Impact of the new economic measures on fiscal ties between the union and states in India.

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90 min

1,000–1,200 words

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Reading the topic

In 2017 the new economic measures meant GST, demonetisation, the replacement of the Planning Commission by NITI Aayog and higher tax devolution under the 14th Finance Commission. The examiner wants an assessment of how these changed the balance of fiscal power between the Union and the states, read today through the GST Council's working, the end of compensation, cesses and the 16th Finance Commission.

ThesisThe post-2015 measures created a more pooled and negotiated fiscal federalism, but states gave up tax autonomy in return for transfers whose predictability they now question.

Dimensions to cover

1Tax autonomy: GST subsumed most state indirect taxes, so states lost the power to set rates independently and depend on a collective forum where the Union holds a third of the votes
2Transfers: the 14th Finance Commission raised the states' share of the divisible pool to 42 percent, and the 15th set it at 41 percent after Jammu and Kashmir's reorganisation
3Cesses and surcharges: these sit outside the divisible pool, so their growing share lets the Union keep revenue that states cannot claim
4Compensation: GST compensation to states ended in June 2022, exposing manufacturing states to revenue loss under a destination-based tax
5Planning and grants: NITI Aayog has no grant-giving power, which shifted discretionary transfers towards centrally sponsored schemes with conditions attached
6Borrowing: disputes over Union limits on state borrowing show that fiscal tension has moved from tax sharing to control over debt

Counter-view

Some argue states have gained, since devolution rose and GST revenues grew strongly. The essay should accept higher transfers but show that autonomy and predictability, not just quantum, decide the health of fiscal federalism

Open and close

Open: Begin with a state finance minister in a GST Council meeting arguing for a rate cut on a local product, realising she can no longer decide it alone in her own assembly
Close: Close by arguing that trust-based fiscal federalism needs cesses brought into the divisible pool, predictable transfers and a stronger state voice in the Council

Where marks usually go

Writing a GST explainer without discussing its effect on Union-state fiscal balance
Treating the topic as frozen in 2017 and ignoring the end of compensation and recent Finance Commission rounds
Making unsupported claims about the 16th Finance Commission's numbers instead of describing its role

Examples that fit

CaseThe 101st Constitutional Amendment, 2016 inserted Article 279A creating the GST Council, which pooled Union and state taxing power and introduced voting with weighted shares.Constitution (One Hundred and First Amendment) Act, 2016
CaseIn Union of India v Mohit Minerals (2022) the Supreme Court held GST Council recommendations are persuasive rather than binding, affirming that both levels retain legislative power.Supreme Court of India, Union of India v Mohit Minerals Pvt Ltd, 2022
CaseKerala's suit under Article 131 against Union limits on its borrowing was referred to a Constitution Bench in 2024, showing debt control as a new fault line.Supreme Court of India, State of Kerala v Union of India, order of April 2024
CurrentThe September 2025 GST rate rationalisation into mainly two slabs was approved in the GST Council, illustrating that major tax changes now need Union-state consensus.GST Council, 56th meeting press release, September 2025
HistoryThe November 2016 demonetisation hit cash-based informal activity and tax flows, showing how a Union decision can affect state economies without state consultation.Reserve Bank of India Annual Report 2017-18