BACKGROUND GUIDE

COMMITTEE:
ALL INDIA POLITICAL PARTIES MEET

AGENDA:
REVIEWING THE FISCAL FEDERALISM
 Introduction
​
Dear Representatives, it’s an honour to moderate the debate of
this committee. All India Political Parties Meet is a forum where
the political parties engage in the deliberation to arrive at a
consensus on a national issue, generally on a legislative
business. We look forward to an enriching and rewarding
experience. The agenda for the session is ‘REVIEWING THE
FISCAL FEDERALISM.’
This Background Guide is to give a mere perspective of the
agenda, and the representatives are required to go beyond the
areas and aspects highlighted in this document.
Kindly note that we are not looking for the imitation of your
portfolio (what the leader had already said in real life), rather we
recommend you all to comprehend the agenda based on the
political ideology of your portfolio.
​
Regards,
The Executive Board
(If queries, feel free to approach
[email protected])
 Note on the Committee & Preparation

A)​ For the Committee

●​ AIPPM is solely a committee focused on building

consensus without any actual authority.

●​ The AIPPM simulation is designed to be an improved

version of the actual one, rather than a copy. You are
expected to present the improved version of the person you
embody while considering their individual and political
ideological constraints.

●​ Be comprehensive in your political ideology – considering

both the viewpoint of a Political Party and that of an
individual. During the preparation phase, ensure that you
concentrate on both personal representation and party
principles. In portfolios such as those of Subramanian
Swamy or Shashi Tharoor, inconsistencies exist between
individual views and party policies.

●​ Although you are anticipated to maintain your political

views, remember that this is mainly a legal committee. We
anticipate that delegates will possess solid legal knowledge
and comprehension of the subject matter.
 B)​For the Preparation

●​ Valid sources for preparation: Government Reports,

Parliamentary Committee Reports, Press Information
Bureau, Relevant Judgements provided by Indian Judiciary
and other government authentic sources.

i) Examining your portfolio and their political connections via

previous news articles, magazines, party websites, social media,
and press releases; Identify the comments regarding the
specified agenda and party positions.

ii) The representatives should possess in-depth research

conducted on the current agenda. This should be accomplished
using sources like academic papers, institutional or
governmental reports, national reports, news articles, blogs, and
similar materials.

iii) To gain an advantage in the committee during debates,

delegates should also investigate other portfolios and seek out
contradictory statements or controversial positions on different
issues to present allegations or significant questions within the
committee.
 Understanding the Rules of Procedure and flow of
the committee:

Motions-
i) Open the floor for Debate
ii) Opening statements: Here, each representative in the
committee is required to give a speech for up-to 90 seconds,
based on his/her portfolio’s stance in regards to the agenda.
iii) Motion for Moderated Caucus: In this, representatives
discuss a particular sub-topic of the agenda, which may consist
of concerns or solutions. (up-to 60 seconds)
iv) Motion for Unmoderated Caucus: It is when the
committee is in an informal session and representatives are
allowed to roam around the room, discuss with people, convince
others on their perspectives, gather support and decide the
direction of the committee. Most importantly, access to the
internet is allowed only during Unmod.
vi) Motion to table Agenda XYZ- A request made by the
representative to suspend or delay the ongoing discussion on
agenda.

Points-
i) Point of Personal Privilege: Addresses personal comfort
issues like room temperature, audibility of a speaker, permission
to leave the committee, and for other personal concerns.
ii) Point of Parliamentary Inquiry: Questioning about the flow
of committee
iii) Point of Order: Raising for factual inaccuracy
iv) Point of Information: Questions to the representative

General Note: All decisions regarding the proceedings,

motions, and documentation of the committee are at the
Executive Board's discretion.
 Historical context

Federalism is the form of government wherein, at least two

levels of Governments exist within the country, i.e., one at the
Central level and the other at the State level.

The term "Federal" has not been mentioned anywhere in the

Constitution of India. However, India, since independence, has
followed a quasi-federal structure. The Constitution of India
has established the federal structure to the Indian government by
declaring "India, that is Bharat, shall be a Union of States" as
specifically incorporated in Article 1 of the Constitution.

