Fiscal federalism, efficiency versus equity concerns

The Finance Commission, an institutional innovation embedded in India’s constitutional architecture, was never intended to be a routine allocator of funds. It was designed as a central pillar of India’s fiscal federal compact and as a corrective institution that would mediate the inherent asymmetry between a fiscally dominant Union and structurally constrained States, while also addressing deep horizontal inequalities arising from history, geography, and institutional capacity. In a country marked by uneven development at Independence, the Commission’s central mandate was to safeguard the interests of the States and thereby preserve a strong Union.