Inter-Governmental Fiscal Relations
Indian Polity & Governance
- PYQs8
- Articles1
Background
This concept is fundamental to understanding the functioning of Indian federalism, the distribution of financial powers, the mechanisms for resource sharing, and the challenges states face in securing adequate funds for development and public services.
Inter-governmental fiscal relations in India define the financial interactions and resource transfers between the Union government and state governments, as well as between state governments and local bodies. These relations are governed by constitutional provisions, recommendations of the Finance Commission, and various central schemes, aiming to address vertical and horizontal fiscal imbalances.
Facts & tables
- Finance Commission
- A constitutional body that recommends the devolution of taxes and grants from the Union to states.
- Centrally Sponsored Schemes (CSS)
- Schemes funded by the Centre but implemented by states, often with specific guidelines and conditionalities.
- Special Assistance to States for Capital Investment
- A scheme providing 50-year interest-free capital loans from the Centre to states to boost capital expenditure.
- Urban Local Body Grants
- Grants recommended by the Finance Commission for urban local bodies, often tied to local tax collection efforts and reforms.
| Type | Reference |
|---|---|
| Conceptual area | Indian Economy |
| Conceptual area | Federal Structure & Centre-State Relations |
| Conceptual area | Constitutional & Statutory Bodies |
| Body | Role |
|---|---|
| Finance Commission | Recommends |
| Ministry of Finance (Union) | Implements |
| State Finance Departments | Implements |
Prelims angle
Prelims angle: Multi-statement analysis
Prelims angle: Factual recall
- Vertical imbalance: Centre has more revenue sources, states more expenditure responsibilities.
- Horizontal imbalance: Disparities in fiscal capacity among states.
- Finance Commission addresses both imbalances through devolution and grants.
- Centrally Sponsored Scheme funds are often underutilized by states.
- Local body grants are often linked to local revenue generation and reforms.
| Year | Framing tags |
|---|---|
| 2025 | Multi-statement analysis, Factual recall |
| 2025 | Multi-statement analysis, Factual recall |
| 2023 | Factual recall, Institutional roles and functions |
| 2018 | Multi-statement analysis, Factual recall |
| 2015 | Conceptual understanding, Multi-statement analysis |
| 2015 | Multi-statement analysis, Factual recall |
| 2014 | Factual recall, Conceptual understanding |
| 2013 | Factual recall, Multi-statement analysis |
Timeline
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Indian Economy
Conceptual area
-
Federal Structure & Centre-State Relations
Conceptual area
-
Constitutional & Statutory Bodies
Conceptual area
-
Prelims 2013
Factual recall, Multi-statement analysis
-
Prelims 2014
Factual recall, Conceptual understanding
-
Prelims 2015
Conceptual understanding, Multi-statement analysis
-
Prelims 2015
Multi-statement analysis, Factual recall
-
Prelims 2018
Multi-statement analysis, Factual recall
-
Prelims 2023
Factual recall, Institutional roles and functions
-
Prelims 2025
Multi-statement analysis, Factual recall
-
Prelims 2025
Multi-statement analysis, Factual recall
-
Damocles’ sword over Kerala’s fortunes
Fiscal federalism in India involves constitutional provisions, Finance Commission recommendations, and central schemes governing financial transfers and resource sharing between different tiers of government.
See also
Past papers
2013–2025 · 8 questions
In the news
Damocles’ sword over Kerala’s fortunes
Fiscal federalism in India involves constitutional provisions, Finance Commission recommendations, and central schemes governing financial transfers and resource sharing between different tiers of government.
Try these PYQs
Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct?
I. It has recommended grants of ₹4,800 crores from the year 2022–23 to the year 2025–26 for incentivizing States to enhance educational outcomes.
II. 45% of the net proceeds of Union taxes are to be shared with States.
III. ₹45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms.
IV. It reintroduced tax effort criteria to reward fiscal performance.
Select the correct answer using the code given below.
The 15th Finance Commission made recommendations to promote better fiscal discipline, education, and agriculture reforms, while adjusting tax devolution among states. ✅ Statement I: Correct 4,800 crores were recommended (2022–23 to 2025–26) to incentivize states for improving educational outcomes. ❌ Statement II: Incorrect The Commission recommended 41% of Union taxes to be shared with states, not 45%. ✅ Statement III: Correct It proposed a ₹45,000 crore performance-based incentive for states to implement agricultural reforms. ✅ Statement IV: Correct It reintroduced the 'tax effort' criterion, rewarding states that better mobilize revenue in relation to their GSDP.
