What is Federalism and Resource Allocation?
Historical Background
Key Points
12 points- 1.
The Constitution of India divides powers between the Union and the States through three lists: the Union List, the State List, and the Concurrent List. The Union List contains subjects on which the Parliament can make laws, the State List contains subjects on which the State Legislatures can make laws, and the Concurrent List contains subjects on which both can make laws.
- 2.
Article 280 of the Constitution provides for the establishment of a Finance Commission every five years (or earlier) to recommend principles governing the distribution of tax revenues between the Union and the States.
- 3.
The Finance Commission considers factors like population, area, income distance (the gap between a state's income and the highest income state), and fiscal discipline while recommending the distribution of taxes.
- 4.
Grants-in-aid are provided by the Union to the States under Article 275 of the Constitution to address fiscal needs and promote development. These grants can be statutory or discretionary.
- 5.
The Goods and Services Tax (GST), introduced in 2017, is a unified indirect tax system that has significantly impacted the fiscal relationship between the Union and the States. GST revenues are shared between the Union and the States as per a formula recommended by the GST Council.
- 6.
The Inter-State River Water Disputes Act, 1956 provides a mechanism for resolving disputes related to the sharing of river waters between states. This is crucial for resource allocation and preventing conflicts.
- 7.
The Union Government can provide special category status to certain states, entitling them to a larger share of central assistance. However, this practice has been largely discontinued after the 14th Finance Commission.
- 8.
The National Development Council (NDC), though not a constitutional body, played a significant role in approving Five-Year Plans and coordinating development efforts between the Union and the States. It has been replaced by NITI Aayog.
- 9.
The concept of cooperative federalism emphasizes collaboration and cooperation between the Union and the States in addressing common challenges and achieving national goals.
- 10.
A common misconception is that states are entirely dependent on the Union for resources. While central transfers are significant, states also have their own sources of revenue, such as state taxes and levies.
- 11.
The 15th Finance Commission recommended that 41% of the divisible pool of taxes should be devolved to the states for the period 2021-26.
- 12.
The Union government can also impose cesses and surcharges, the revenue from which is not shared with the states.
Visual Insights
Federalism and Resource Allocation
Mind map illustrating the key aspects of federalism and resource allocation in India.
Federalism & Resource Allocation
- ●Constitutional Provisions
- ●Key Mechanisms
- ●Challenges
- ●Related Concepts
Recent Developments
7 developmentsThe 15th Finance Commission's recommendations are currently in effect, guiding the distribution of tax revenues between the Union and the States for the period 2021-26.
There are ongoing debates about the optimal formula for GST revenue sharing, with some states arguing for a larger share to compensate for revenue losses.
The Union Government has launched various centrally sponsored schemes, which involve resource sharing with the States for specific development projects.
The Supreme Court has adjudicated on several cases related to inter-state river water disputes, highlighting the complexities of resource allocation in a federal system.
NITI Aayog is playing an increasingly important role in promoting cooperative federalism and facilitating dialogue between the Union and the States on development priorities.
Increased scrutiny of centrally sponsored schemes to ensure efficient resource utilization and prevent duplication of efforts.
Discussions around increasing the borrowing limits for states to address fiscal stress caused by unforeseen events like the COVID-19 pandemic.
This Concept in News
2 topicsJ&K Parties Criticize BJP MP for MPLADS Spending in U.P.
16 Feb 2026This news demonstrates a potential challenge to the principles of federalism and equitable resource allocation. (1) It highlights the importance of accountability and transparency in the use of public funds. (2) The news event challenges the assumption that MPs will automatically prioritize the development of their own constituencies. It raises questions about the incentives and oversight mechanisms in place to ensure that funds are used appropriately. (3) This reveals a potential weakness in the implementation of the MPLADS scheme, where funds may be diverted to areas outside the intended constituency. (4) The implications are that the scheme may not be effectively addressing regional disparities if funds are not being used to benefit the intended areas. This could lead to further calls for reform of the MPLADS scheme. (5) Understanding federalism and resource allocation is crucial for analyzing this news because it provides the framework for understanding the expected roles and responsibilities of elected representatives and the mechanisms for ensuring equitable development across different regions.
Ken-Betwa River Linking Project Protest Turns Violent in M.P.
12 Feb 2026The Ken-Betwa river linking project and the associated protests directly demonstrate the challenges of balancing national development goals with local concerns within a federal framework. This news highlights the aspect of resource allocation disputes between states and the potential for conflict when projects impact local communities and the environment. The protests challenge the concept of top-down decision-making and emphasize the need for greater consultation and participation of affected stakeholders. The news reveals that while such projects are intended to address water scarcity and promote regional development, they can also exacerbate existing inequalities and lead to social unrest if not implemented equitably. The implications of this news are that future resource allocation projects must prioritize environmental sustainability, community participation, and fair compensation to avoid similar conflicts. Understanding federalism and resource allocation is crucial for analyzing this news because it provides a framework for understanding the competing interests of the Union, the States, and local communities, and for evaluating the effectiveness of existing mechanisms for resolving resource disputes.
Frequently Asked Questions
121. What is Federalism and Resource Allocation, and what is its constitutional basis in India?
Federalism is a system where power is divided between the central government and the states. Resource allocation is how a country's resources are distributed. In India, the Constitution divides powers and responsibilities between the Union and the States. Article 280 provides for a Finance Commission to recommend principles for distributing tax revenues.
