Union State Relations and Federal System ( Part -1) - Indian Polity and Governance Notes | Study Polity and Constitution (Prelims) by IAS Masters - UPSC

UPSC: Union State Relations and Federal System ( Part -1) - Indian Polity and Governance Notes | Study Polity and Constitution (Prelims) by IAS Masters - UPSC

The document Union State Relations and Federal System ( Part -1) - Indian Polity and Governance Notes | Study Polity and Constitution (Prelims) by IAS Masters - UPSC is a part of the UPSC Course Polity and Constitution (Prelims) by IAS Masters.
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Union State Relations and Federal system

( Part -1)

On the basis of distribution of power between centre and states, Governments can be classified into three types     

  • Unitary
  • Federation and                                                                      
  • Confederation

Unitary system                        

In a unitary government, the central government possesses preponderant authority and decision­making power. Provincial governments are the administrative arms of the central government. They do not have any constitutionally conferred powers. The powers enjoyed by them are devolved’ to them by the unitary government at its will and these powers are subject to withdrawal- partly or wholly. In fact, the provinces can be abiolished altogether. Examples, Britain, France and China


Federation is a system of constitutional governance brought about by the voluntary agreement among states that join together into a new federal union in which power is divided between the Union Government at the centre(federal government) and states(provinces) . A written Constitution divides powers. Constitution is rigid and can be amended only when the centre and states accept the amendment. Thus, there is a dual government with their respective jurisdictions . In case of a conflict, there is an independent judiciary to resolve the differences. Examples, India, USA, Canada, Australia, Belgium and Switzerland. Each level of government has its own resources as conferred by the Constitution.

Federal system is adopted so that states and their diversity car) flourish with autonomy and their security is assured by the central government.


They are nations where the provinces have maximum autonomy so much so that they can become members of international organizations, have flag and may even secede.For instance, the former USSR and Yugoslavia that broke up in the 1990’s.

 'Coming together’ and ' Holding together’ Federations

When independent states 'come together’ voluntarily to form a larger nation where they retain their cultural identity and Constitutional powers of-Jegislation and administration while having their security ensured by a central government, it is called 'coming together’ type of federation. For example, the USA. In this case, constituent units tend to enjoy more powers than the federal government.

When a large country decides to establish provincial governments with which it is willing to share Constitutional powers in a written manner so that the country can 'hold together’, it is called 'holding together’ federation. For example, India.In this case, states are not given co-equal powers on par with the federal government.

Motives of federating units

There is a range of expectations on the part of the federating units to come together.'

The political motives are

  • security from external and internal threats
  • additional central assistance when required
  • political stability while keeping a separate cultural and ethnic identity .

In the economic sphere, the federating state can expect

  • access to a larger national market
  • financial assistance from federal government
  • transfer of resources from other states in case of underdeveloped states etc

The case of India

In India, 'holding together ‘ federation formed differently from the American experience of coming together. 'Holding together’ federations as in India is a framework that is adopted for the sake of unity of the country and national integration. It is a response to a specific historic situation. Constituent Assembly prescribed federalist model so that the country can be 'held together’ in the face of the challenges in the form of centrifugal forces; rapid and balanced development; reorganization of states etc. Therefore, compared to 'coming together’ federation like the UAS, Indian federation does not confer high level autonomy on the states.

States did not bargain and create a federation as in the USA. There were only three states at the time of Independence and the others were created according to the Constitutional provisions.

Federal System in India

India is essentially a federation though in our case the provinces did not join together voluntarily. Federalism is a prescription for our multi-diverse country to pursue pluralist polity.

While the core of federalism is seen in the Indian polity, there are some features that are unfederal, which are seen to be necessary for national security, integration and development, particularly in the light of the experience of partition. They are

  • States can be created and abolished without their consent. States are not indestructible
  • Residuary powers are with the Union parliament.
  • There is no dual citizenship- of province(state) and the country unlike in the USA There is a unified system of audit which is under Union control
  • Unified and hierarchical judiciary
  • Elections are held for assemblies under the authority of the Election Commission that is appointed by the Union government.
  • The role of Governor is pro-Centre
  • President’s rule is a threat to the existence of democratically elected state governments.