With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct?
1. It has increased the share of States in the central divisible pool from 32 per cent to 42 per cent
2. It has made recommendations concerning sector-specific grants
Statement 1 is Correct: The Fourteenth Finance Commission indeed increased the devolution of tax revenue from the central government to the states. Statement 2 is Incorrect: While promoting formula-based devolution, the commission does not provide recommendations regarding sector-specific grants to ensure focus on critical areas.
Who among the following constitute the National Development Council?
1. The Prime Minister
2. The Chairman, Finance Commission
3. Ministers of the Union Cabinet
4. Chief Ministers of the States
Select the correct answer using the codes given below:
The National Development Council (NDC) in India is comprised of the following members: * The Prime Minister (who chairs the council)
* Ministers of the Union Cabinet
* Chief Ministers of the States The Chairman, Finance Commission - while the Finance Commission plays a crucial role in recommending the devolution of financial resources from the central government to the states, the Chairman is not a member of the NDC. _Note: While the NDC was proposed to be abolished, it has not been formally dissolved, although its powers have largely been transferred to the NITI Aayog's Governing Council._
Consider the following:
1. Demographic performance
2. Forest and ecology
3. Governance reforms
4. Stable government
5. Tax and fiscal efforts
For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?
Based on principles of need, equity and performance, overall devolution formula is as given in the chart:
Consider the following statements
1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
2. The Central Government has domestic liabilities of 21% of GDP as compared to 49% of GDP of the State Governments.
3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.
Which of the statements given above is/are correct?
Statement 1 is correct. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report indeed recommended a debt-to-GDP ratio of 60% for the general (combined) government by 2023, with 40% for the Central Government and 20% for the State Governments. This recommendation aimed to ensure fiscal discipline and sustainability. Statement 2 is not correct. The Central Government has domestic liabilities of 46.1% of GDP (2016-17) and as a percentage of GDP, States liabilities increased to 23.2 per cent at end-March 2016. Statement 3 is correct. The Constitution of India empowers State Governments to borrow only from domestic sources (Article 293(1)). Further, as long as a State has outstanding borrowings from the Central Government, it is required to obtain the Central Government's prior approval before incurring debt (Article 293 (3)).
Show 3 more PYQs
The fundamental object of the Panchayati Raj system is to ensure which among the following?
1. People’s participation in the development
2. Political accountability
3. Democratic decentralization
4. Financial mobilization
Select the correct answer using the code given below
The Panchayati Raj system is designed to empower rural communities by enabling 1. People's participation in development: This involves involving villagers in decision-making processes related to local development projects and resource allocation. 2. Political accountability: This is a desirable outcome, but not the sole purpose. The Panchayati Raj system aims to create a more participatory and democratic structure for rural development. 3. Democratic decentralization: Power is transferred from the central government to local bodies, allowing communities to address their specific needs and priorities. 4. Financial mobilization: While financial mobilization can be a consequence, it's not the fundamental objective. Therefore, only statements 1 and 3 are true.
Consider the following pairs:
State – Description
I. Arunachal Pradesh : The capital is named after a fort, and the State has two National Parks.
II. Nagaland : The State came into existence on the basis of a Constitutional Amendment Act.
III. Tripura : Initially a Part 'C' State, it became a centrally administered territory with the reorganization of States in 1956 and later attained the status of a full-fledged State.
How many of the above pairs are correctly matched?
This question tests knowledge of historical and administrative facts about northeastern Indian states. ✅ Pair I: Arunachal Pradesh – Correct
* Itanagar, the capital, is named after Ita Fort.
* The state has two National Parks: Namdapha and Mouling. ✅ Pair II: Nagaland – Correct
* Nagaland attained statehood via a constitutional amendment and came into being on 1 December 1963 through the State of Nagaland Act, 1962. ✅ Pair III: Tripura – Correct
* Tripura was a Part 'C' state, became a Union Territory in 1956, and was granted statehood in 1972.
The power of the Supreme Court of India to decide disputes between the Centre and the States falls under its
Article 131 of the Constitution of India provides for the original jurisdiction of the Supreme Court to settle the disputes between the different units of the Indian Federation such as between the Centre and one or more states and, between the states.