Through the Lens of Legality Evolution of Fiscal Federalism in India

Indian federalism is a judicious balance of power between the Union and the States, as provided in the Seventh Schedule of the Constitution in the Union, State, and Concurrent Lists. It was through the Government of India Act, 1935, that the federal concept was introduced for the first time, an important shift from the previous unitary system. The Indian Constitution framers converted this colonial model into a cooperative federation that guarantees both regional autonomy and national unity. Under this constitutional setup, fiscal federalism—a concept popularised by Richard Musgrave in 1959—takes on cardinal significance by regulating the financial relationships and revenue-sharing arrangements between different levels of governments. This article critically reviews India’s constitutional and judicial development of fiscal federalism in a doctrinal and comparative perspective. It assesses how provisions of the Constitution, Finance Commissions, and judicial decisions have influenced Centre–State fiscal relations over time. The research also weighs the benefits of fiscal decentralisation—such as responsiveness to local diversity, administrative efficiency, and innovation—against its intrinsic challenges, including fiscal imbalance, limited accountability, and capacity constraints at the subnational level. Casting a comparative view from the US, the study showcases the similarities and differences between two different federal traditions. With qualitative and analytical analysis, the study examines if India’s fiscal federal model can successfully balance state autonomy and national unity. It also discusses how judicial intervention and institutional design have reordered intergovernmental financial relationships, especially in the context of the Goods and Services Tax (GST) regime. Finally, the paper concludes that India’s fiscal federalism is still a developing and adaptive concept—one that continuously tries to reconcile equity, efficiency, and unity within the intricate framework of cooperative federalism.