However, all the basic features of federalism are found in the Indian Constitution . Since there are strong unitary features as well, it is called quasi-federatiori. It must be clarified that the fact that in Art. I of the Constitution India is described as a 'Union of States’ only stresses the unity among the provinces and not have any unitary implications for our polity. Dr. Ambedkar explained that the expression “ India is a union of states’ in Art. 1 is chosen to mean that we are a union at the time of Independence and that it is not a result of the voluntary coming together of the provinces.

No particular significance need be attached to the word 'Union', since it is used in the Preamble to the Constitution of the United States of America, which is a federation. During the Constituent Assembly discussions, B.R. Ambedkar mentioned the above examples and stated that 'the description of India as a Union of States, though its Constitution is federal, does no violencato usage’.

There is no model federal State. One can only determine whether a constitution is basically federal or unitary. The Indian Constitution is basically federal, but with strong unitary features. Therefore it is described as 'quasi-federal' _ 'unitary with subsidiary federal features', 'a federation with a strong centralizing tendency', etc.

The Constitution framers opted for a mix of strong Central control with adequate provincial autonomy . In their concern for the unity and integrity of the country in the face of partition of the country, a strong centre was preferred. Strong centre is found to be necessary to coordinate policy and action among the federal units. At the same time, there is enough scope for autonomy of States in the Indian Constitution     ’

Union-State relations in India : Constitutional Framework

Legislative Sphere

The framework for division of legislative powers in the Indian Constitution is contained in Chapter 1 in Part XI. It comprises 11 articles- 245 to 255. It should be read with Seventh Schedule. Three fold distribution of the subjects of legislative power is adopted- Union List(List 1); State List(List II); and Concurrent List(List 111).

Union list

Union list consists of 99 items on which the parliament has exclusive power to legislate with including: defence, armed forces, arms and ammunition, atomic energy, foreign affairs, war and peace, citizenship, extradition, railways, shipping and navigation, airways, posts and telegraphs,
telephones, wireless and broadcasting, currency, foreign trade, inter-state trade and commerce, banking, insurance, control of industries, regulation and development of mines,"“mineral and oil resources, elections, audit of Government accounts, constitution and organisation of the Supreme Court, High Courts and union public service commission, income tax, custom duties and export duties, duties of excise, corporation tax, taxes on capital value of assets, estate duty, terminal taxes.

Stale list

The state list consists of 61 items and individual states have exclusive authority to legislate on items included in this list: Public order, police, administration qf justice, prisons, local government, public health and sanitation, agriculture, animal husbandry, water supplies and irrigation, land rights, forests, fisheries, money lending, state public services and state Public Service Commission, land revenue; taxes on agricultural income, taxes om lands on buildings, estate duty, taxes on electricity, taxes on vehicles, taxes on luxuries.

Concurrent list

Concurrent list consists of 52 items. Uniformity is desirable but not essential on items in this list: Marriage and divorce, transfer of property other than agricultural land,education, contracts, bankruptcy and insolvency, trustees and trusts, civil procedure, contempt of court, adulteration of foodstuffs, drugs and poisons, economic and social planning, trade unions, labour welfare, electricity, newspapers, books and printing'press, stamp duties.

Subjects of common importance are in the Concurrent List, matters that can be legislated upon by both the union and state legislatures - socio economic planning, education, forests, protection of wild animals and birds; ports other than major ports; marriage and divorce; adoption; price control; criminal law; preventive detention; labour etc.

Matters that do not figure in any of the three Lists are the residuary items and are given to the Union Parliament. Which item is residuary is determined by the Supreme Court. (Art.248, entry 97 in the Union List), including items related to residuary matters in taxation. For example, service tax was in the residuary category till the 88th amendment act made it explicit.

Parliament has the exclusive jurisdiction over List I items. State legislatures have exclusive jurisdiction over List II items except under five circumstances when the Union parliament is empowered to legislate on them. Regarding the Concurrent List, the following are the relevant facts           ''

  • Union and State legislatures can legislate on these items.
  • Rule of federal supremacy operates in this List- if there is a clash between the Union and State laws, the Union law prevails. However, in the following case, the State law is valid even if there is a clash: if the State law is reserved for the assent of the President by the Governor and such assent is already received. But at the same time, the Parliament can legislate to overrule the State law subsequently.Thus, the Union power is seen in case of conflict or inconsistency when the.rule of repugnancy, as contained in article 254, comes into play.

Art.245 says that parliament can legislate for the whole nation while the State Legislatures can . legislate for the whole or part of the State.

