NEW DELHI: India’s federal structure rests on a calibrated balance between a strong Union and fiscally and politically empowered states. Although states shoulder wide responsibilities in health, agriculture, law and order, and welfare, revenue-raising powers are increasingly being centralised. Over the past year (late 2024–2025), this latent imbalance has crystallised into political and economic contention.
Fiscal Federalism: GST, Cesses and the Erosion of State Space
Introduced in 2017 as a putative “grand federal bargain”, the Goods and Services Tax has emerged as the principal arena of Centre–state recrimination. Although constitutionally conceived as a shared levy, states often claim that they retain little effective autonomy over rates and remain dependent on timely compensation and transfers.
In September 2025, the 56th GST Council approved a major rate rationalisation, nudging the regime towards a two-rate structure centred on 5 per cent and 18 per cent. The Union government projected the reform as efficiency-enhancing and fiscally neutral. Several states, however, impugned this claim, arguing that rationalisation disproportionately burdens consumption-driven economies while the Centre continues to expand its reliance on cesses and surcharges—revenues explicitly excluded from the divisible pool.
RBI data corroborates the materiality of this concern. The share of cesses and surcharges in gross tax revenue has risen inexorably from 9.6 per cent in 2011–12 to over 18.5 per cent in 2024–25, substantially shrinking the pool mandated for devolution under Article 270. This fiscal architecture has drawn sustained opprobrium from opposition-ruled states. Kerala has warned that despite adherence to fiscal discipline norms, it faces a shortfall of nearly `8,000 crore in FY 2025–26 owing to GST rationalisation and delayed IGST settlements. Tamil Nadu has repeatedly pointed out that while it contributes roughly 8–9 per cent of national GST collections, its fiscal autonomy has steadily waned due to minimal control over rates.
Karnataka, among the fastest-recovering post-pandemic economies, has cautioned that altered transfer mechanisms and the tightening of centrally sponsored schemes could deprive it of nearly `5,000 crore annually, with direct ramifications for employment generation and welfare provisioning. Punjab and West Bengal have raised a related but graver grievance: persistent delays in GST compensation and other statutory dues. West Bengal’s finance department estimates pending central transfers exceeding `1.2 lakh crore across GST compensation, disaster relief and scheme reimbursements—delays it characterises as structurally debilitating rather than episodic.
MGNREGA’s Dismantling and the Politics of Welfare Federalism
The repeal of MGNREGA and its replacement with the Viksit Bharat – Guarantee for Rozgar and Aajeevika Mission (Gramin) Act in December 2025 has further exacerbated Centre–state tensions. MGNREGA, which statutorily guaranteed 100 days of employment and functioned as a counter-cyclical stabiliser, had become a cornerstone of rural livelihoods, particularly in agrarian and fiscally constrained states.
The new framework pares back statutory guarantees and amplifies discretion in funding, effectively shifting fiscal risk onto states. Punjab and Tamil Nadu have argued that this restructuring militates against employment security and undermines state-level planning. In Tamil Nadu, widespread protests followed, with the state government accusing the Centre of a unilateral and obstinate restructuring of welfare federalism.
Official data reinforce these apprehensions. Funds released for MGNREGA declined between 2023–24 and 2025–26, even as rural distress indicators remained elevated. Kerala and West Bengal have argued that the Centre’s reluctance to augment allocations, coupled with increasingly stringent payment conditions, violates both the letter and spirit of cooperative federalism.
Tamil Nadu and the Revival of the Autonomy Question
In April 2025, Tamil Nadu Chief Minister M K Stalin constituted a high-level committee, chaired by former Supreme Court judge Justice Kurian Joseph, to examine Centre–state relations. The move, redolent of the Rajamannar Committee of 1969, marks the most serious institutional interrogation of federal balance in decades.
The committee is examining shifts in legislative competence, fiscal devolution, and the expanding remit of central agencies. Its very constitution reflects a deeper political argument: that fiscal centralisation—through GST design, cesses, centrally sponsored schemes, and discretionary grants—has progressively weakened the constitutional position of states. Although the report is due only in early 2026, its announcement has already emboldened similar demands in Kerala and Punjab for a re-examination of the divisible pool and the terms of reference of Finance Commissions.
Governance, Article 356 and Central Authority
The extension of President’s Rule in Manipur during 2025 revived long-standing debates around Article 356. Opposition parties argued that prolonged Central control without a clear roadmap for restoration of elected government weakens democratic federalism, even when justified on security grounds. This concern resonates with a broader pattern of Central intervention via governors, investigative agencies, and administrative instruments in opposition-ruled states.