(GIST OF YOJANA) FISCAL FEDERALISM IN INDIA: THE ROLE OF UNION BUDGET 2025-26

GIST OF YOJANA : FISCAL FEDERALISM IN INDIA: THE ROLE OF UNION BUDGET 2025-26

MARCH-2025

FISCAL FEDERALISM IN INDIA: THE ROLE OF UNION BUDGET 2025-26

Introduction

Fiscal federalism pertains to the monetary interaction among various tiers of government within a federal framework. It encompasses the distribution of financial assets and obligations between Union and State authorities, ensuring resources are allocated justly and effectively. This concept was introduced by German economist Richard Musgrave and is vital to India's financial administration.
The Union Budget 2025-26 highlights the importance of fiscal federalism in achieving the vision of “Viksit Bharat” (Developed India). The budget outlines a strategy for economic advancement through increased transfer of fiscal resources, capital investment support, grants-in-aid, and borrowing options for states.

Fiscal Federalism in India: Constitutional Structure

The Indian Constitution distinctly outlines the fiscal duties and roles of both Union and State governments through:

(i) Seventh Schedule:

Union List – Matters on which only the Centre can legislate and impose taxes (e.g., defense, foreign relations, income taxation).
State List – Matters where States hold exclusive authority (e.g., law enforcement, public health, agriculture).
Concurrent List – Issues both Centre and States can legislate on, with central laws taking precedence during conflicts (e.g., education, environmental conservation).

(ii) Finance Commission (Article 280):

Defines the distribution of taxes collected by the Union to the States.
The 14th Finance Commission raised States’ share of central taxes from 32% to 42% (later adjusted to 41% by the 15th Finance Commission following J&K reorganization).

(iii) Revenue Allocation Mechanisms:

Tax devolution (direct transfer of tax revenues to states).
Grants-in-aid (for specific purposes such as disaster recovery, social sector initiatives).
Loans and borrowings (to assist States in funding developmental projects).

Union Budget 2025-26: The Quad-Pillar Framework of Fiscal Federalism

The Union Budget 2025-26 is structured around a four-pillar framework to enhance fiscal federalism and empower States:

(i) Increased Devolution of Central Taxes and Duties

Tax devolution is guided by the Finance Commission’s recommendations under Article 280.
The 14th Finance Commission raised the States' share from 31% to 42%, while the 15th Finance Commission maintained 41%.
The 2025-26 budget boosts the total transfer of taxes and duties to ₹14.22 lakh crore, marking a 14.01% increase from the prior year (₹12.47 lakh crore in 2024-25).

(ii) Special Support to States for Capital Investment

Capital expenditure augments economic productivity and long-term growth.
The 2025-26 budget allocates ₹1.5 lakh crore under the Special Assistance Scheme.

Key advantages of this scheme:

50-year interest-free loans to States.
Unrestricted funds, permitting flexibility in capital investment.
Incentives for urban planning, land record modernization, farmers’ registry, and vehicle scrappage programs.

(iii) Enhanced Grant-in-Aid for Centrally Sponsored Schemes (CSS)

The Centre provides grants-in-aid for initiatives that necessitate joint implementation by States. The Union Budget 2025-26 allocates ₹5.41 lakh crore for such initiatives.

Key Initiatives under CSS:

(i) Agricultural Sector:

PM Dhan-Dhaanya Krishi Yojana: Targets 100 agricultural districts, improving productivity and irrigation.
Atma Nirbharta in Pulses: A six-year mission to enhance domestic pulse production.
Comprehensive Vegetables & Fruits Program: Fortifying production, supply chains, and processing sectors.
Mission for Cotton Productivity: Encourages high-yielding cotton varieties for textile industry growth.

(ii) Rural Development:

Rural Prosperity & Resilience Program: Seeks to mitigate rural underemployment through skill enhancement.
Jal Jeevan Mission Extension (until 2028): Ensures 100% rural tap water access through Jan Bhagidari.

(iii) Urban Development:

PM SVANidhi: Increased support for 68 lakh street vendors through micro-financing.
Urban Challenge Fund (₹1 Lakh Crore): Aids urban redevelopment, sanitation, and infrastructure improvements.
Social Security for Gig Workers: Registers 1 crore workers on e-Shram portal with healthcare coverage under PM Jan Arogya Yojana.

(iv) Education Sector:

50,000 Atal Tinkering Labs in government schools fostering innovation.
Broadband access for all secondary institutions via BharatNet.
Centre of Excellence in AI for Education (allocation of ₹500 crore).

(v) Strengthening State Finances through Enhanced Borrowing

Additional borrowing authority of 0.5% of Gross State Domestic Product (GSDP) for States.
Unlocks ₹2 lakh crore for State governments.
Linked to power sector reforms, ensuring financial sustainability of DISCOMs.

Boosting Growth Through Central-Sector Initiatives

The budget also stresses Centre-led strategic investments in pivotal sectors, with allocations rising from ₹63,614 crore (2024-25) to ₹76,758 crore (2025-26).

Key Initiatives: Technology & Innovation:

20,000 crore fund for private-sector R&D.
Deep Tech Fund of Funds to back next-gen startups.
Regional Connectivity Scheme (RCS) – Udaan 2.0: Adds 120 new airports, aiding 4 crore passengers over the next decade.
Maritime Development Fund: Enhances shipbuilding and port infrastructure for economic growth.

Conclusion

The Four-Pillar Framework guarantees that States retain the financial independence necessary to execute policies tailored to their regions while upholding fiscal responsibility. With a bold aspiration for “Viksit Bharat,” the Union Government strives to cultivate a robust, self-sustaining, and inclusive economy, where both the Centre and States collaborate towards balanced growth.