Rationale for the Concurrent List

Concurrent List items fall in the common territory. Both Centre and states have a common interest in them. On these items , depending on the circumstances, Centre or the States or both can make the relevant law. Uniformity of law throughout the country is necessary in national interest and so the Parliament legislates. Being restricted to its own territory, State Legislature can not assure such uniformity. On the other hand, problems vary from state to state and may require diverse remedies suited to the peculiarities of the state. For example, education; In such situations , State laws are more relevant though the centre can give the broad policy framework. Therefore, there is a need for the Concurrent List to enable the best policy response under all circumstances.

There are three reasons for the Concurrent List

  • To secure uniformity in the main principles of law
  • To guide and encourage local efforts
  • For flexibility in public policy

It can be explained with the help of education as a subject of legislation.

Education, which was originally distributed in its various aspects into all the three Lists, was subsequently transferred to the Concurrent List by means of 42nd Constitution amendment in 1976. It enables the Union Government to accept a larger responsibility to reinforce the national and integrative character of education, to maintain quality and standards (including those ofthe teaching profession at all levels) etc.

NCRWC report(2002) expresses the need and significance ofthe Concurrent List in the following words: “The framers of the Constitution recognised that there was a category of subjects of common interest which could not be allocated exclusively either to the States or the Union. Nonetheless, a broad uniformity of approach in legislative policy was essential to combine specific requirements of different States with the articulation of a common national policy objective. Conceived thus, harmonious operation of the Concurrent List could well be considered to be creative federalism at its best.”

Government accepted Sarkaria Commission's recommendation that law's in respect of subjects in the Concurrent List should be made, as a matter of convention, only after active consultation with the State governments except in cases of extreme urgency. This is because laws enacted by the Union, particularly those relating to matters in the Concurrent List, are enforced through the machinery of the States and consultation is essential to secure uniformity.

Recent developments 2013

Right to Free and Compulsory Education Act was passed by Parliament in 2009. The implementation of this Act would require large capital as well as revenue outlays.'The Act has a provision for sharing of costs between the centre and, the states.

There is another challenge. Land Acquisition and Rehabilitation and Resettlement Bill has been introduced in Parliament. Land,is a State List item while land acquisition is a concurrent list subject. States may also make laws on this topic as long as those laws do not contradict the central enactment. This leaves open the question of the level of detail to be included.in the central law. A higher degree of detail ensures uniformity across the country and provides the same level of protection and rights to land owners and displaced persons. However, it reduces the flexibility for states to tailor the law for their local (and possibly very different) conditions. For example, the Bill lists 25 facilities that need to be provided in any area being developed for rehabilitation and resettlement. If people in some states prefer a higher level of an item being guaranteed and are wilting to take a lower level of another item in return, isuch a compromise would not be possible under the current Bill. Such a state Bill, however, can be reserved for the President by the Governor under Art.200 and the President may assent to it.

Food is in the Concurrent List. The National Food Security Bill also raises these two issues. It requires states to implement a number of initiatives, and to provide for the funds for the purpose. It also prescribes a uniform system for implementation across states.

Singur 2013

Within a month of Ms. Banerjee's government coming to power, the Singur Land Rehabilitation and Development Act. 2011 was passed to enable the return of a portion of the land acquired for the setting up of the Tata Motors small car factory to “unwilling farmers "A week later, Tata Motors moved the Calcutta High Court against the Act challenging its constitutional validity.In 2012 , a Division Bench held the Act to be “unconstitutional and void.” The reasons are the following:

  1. Land acquisition being in the concurrent list, the state law has to be in line with the central law. In the central law- Land Acquisition Act, 1894- there is no provision for return of the land.
  2. In such a case of friction with central law, the Governor should have reserved the state law for the Presidential assent and if the assent is given, it would be valid, repugnance not with standing.
  3. The stte government did not do it and so the Act is invalid.

The State government then went to the apex court where the case is pending.

