolidated fund, with contributions from Central GST (CGST) and State GST (SGST) collections, can generate significant resources for local public goods financing.


The return of coalition politics and the accompanying rise in demands for special packages underscore the need for a transparent and objective fiscal framework to nurture a healthy federal structure. While coalition partners can act as a check on unitary trends, the discretionary nature of special grants risks undermining fiscal federalism. Ensuring that fiscal allocations are guided by the Finance Commission rather than political bargaining is crucial for maintaining the integrity of India’s federal system and addressing the diverse needs of its states effectively.


Q.1 Explain the significance of the 101st Constitutional Amendment Act. To what extent does it reflect the accommodative spirit of federalism? 2023

Q.2 How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? 2021

Q.3 How is the Finance Commission of India constituted? What do you about the terms of reference of the recently constituted Finance Commission? Discuss. 2018


Q.1 Analyze the role of the Finance Commission in maintaining a balanced fiscal federal structure in India. How does the increasing reliance on discretionary grants under Article 282 challenge this balance?



Spread the Word