In Ganga Ram Moolchandani v. State of Rajasthan, the

Supreme Court reiterated: 'Indian Constitution is basically
federal in form and is marked by the traditional characteristics of
a federal system, namely supremacy of the Constitution, division
of power between the Union
and States and existence of an independent judiciary.

Fiscal Federalism refers to the distribution of governmental

functions and financial relations among levels of government—
the Union, states, and local. This includes taxation powers,
revenue sharing, Grants-in-aid, borrowing powers, spending
autonomy.
The concept of Federalism can be classified into two types based
on the relationship between the Union Government and the State
Governments-

Cooperative Federalism: involving the Centre and States

governments co-operating with each other for the pan
development of the Country. It involves the participation of all
the States in the creation and implementation of the National
Policies of the Nation.

Competitive Federalism: involving competition amongst the

States and also the Centre for the economic benefits, in respect
of economic affairs. This concept became more prominent
Post-1990's Economic Reforms. When India opened its doors
and windows forGlobalization, there is now increasing
competition between the States, for the limited resources.
 Current Scenario:

❖​NITI Aayog:

-​ Established in 2015 to take the place of the Planning

Commission, this advisory organization was created with
the aim of promoting cooperative governance among states.
It functions primarily as a think tank rather than as a
financial institution.
-​ Unlike the Planning Commission, which had the ability to
distribute discretionary funds, Niti Aayog does not possess
the authority to allocate financial resources.
-​ While some commend Niti Aayog for its collaborative
approach, others argue that it lacks the power to impact the
financial relationship between the Centre and the states.

❖​Goods and Services Tax (GST)

-​ Enacted in 2017 through the 101st Constitutional

amendment, GST integrated various state and central
indirect taxes into one unified taxation system.
-​ The GST Council, as established by Article 279A, is a
central entity where the Union Finance Minister leads the
council, with state finance ministers as members.
 ❖​Finance Commission:

-​ This is a constitutional authority formed under Article 280

of the Indian Constitution, appointed every five years to
advise on the distribution of the Centre’s tax income
between the Centre and the States (vertical devolution) as
well as among the states themselves (horizontal
devolution).

The 15th Finance Commission (2021-26) was headed by N.K.

Singh, recommending
●​ Vertical devolution: 41% of divisible tax pool to states
(reduced from 42% due to Jammu & Kashmir's change in
status).
●​ Horizontal devolution: Used new criteria like-
2011 population (15% weightage), Income distance (45%),
Forest & ecology (10%), and Tax effort & demographic
performance.

❖​Relevant Stakeholders

Ruling

●​ Bharatiya Janata Party (BJP)

-​ Promotes a model of “cooperative federalism” with a
robust central authority.
-​ Supports a central position in maintaining consistent
policies.
-​ Backs initiatives such as GST, Direct Benefit Transfer
(DBT), and conditional central schemes for efficiency and
accountability.
-​ Advocates for the Finance Commission's 2011
population-based weighting, emphasizing the necessity to
tackle disparities and developmental shortfalls.

●​ NDA Allies

-​ JD(U) in Bihar: Advocates for increased funding to less

affluent states, yet grows more cautious about the BJP's
centralizing tendencies.

-​ Shiv Sena (Shinde faction) and NPP (Meghalaya) usually

maintain a cooperative stance with the central government,
though they express local issues either privately or within
the NDA framework.

These parties frequently find themselves balancing their

support for the BJP nationally while voicing their
state-level needs that indicate a rising unease with the
predominant influence of the central government on
finances.
 Opposition

●​ Indian National Congress (INC)

-​ Advocates for greater independence for states in financial

issues.
-​ Condemns BJP’s approach to “unitary federalism” —
claims the central government undermines bodies such as
the GST Council and Finance Commission by making them
politically influenced.
-​ Calls for an examination of the cess and surcharge system
that overlooks the suggestions made by the Finance
Commission.

●​ Trinamool Congress (TMC)

-​ Firmly believes in federalism and openly challenges the

central government's authority.
-​ Rejects centrally initiated programs that overlook the
unique needs of the states.
-​ Aims for legal protections to stop the central government
from imposing budgetary restrictions on its own.

