From a fiscal perspective, India’s federal system has three important components: (1) Article 1 of the Constitution states that India, that is Bharat, shall be a union of states; (2) the Seventh Schedule of the Constitution allocates subjects to the Union and the States under different Lists, with overlapping functions contained in a separate Concurrent List; and (3) Article 280 of the Constitution mandates formation of the Finance Commission every five years to recommend vertical and horizontal devolution of net central taxes and various other grants.
6. Over the past decades, the actual working of these constitutional provisions have generated considerable debate. Successive Finance Commissions have made efforts to address the emerging issues and challenges, but in a vibrant democracy like India the debate goes on. Geopolitical risks have necessitated higher expenditure on defence and internal security. Natural calamities and disasters have called for higher expenditure on relief and rehabilitation.