Exam Tip
Remember Article 280 relates to the Finance Commission and resource distribution.
2. What are the key provisions related to Federalism and Resource Allocation in the Indian Constitution?
The key provisions include: * The division of powers between the Union and the States through the Union List, State List, and Concurrent List. * Article 280, which establishes the Finance Commission to recommend principles for distributing tax revenues. * Article 275, which allows the Union to provide grants-in-aid to the States.
- •The division of powers between the Union and the States through the Union List, State List, and Concurrent List.
- •Article 280, which establishes the Finance Commission to recommend principles for distributing tax revenues.
- •Article 275, which allows the Union to provide grants-in-aid to the States.
Exam Tip
Focus on Articles 275 and 280, and the three lists for Prelims.
3. How does the concept of Federalism and Resource Allocation work in practice in India?
In practice, the Finance Commission recommends how taxes collected by the Union should be shared with the States. The GST Council also plays a role in deciding how GST revenues are shared. The Union government also provides grants to states for specific development projects through centrally sponsored schemes. States have autonomy in spending their allocated resources.
Exam Tip
Understand the roles of the Finance Commission and GST Council.
4. What is the significance of Federalism and Resource Allocation in Indian democracy?
Federalism ensures that states have autonomy and can address the specific needs of their population. Resource allocation aims to reduce regional disparities and promote inclusive growth. It helps maintain balance between national priorities and regional development.
Exam Tip
Link federalism and resource allocation to concepts of equity and regional development.
5. What are the challenges in the implementation of Federalism and Resource Allocation in India?
Challenges include: * Disputes between states over resource sharing, such as water. * Debates about the optimal formula for GST revenue sharing. * Ensuring fiscal discipline among states. * Balancing the needs of developed and less developed states.
- •Disputes between states over resource sharing, such as water.
- •Debates about the optimal formula for GST revenue sharing.
- •Ensuring fiscal discipline among states.
- •Balancing the needs of developed and less developed states.
Exam Tip
Focus on inter-state disputes and GST related challenges for Mains.
6. What reforms have been suggested for Federalism and Resource Allocation in India?
Suggested reforms include: * Improving the efficiency and transparency of the Finance Commission's recommendations. * Developing a more equitable formula for GST revenue sharing. * Strengthening inter-state coordination mechanisms. * Promoting fiscal autonomy for states.
- •Improving the efficiency and transparency of the Finance Commission's recommendations.
- •Developing a more equitable formula for GST revenue sharing.
- •Strengthening inter-state coordination mechanisms.
- •Promoting fiscal autonomy for states.
Exam Tip
Relate reforms to current debates on fiscal federalism.
7. What are the important articles related to Federalism and Resource Allocation?
Important articles include Article 280 (Finance Commission) and Article 275 (Grants-in-aid to the States). Also relevant is the division of powers outlined in the Union List, State List, and Concurrent List.
Exam Tip
Memorize Articles 275 and 280 for quick recall.
8. How has Federalism and Resource Allocation evolved over time in India?
The concept evolved from the Government of India Act, 1935. After independence, the Constitution adopted a federal system. The introduction of GST in 2017 significantly impacted Centre-State financial relations. The recommendations of successive Finance Commissions have also shaped resource allocation.
Exam Tip
Note the historical progression from 1935 Act to GST.
9. What is the difference between statutory and discretionary grants-in-aid under Article 275?
Statutory grants are provided based on the recommendations of the Finance Commission, while discretionary grants are provided by the Union Government at its discretion for specific purposes.
Exam Tip
Understand the source and purpose of each type of grant.
10. What are some common misconceptions about Federalism and Resource Allocation in India?
A common misconception is that states are entirely dependent on the Union for funds. While grants and tax sharing are significant, states also generate their own revenue. Another misconception is that the Finance Commission's recommendations are binding; they are advisory in nature.
Exam Tip
Clarify the roles and financial autonomy of states.
11. How does India's Federalism and Resource Allocation compare with other countries?
India's federal system is unique due to its quasi-federal nature, with a strong central government. Resource allocation mechanisms vary across countries, with some relying more on direct transfers and others on tax devolution. The specific formulas and institutions involved differ significantly.
Exam Tip
Focus on the 'quasi-federal' aspect of Indian federalism.
12. What are frequently asked aspects of Federalism and Resource Allocation in the UPSC exam?
Frequently asked aspects include the Finance Commission, Centre-State financial relations, inter-state disputes, and the impact of GST on fiscal federalism. Understanding the constitutional provisions and recent developments is crucial.
Exam Tip
Prioritize the Finance Commission and GST for exam preparation.
Source Topic
J&K Parties Criticize BJP MP for MPLADS Spending in U.P.
Polity & GovernanceUPSC Relevance
Federalism and resource allocation are crucial for the UPSC exam, especially for GS-2 (Governance, Constitution, Polity, Social Justice & International relations) and GS-3 (Economy). Questions are frequently asked about the Finance Commission, Centre-State financial relations, inter-state disputes, and the impact of GST. In Prelims, expect factual questions about articles, amendments, and commissions.
In Mains, analyze the challenges and opportunities of cooperative federalism, the effectiveness of resource allocation mechanisms, and the impact of government policies on regional development. Recent years have seen questions on fiscal federalism and the role of NITI Aayog. For essay papers, federalism can be a relevant topic.
Focus on understanding the constitutional provisions, the role of key institutions, and the contemporary challenges in Centre-State relations.