Parliament can make laws on State List items under certain special circumstances:


Though states have exclusive powers to legislate with regards to items on the states list, articles 249, 250.252, and 253 state situations in which the federal government can legislate on these items.Under the following five circumstances, Parliament can legislate on an item in the State List    -

  • when national emergency is in force. The law made by the Parliament during emergency can last a maximum of 6 months after the emergency has been ended. It needs to be emphasized that when there is national emergency(Art.352), State Legislative Assembly continues to exist but the Constitution gives power to parliament as well to legislate on an item in the State List unlike when the President's rule is proclaimed when the State Legislative Assembly is either suspended(suspended animation) or dissolved and the Parliament can make laws for the State concerned
  • President’s rule when the Assembly, does not operate as mentioned above and so the Parliament makes laws for the state. Such laws may be repealed, retained or amended by the Assembly after a new- democratic government resumes in the state.
  • Art.249 says that Rajya Sabha can empower the Parliament to legislate on an item in the State List in national interest by passing the relevant resolution by two thirds majority of the members present and voting. In other words, Rajya Sabha authorizes Parliament to legislate on a subject in the State List. The resolution has a life of one year but can be extended by year at a time. The law made by the parliament can be in force for a maximum of 6 months after the resolution has expired.Such a law can be made for the whole or part of the country. The need for empowering the Parliament in such a manner as shown above is because routing it through the Rajya Sabha makes it federal
  • When two or more States request the parliament to do so by passing a resolution to that effect. For example, Wild Life (Protection) Act 1972; Water (Prevention and Control of Pollution) Act; Urban Land (Ceiling and Regulation) Act; Transplantation of Human Organs Act 1994 and its amendment in 2011; Clinical Establishments (Registration and Regulation) Act, 2010.0ther states may later resolve to come under such a law. (Art.252)
  • In the implementation of international treaties and agreements, Parliament can legislate on a State List item. For example, WTO. There is no Constitutional validity to the States challenging the Central policies made under WTO agreements.(Art.253). Lokpal and Lokayuktas Bill 2011 has provisions relating to state government officials. Two justifications were made for the inclusion of these provisions: first that the law was on criminal justice which is a concurrent list item, and second that India’s obligations under the LIN Convention Against Corruption meant that. Parliament had jurisdiction to enact such a law. The latter falls under Art.253.

Residuary' Power and Taxation

All residuary powers are with the Union Parliament. Service faxes are still imposed and collected by the Union government by virtue of this power even though the 88th Amendment Act was passed in 2002 because it has not been notified. States demand that the power be transferred to the'Concurrent List. However, Sarkaria Commission on Centre-State relations, which submitted.its report in 1987, wanted the residuary powers in taxation to be retained with the centre and not transferred to the States, even though it endorsed the Supreme Court's interpretation that these powers cannot be so expansively interpreted as to dilute the power of the State legislatures.

The Sarkaria Commission reasoned that the Constitution-makers did not include any entry relating to taxation in the Concurrent List so as to avoid Union-State frictions, double taxation and frustrating litigation .The Commission said that the power to tax might be used not only to raise resources but also to regulate economic activity and giving the power to states may prejudice national interest.As mentioned above, states demand that the residuary powers, including those of taxation, be vested in the States. The States argue that they need taxation powers in order to mobilise resources to meet their developmental needs.

Centre’s control over state laws

Centre’s control over State legislation is covered by the following

  • Governor can reserve a Bill for President’s consent over which the President has absolute veto (Art 200 and 201)
  • President’s prior permission is required for the introduction of state Bill restricting freedom of trade and commerce
  • During financial emergency( Art.360), President may direct the State government to send for his consideration Money Bills and related Bills
  • During Emergency (Art.352), Parliament can legislate on any State subject
  • During National Emergency, the union state financial relations as they are contained in Art.268-279 can be suspended in favour of the Centre.
  • The Concurrent List items are subject to the doctrine of federal supremacy. That is, in case of repugnancy between the central and state laws, federal law prevails.

Sports, betting and Centre’s residuary powers

The IPL spot fixing scam also brought to light the question of regulating sports and dishonest practices in sports. One view is that there can be no national legislation on this because sports under entry 33 of list two is a state subject. Betting and gambling under entry 35 of list two is also a state subject. But if the IPL scam is neither betting nor gambling and is an unfair practice that changes the outcome of the game, centre can legislate in its residuary capacity.

The AG is of the opinion match-fixing, spot-fixing do not come within the purview of the term betting and gambling as defined in the state list.

Fiscal Federal Relations

Art.268 to 293 in Part XII deal with the financial relations. The Constitution contains fixed as well as dynamic parts for ensuring adequate finances to the States and the Union. The static part relates to some sources of finance being entirely given to the states- taxes and duties . specified as such in the Constitution like sales tax.