●​ Dravida Munnetra Kazhagam (DMK)

-​ Advocates for authentic federalism, claiming that the
central government punishes states that have achieved
better population management and social results.
-​ Criticizes the reliance on the 2011 census for Finance
Commission assessments.
-​ Calls for a GST framework that is revenue-neutral and
insists on prompt compensation.
 Constitutional Provisions and Challenges

The subject of Fiscal Federalism is crucial because it defines the

boundaries of governmental authority, ensures accountability,
and protects against fiscal overreach or discrimination.

➢​Constitutional Supremacy

The Constitution of India provides the legal basis for fiscal

arrangements between the Centre and the States.

i) Article 246: Distribution of legislative powers between the

Union and the states, where Union law prevails over state law in
case of conflict.

ii) Seventh Schedule: Division of subjects for legislation via

Union List, State List and Concurrent List

iii) Articles 268-281: Distribution of revenues between the

Centre and the states

iv) Article 269A: Levy and collection of Goods and Services

Tax (GST) on inter-state trade/commerce

v) Article 275: Grants-in-aid from the Union to certain States

vi) Article 279A: Goods and Service Tax (GST) Council

vii) Article 282: Grants for Public Purposes

viii) Article 293: Borrowing by states

ix) 73rd and 74th amendments: Decentralization by extending

constitutional status to rural local governance and urban local
governance through Panchayati Raj Institutions and
Municipalities respectively.

➢​Challenges involved:

a)​Contention over the Devolution Formula -

​The Finance Commission (FC) advises on the allocation of

central taxes between the federal government and the states
(vertical distribution), as well as among the states
themselves (horizontal distribution). Following the division
of Jammu and Kashmir, the 15th FC decreased the share of
states from 42% to 41%.

​The reliance on the 2011 Census Data is contentious since

it disadvantages states that have made significant efforts in
education, health care, and family planning. Although
lower-income states benefit more because of income
disparities, states that are performing well feel unfairly
treated for their success.
 ​Urban and Climate Issues: No consideration is given to the
pressures of urbanization, the risks posed by climate
change, or the gaps in infrastructure in smaller states that
are experiencing rapid urban growth.

b)​ Vertical Fiscal Imbalance

​It stands for the mismatch between the revenue-raising

powers and expenditure responsibilities.

​ lthough the States are in charge of only 40% of overall

A
resources, they are responsible for approximately 60% of
the total government spending.
This is due to several factors linked to local governance,
such as health care, education, infrastructure, and
maintaining law and order. This limited financial autonomy
forces States to depend significantly on funds from the
central government.

c)​Centralization vs. Autonomy Debate

While the Centre emphasizes the standard and uniform policies

citing the significance of national integration and promoting
equality, the states argue that regional diversity requires fiscal
and policy flexibility.
 d)​Centrally Sponsored Schemes (CSS) - conflict of priorities

Centrally Sponsored Schemes (like PMAY, PMGSY, and Jal

Jeevan Mission) are jointly funded programs, in which the
Central Government establishes objectives and the states are
responsible for carrying them out. State-specific requirements
are disregarded in these programs, and states have little
influence over plan development.

e)​GST

Although the GST act seeks a mechanism to settle

differences between the Centre and the states , no
independent Dispute Resolution Mechanism was never
notified or operationalized.
Hence, it necessitates disputes be resolved within the
Council itself, where the Centre has a one-third voting
weight that can halt any decision.

f)​Inequality in Revenue Sharing

There exists–
i) North vs. South Divide
ii) Rich vs. Poor States
iii) Opacity in the allocation of discretionary grants
 g)​Cesses and Surcharges

Cesses and surcharges are levied by the Centre but are not
shared with states. Their use has increased significantly over the
past decade, which shrinks the divisible pool.

h)​Centre’s Capping of State Borrowings

The Centre approves for additional borrowings by the states.
The Center, to improve budget management and fiscal
accountability, is authorized to restrict the states' borrowing in
order to maintain fiscal deficit under control which erodes states'
autonomy.
The Center imposed additional borrowing limitations tied to
changes in the electricity, agriculture, and labor sectors
throughout the COVID-19 pandemic, which the states deemed
to be coercive.

i)​ Underutilization of State Finance Commissions

While the Finance Commission deals with Centre–State

relations, State Finance Commissions are meant to devolve
funds to local bodies (panchayats and municipalities). However,
State Finance commissions are irregularly constituted and often
ignored. Further, Urban local bodies suffer from severe fund
shortages due to weak implementation.