NITI Aayog and a Deepening Federalism in India

Syllabus: GS2/Centre-States Relations; Governance

Context

• Over the past 11 years, India has embraced an era of cooperative and fiscal federalism. The Centre and state governments have actively collaborated on socioeconomic transformation to achieve shared goals.

Federalism & Types

• Reinterpreting Federalism: The “federalism” isn’t explicitly mentioned in the Constitution, however, B.R. Ambedkar’s vision of a system “both unitary as well as federal according to the requirements of time and circumstances” has been the guiding principle. The recent decade exemplifies a deliberate move towards the ‘federal’ aspect, shifting from a traditionally more unitary tilt.
• Cooperative Federalism: It means the Centre and states work together as partners in decision-making and implementation. Instead of the Centre dictating everything, states have equal voice.
  • Example: NITI Aayog’s Governing Council, where Chief Ministers and the PM sit at the same table.
  • Idea: “Sabka Saath, Sabka Vikas” — development through unity.
• Competitive Federalism: It means states compete with each other to perform better, attract investments, improve governance, and get rewarded.
  • Example: Aspirational Districts Programme – states compete to improve health, education, etc.
  • NITI Aayog’s indices (Health Index, SDG Index, Innovation Index) create benchmarks and rankings.
• Fiscal Federalism: It refers to sharing of financial resources between Centre and states.
  • Example: GST Council – where tax policy is jointly decided by Centre + states.

Role of NITI Aayog in Promoting Federalism

• Replaced Planning Commission in 2015.
• Became a bridge between Centre and states.
• Promotes both cooperative and competitive federalism (Aspirational Districts Programme)
• Unlike the old Planning Commission, NITI doesn’t just fund, it guides, facilitates and coordinates.

Other Initiatives Boosting Federalism 

• GST Council: The GST Council has ensured consensus-driven fiscal governance, with states receiving 71% of GST revenues, while the Centre retains about 29%.
  • Since GST’s implementation, the Centre has foregone 0.5-1% of GDP annually to fund the 14% compensation guarantee for states.
  • Between 2017-18 and 2024-25, the Centre has provided ₹6.52 lakh crore in GST compensation to states, ensuring stability during the transition period and supporting state economies.
• Tax Devolution: The states’ share in the divisible tax pool increased from 32% to 42% (recommended by the 14th Finance Commission), empowering them with greater financial autonomy.
  • Transfers to economically weaker states such as Uttar Pradesh, Rajasthan, and Chhattisgarh have seen substantial increases over successive Finance Commissions.
  • States’ share in central taxes grew from ₹3.37 lakh crore in 2014-15 to ₹12.23 lakh crore in 2024-25.
• Boost in Centrally Sponsored Schemes (CSS) funding: Between 2015-16 and 2023-24, Centrally Sponsored Schemes (CSS) and Centrally Sponsored Schemes (CSS) allocations increased by 197%, leading to significant socioeconomic transformations.

Challenges in Indian Federalism

• Fiscal Centralization: States rely heavily on the Centre for funds – over 40% of their revenue comes from transfers. The sunset of GST compensation in 2022 has left many states fiscally strained (e.g., Punjab, Kerala).
• Unequal Bargaining Power: Strong Centre vs weaker states dynamic persists. Smaller or politically-opposing states often struggle to negotiate better terms in fund allocation or policy implementation.
• Over-centralization of CSS (Centrally Sponsored Schemes): One-size-fits-all scheme design ignores local realities. States often bear partial cost burdens but have limited say in design and targets.
  • E.g. PMGSY, PMAY — centrally set parameters may not suit every state.
• Political Polarization: Allegations of political discrimination in fund allocation are common.
  • E.g., West Bengal, Kerala, and Delhi have often accused the Centre of bias.
• Weak Institutional Mechanisms: Bodies like the Inter-State Council and Zonal Councils are underutilized.
  • NITI Aayog is advisory and lacks statutory authority. It does not have constitutional backing, limiting its authority and accountability.
• Encroachment on State Subjects: Centre often intervenes in State List subjects via national schemes or laws.
  • Farm Laws (now repealed) were seen as encroachment on agriculture.

Way Forward

• Federalism as a Guiding Principle: Federalism remains a core governance philosophy, although it does not appear explicitly in the Indian Constitution.
  • As B. R. Ambedkar noted, ‘Our Constitution would be both unitary as well as federal according to the requirements of time and circumstances’.
• Suggestions for strengthening overall functioning of NITI Aayog are:
  • Granting NITI Aayog statutory status to enhance its authority.
  • Strengthening state consultations to ensure equitable policy formulation.
  • Improving funding and staffing to enhance operational efficiency.
  • Balancing cooperative and competitive federalism to prevent unintended consequences.

Source: IE