The dynamic portion consists of making revenues from central taxes and duties divisible between centre and the states- respective shares of the divisible pool being determined every five years by a Finance Commission(Art.282)

All the taxes and duties can be grouped under the following broad categories:

  • Taxes and duties imposed, collected and enjoyed by the states. For example, sales tax
  • Duties levied by the Union but collected and appropriated by the States(Art.268) Stamp duties on bills of exchange, cheques, promissory notes etc
  • Taxes levied and collected by the Union but assigned to the States(Art.269)- central sales tax on goods produced in one state where they are bought so as to sell them in another state. The latter state gains in the form of sales tax while the former (producing state) gets the CST. However, CST is being phased out as it has to be made a part of the GST which is due.
  • Taxes levied and collected by the Union but shared with the states on the recommendations of the Finance Commission(Art.270)- all central taxes and duties except cess and surcharges(Art.271)

Following are the important Articles in the fiscal federal relations:

Art.268. Taxes and duties levied by the Union but collected and appropriated by the States. Exrmedicinal preparation with alcohol in them

Art.269. Taxes levied and collected by the Union but assigned to the States- CST as mentioned above

Art.270. Taxes levied and collected by the Union and distributed between the Union and the States. Income tax, corporation tax etc ( see ahead)

Art.271. Surcharge on certain duties and taxes for purposes of the Union. Surcharges are not shareable                                                                                                                                     -

Art.274: Prior permission of President for the introduction of certain Bills. Art.274

No Bill or amendment which imposes or varies any tax or duty in which States are interested, or varies the meaning of the expression “agricultural income” as defined for the purposes^of the enactments relating to Indian income-tax, or affects the principles on which moneys are or may be distributable to States, shall be introduced or moved in either House of Parliament except on the recommendation of the President.This is to protect the interests of the States.

275. Grants from the Union to certain States. Parliament may provide grants-in-aid of the revenues of some States if they are in need of assistance, and different sums may be fixed for different States. Such sums are charged on the CF1.

276. Taxes on professions, trades, callings and employments. It is a tax that the States impose, collect and appropriate but the annual limit is set by the Parliament. Presently the limit is R.s.2,500 per annum. There is no profession tax in Union Territories.The power of the Legislature of a State to make laws with respect to taxes on professions, trades, callings and employments shall not be seen as lijniting in any way the power of Parliament to make laws with respect to taxes on income accruing from or arising out of professions, trades, callings and employments.

279. Calculation of "net proceds", etc. (from the gross collections of taxes, when the amount spent on collection is deducted, net amount is arrived at: gross minus collection expenditure= net).

280. Finance Commission.

Finance Commission: Constitutional provisions

Article 280

The President sets up every five years, or at such earlier time as the President considers necessary, a Finance Corpmission which shall consist of a Chairman and four other members to be appointed by the President. Duties of the FC involve making recommendations to the President as to

  • the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds
  • the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India;
  • the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State
  • the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State
  • any other matter referred to the Commission by the President in the interests of sound finance. .

The recommendations are presented to the President in the FC report and the President causes the same to be tabled in the Parliament. They are not binding but are conventionally accepted by the Government. They fall into three categories

  • Implemented by an Order of the President- relating to Art.270( income tax etc that isdivisible) and Art.275( grants in aid)
  • Those to be implemented by executive orders(relief grants etc)
  • Those to be examined further. 

Art.280 says that the Parliament may by law determine the qualifications which shall be requisite for appointment as members of the Commission and the manner in which they shall be selected. Parliament made the Finance Commission (Miscellaneous Provisions) Act, 1951 in pursuit of Art.280.The Finance Commission is headed by one who has wide experience in public affairs. There are four other members including a High Court judge- one who is qualified to be a judge or vyho is or retired as a judge. Other three are distinguished with special knowledge in economics and two members with experience and special knowledge in government finances and accounts respectively.

Art. 270 Taxes levied and collected by the Union and distributed between the Union and the States.
There are many taxes and duties that are levied and collected by the Union and are shared with the states. In fact, there are no taxes and duties that go only to the centre except the cesses and surcharge on taxes. Surcharges are temporay and additional taxes on taxes. The difference between cess and surcharge is that the purpose for the levy of the former is made explicit while the latter is general purpose additional levy. Surcharges and cesses are not shareable as they are temporary( Art.271). Originally, income tax other than agricultural income tax and Union Excise duties were in the divisible pool. But since the Tenth Finance Commission recommendations ( 80th Constitution Amendment Act 2000) came into force , all taxes and duties that were exclusive to the Union Government are also made divisible . For example, customs duties, corporate tax , service tax etc. Only surcharges go to the Union exclusively.

