The the Centre and states are shaped by the

The Constitution of India
is said to be federal in structure, but unitary in spirit. In a diverse country
like India, federalism and unitary rule are both necessary. The federal nature
of the Constitution is extremely important since it ensures smooth governance
and greater coordination between the central and the state governments. It
preserves the autonomy and independence of the different regions and states and
at the same time ensures efficient governance on the national level. India has
twenty nine states which are governed by their own elected parliaments and
seven union territories which come under the jurisdiction of the central
government. Fiscal relations between the Centre and states are shaped by the
Seventh schedule in the Indian Constitution which describes the legislative,
executive and judicial powers of the Centre and state through Union, State and
Concurrent lists. Recent developments in both politics and
economics have changed the centre-state relationships.  However, the systems and institutions evolved
under the dirigisme policy regime and a single party rule have continued to
provide enabling competitive environment to the states in the globalizing
environment and persisting inter-state inequalities have accentuated the
tensions.  At the same time, the
emergence of coalition government at the Centre, regional parties as partners
in coalition and governments led by opposition parties in the states on the one
hand and declining time horizon of the political parties and politicians on the
other has put severe strains on implementing policies for long run growth.  The changes in centre-state relations demand
changes in policies and institutions and accelerating India’s economic growth
and ensuring its inclusiveness over the medium and long term and this requires
significant reforms in both policies and institutions. Being aware of the need
for a comprehensive review, the Government of India appointed various
committees and commissions for the purpose. While these Commissions have made
far reaching recommendations, there has been a lag in implementation. The
consequence has been that whatever policy and institutional changes are
necessary to deal with economic and political changes have not been
accomplished with adverse consequences on both governance and development of
the country. This paper attempts to explore some of the important issues pertaining
to centre-state financial relations in India.