Experts Explain | India’s federalism challenges, and how consensus building is the way forward

Experts have examined the structural tensions in India's federal arrangement, focusing on the gap between formal devolution percentages and effective transfe...

What Happened

Experts have examined the structural tensions in India's federal arrangement, focusing on the gap between formal devolution percentages and effective transfers to states, following the tabling of the 16th Finance Commission report in Parliament in February 2026.
The 16th Finance Commission recommended retaining states' vertical share at 41% of the divisible pool — the same level as the 15th Commission's award — for the period 2026–27 to 2030–31, accepted by the Union Government in the Union Budget 2026–27.
Experts point out that the effective transfer to states is estimated at only 29–30% of gross tax revenue once cesses and surcharges (which are excluded from the divisible pool) are factored in, raising questions about the erosion of fiscal federalism.
A recurring concern is horizontal equity versus efficiency: how far devolution should correct inter-state economic inequality versus rewarding fiscal performance — a tension that sharpened in the 15th and 16th Commission periods as southern states raised concerns about population-based criteria disadvantaging them for having controlled demographic growth.
Experts identify the GST Council and the Inter-State Council as the two most important consensus-building mechanisms in contemporary Indian federalism, while also noting structural limits on their authority.

Static Topic Bridges

Article 1 and the Nature of Indian Federalism

Article 1 of the Constitution states: "India, that is Bharat, shall be a Union of States." The choice of the word "Union" rather than "Federation" was deliberate. Dr. B.R. Ambedkar clarified in the Constituent Assembly that "Union" was chosen to signal that India is indestructible and that no state has the right to secede — unlike a classical federation formed by a compact among sovereign units.

India's federal structure is described by constitutional scholars as "quasi-federal" or "federal with a strong unitary bias" — reflecting features such as a single citizenship, an integrated judiciary, dominance of the Union List over the State List, and the Governor's appointive role.
The Seventh Schedule divides legislative competence into three lists: List I (Union, 98 entries), List II (State, 59 entries), and List III (Concurrent, 52 entries). Parliament has residuary power under Article 248.
The Supreme Court in State of West Bengal v. Union of India (1963) held that India is not a true federation; but in Kesavananda Bharati v. State of Kerala (1973) and S.R. Bommai v. Union of India (1994), the Court increasingly recognised federalism as a basic feature of the Constitution.
S.R. Bommai (1994) is the seminal case limiting arbitrary imposition of President's Rule under Article 356 and affirming the constitutional status of state governments.

Connection to this news: The expert discussion on federalism is rooted in whether the structural design of Article 1 — a Union-centric federation — adequately protects state autonomy in fiscal and legislative domains in a period of growing central assertion.

Finance Commission — Constitutional Role and the Divisible Pool

The Finance Commission is a constitutional body established under Article 280. The President constitutes a Finance Commission every five years (or earlier). Its primary mandate is to recommend the distribution of the net proceeds of taxes between the Union and the States (vertical devolution) and the allocation among the states inter se (horizontal distribution).

The "divisible pool" under Article 270 comprises all central taxes except surcharges and cesses — the latter two are collected by the Centre and need not be shared with states.
The 15th Finance Commission (award period 2021–26) fixed the states' share at 41% of the divisible pool (down from 42% under the 14th Commission, with 1% offset for the reorganisation of Jammu and Kashmir).
The 16th Finance Commission (award period 2026–31, chaired by Dr. Arvind Panagariya) recommended retaining the 41% share.
The rising share of cesses and surcharges in gross tax revenue means the effective transfer is substantially lower than 41%; critics estimate it at approximately 29–30% of gross tax revenue.
14 states — especially smaller and lower-income ones — receive reduced effective shares due to the cesses/surcharges exclusion.

Connection to this news: The cesses-and-surcharges structural gap is the core fiscal federalism grievance identified by experts, as it allows the Centre to raise revenue outside the sharing mechanism while formally maintaining the 41% devolution promise.

GST Council — Cooperative Federalism in Action

The Goods and Services Tax (GST) Council was constituted under Article 279A (inserted by the Constitution (101st Amendment) Act, 2016). It is a constitutional body comprising the Union Finance Minister (chairperson), the Union Minister of State for Finance, and the Finance Ministers of all States and Union Territories with legislatures.

The GST Council makes recommendations on GST rates, exemptions, threshold limits, and dispute resolution between states and the Centre.
Decisions are taken by a three-fourths majority: the Centre has one-third of the total votes and states together have two-thirds; the Centre effectively has veto power.
The Supreme Court in Union of India v. Mohit Minerals (2022) clarified that GST Council recommendations are persuasive, not binding — affirming that both Parliament and state legislatures retain the freedom to deviate from Council recommendations within their respective domains.
The GST Council is cited as the most functional example of cooperative federalism in India because it institutionalises dialogue, consensus, and joint decision-making on a major revenue instrument.

Connection to this news: The Mohit Minerals ruling is central to the expert debate on federalism: it reaffirmed that cooperative federalism through the GST Council does not subordinate state legislative autonomy, but also does not resolve the underlying structural imbalance in the divisible pool.

Inter-State Council — Article 263

Article 263 of the Constitution empowers the President to establish a council charged with inquiring into and advising upon inter-state disputes, investigating subjects of mutual interest, and making recommendations on better co-ordination of policy and action. The Inter-State Council (ISC) was established in 1990 on the recommendation of the Sarkaria Commission.

The ISC is chaired by the Prime Minister and includes the Chief Ministers of all states and union territories with legislatures, and six Union Cabinet Ministers.
Unlike the GST Council, the ISC's recommendations are purely advisory and it has no statutory enforcement power.
The Punchhi Commission (2010) recommended that the ISC be made a permanent constitutional body meeting at least three times a year; this has not been implemented.
The Zonal Councils (established under the States Reorganisation Act, 1956) operate under the Ministry of Home Affairs and serve as regional consensus-building forums, but also lack executive authority.

Connection to this news: Experts point to the ISC's advisory-only status and infrequent meetings as a structural gap in India's consensus-building architecture — suggesting the federal compact relies more on political accommodation than institutional mandates.

Key Facts & Data

Article 1: India is a "Union of States" — federalism with a unitary bias, no right of secession.
Article 280: Finance Commission constituted every five years.
16th Finance Commission: States' vertical share retained at 41% of divisible pool for 2026–27 to 2030–31.
Effective transfer estimated at approximately 29–30% of gross tax revenue when cesses and surcharges are excluded from the divisible pool.
Article 279A (101st Amendment, 2016): GST Council — decisions by three-fourths majority; Centre holds one-third of votes.
Union of India v. Mohit Minerals (2022): GST Council recommendations are persuasive, not binding.
Article 263: Inter-State Council — established 1990 on Sarkaria Commission recommendation; advisory only.
S.R. Bommai v. Union of India (1994): Federalism is a basic feature of the Constitution; Article 356 is judicially reviewable.
Kesavananda Bharati v. State of Kerala (1973): Established the Basic Structure doctrine, within which federalism is located.
Seventh Schedule: List I (98 entries), List II (59 entries), List III (52 entries); Parliament has residuary power under Article 248.