Tenth Finance Commission(TFC) and Alternative Scheme of Devolution(ASD)

 The Constitution (Eightieth Amendment) Act, 2000, which seeks to provide an alternative scheme for sharing taxes between the Union and the States, is based on the recommendations of the Tenth Finance Commission.

Constitution was amended to give it legal effect. Under the provisions of the Act, amendments have been made in Article. 270 .ASD essentially means making all Union taxes and duties - shareable with States unlike earlier when the Union had some taxes and duties exclusively to it.

The advantages of the system are

  • States will be able to share the buoyancy of Central taxes
  • The Central Government can pursue tax reforms and expect states to cooperate
  • Economic reforms in general will have wider consensus
  • Creates conditions for Cooperative federalism in other spheres


Background to ASD

The Constitution of India specified the taxes whose revenues were to be shared between the Union and the state governments, but did not mention the formula for such division, leaving it to the Finance Commission. Over the years, it was observed that the Union government concentrated in improving the elasticity of non-sharable taxes such as corporate income tax and Union Customs duty, and similar effort was not visible in shareable taxes like personal income tax and Union excise duty. Regional parties became a force to reckon with since 1967 and particularly since the eighties. They demanded that more fiscal resources be made available to them . With Coalition government becoming the norm and the regional parties being influential players, center yielded.

Need for rapid tax reforms to make the country a common- market and bring in foreign investment is another reason. Economic reforms and political developments thus made it necessary to move towards ASD.

Short Notes on Art 275: Grants from the Union to certain States

After the devolution of the taxes and duties from the divisible pool, if some States still face revenue deficits, the Finance Commission recommends 'gap-filling grants' to such states. They are meant to even out the 'horizontal imbalances' among the states to an extent. They are the grants in aid of the revenues of the States. Not all states get them . Nor is the amount same to all states.Generally, gap-filling grants are interpreted to mean only revenue grants and not for plan purposes.

Dr.Kelkar says: Art. 275 which enjoins the Commission to give State specific grants to ameliorate particular problems faced by individual States. It is through these grants that the Finance Commission meets the requirements of what we call ‘special category’ States, which are essentially micro States which have geographically difficult terrain such as mountainous regions and which are relatively more sparsely populated. The share of these Art 275 grants in the total Finance Commission’s transfers has been between 15-18 per cent.

Central fiscal transfers to the states

They are of the following types:

  • The Central tax devolution through the FC which constitutes about one-third of the total tax revenues of the states.
  • A second channel of resource flow from the Centre to the states is central assistance for. state plans. State plans are financed partially by states’ own resources and the balance by central plan assistance. Plan assistance is by way of grants and loans. In the case of fiscally weak states (called Special Category States) the grant component is 90 percent and loan is 10%. These states are the hill, border and weak-infrastructure states and can not repay the loan. For other states, it is 70% loan and 30% grant. The distribution of Plan assistance to the states is governed by the "Gadgil formula", so called after the Deputy Chairman of the Planning Commission which prepared the Fourth Five Year Plan (1969- 74). National development council (NDC) approved the formula in 1991 and it is called the Gadgil-Mukherjee foirnula since then as Shri.Pranab Mukherjee was the Deputy Chairman of the PC then.
  1. Eleven Special Category states - Arunachal Pradesh, Assam, Himachal Pradesh,Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand are given preference. Their needs should first be met out of the total pool of Central assistance.
  2. The remaining balance of the Central assistance should be distributed among the remaining States on the basis of the following criteria: (i) 60 per cent on the basisof population; (ii) 25% on per capita income (iii) 7.5% for performance in Tax Effort, Fiscal Management and Progress in respect of National objectives and (iv)7.5% on the basis of special problems like: all of them have the common characteristics of hilly and difficult terrain and very low level of infrastructural development. Most of them have significant tribal population. Almost all of them are.border States with considerable international borders.
  • Central ministries provide finances for some central schemes in the areas of irrigation, power, health etc
  • Miscellaneous transfers like the transfers from the National Investment Fund(NIF)

Finance Commission and Fiscal federalism

FC has a crucial role in the following areas

  • Cooperative financial relations between centre and states
  • Level the inequality among the states- bridge horizontal imbalances by giving more to the backward states( read ahead) as a part of the mandate to create equity.
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