A brief description about the union state relations in India, containing an activity for the students at the end. Helpful to understand the concept and as a summary of the concept to study.

1. UNION – STATE FINANCIAL
RELATIONS IN INDIA

2. KEY TAKEAWAYS:
 In India there is a clear demarcation of the financial relations and responsibilities of
both the Central and the State governments. As specified by the constitution there
are three types of lists – Union list, State list, Concurrent list.
1. Union list: It describes the subjects under the control of the central governments.
2. State list: It describes the subjects under the control of the state governments.
3. Concurrent list : It describes the subjects which are under the joint jurisdiction of the
centre and the state governments.
4. Residual Subjects: These subjects do not come under these lists but are handled by the
states.
 Vertical and Horizontal imbalances are common features of most
federations and India is no exception to this.
 The constitution assigned the taxes with a nation- wide base to the Union to
make the country one common space unhindered by the internal barriers to
the extent possible.

3.  The States being closer to people and more sensitive to the local needs have been
assigned functional responsibility involving the expenditure disproportionate to
their assigned sources of revenue resulting in the vertical imbalances.
 Horizontal imbalances across the states are on account of factors which
historical backgrounds, differential endowment of resources and the capacity
raise capital.
 Unlike in most other federations, differences in the development levels in Indian
states are very sharp. This can be attributed to a few causes as under:
1. India’s GDP growth has been fuelled by isolated sectors of the economy
in a few states.
2. The coefficient of variation in the per capita income between the states shows that there
there has been an increase from 42.2% in 2000-01 to 57.8% in 2017-18. Indicating
growing divergence in the fortune of the states.
3. The differences in spending on health and education are particularly stark with
states spending far less per person compared to richer states.
4. This has meant that the poorer states are constrained in their ability to raise revenues
and are able to spend much less on investments in human and physical capital, thus
perpetuating the cycle of inequality.

4.  In an explicit recognition of vertical and horizontal imbalances, the Indian
Constitution embodies enabling and mandatory provisions to address them
through the transfer the transfer of resources from the centre to the states.
 At present the financial relationship between the Union and the state governments
have undergone significant changes in recent years, they are as follows:
1. The abolition of the Planning Commission in January 2015 and the subsequent
creation of the NITI Aayog.
2. The fundamental changes in the revenue transfers from the centre to the state by
providing higher tax devolution to the states from the fiscal year 2015-16 based
on the recommendations of the 14th Finance Commission.
3. The Constitutional amendment to introduce GST and the establishment of the GST
council for the central and state governments to deliberate and jointly take
decisions.
 These changes have far reaching implications for the Union-State fiscal relations
and the provision of public services.

5. QUIZ TIME
 What do you mean by residual subjects ?
 When was the Planning Commission abolished ?
 State any two reasons for Horizontal imbalance.
 What is meant by a Vertical Imbalance ?
 Give any one reason for the different development levels of Indian states.

6. THANK YOU!