Exploring Fields of Partnership in Union-State Government Collaboration

When a country as vast and diverse as India tries to deliver roads, schools, hospitals, and jobs to 1.4 billion people, no single level of government can do it alone. The Union and State governments must work together, sharing powers, responsibilities, and resources across several fields. This partnership is neither automatic nor simple. It plays out in tax rooms, policy drafts, state secretariats, and panchayat offices, shaping how citizens experience governance every single day.

Why partnership between Union and States matters 🔗

The Constitution divides powers between the Union and the States through the Seventh Schedule, which contains the Union List, State List, and Concurrent List. But the division of powers is only the starting point. What matters in practice is how both levels coordinate on money, policy, and administration. As the Supreme Court affirmed in the S.R. Bommai case (1994), states are equal partners in governance, not mere agents of the Centre. This idea of cooperative federalism runs through every field of partnership we discuss below.

Partnership is essential because responsibilities are asymmetric. The Centre collects the lion’s share of taxes, while states carry most of the spending load. State expenditure is more than 75 per cent of the combined union-state expenditure in key sectors like education, health, and agriculture – as high as 85 per cent in education. Without structured partnership, this mismatch would paralyse service delivery.

Revenue assignment: who gets to tax what 🔗

The first major field of partnership is revenue assignment – deciding which tax belongs to which level of government. The Constitution attempts a clean separation so that the same activity is not taxed twice. Article 246 provides separate legislative heads of taxation to the Centre and the States, and taxes listed in the Union List are leviable by the Centre exclusively.

The guiding principles 🔗

Three principles guide how taxes are assigned. The first is efficiency – taxes with a wide, mobile base (like income tax or customs) are better handled by the Centre, because states would otherwise compete and distort markets. The second is equity – the Centre is better placed to redistribute resources from richer to poorer regions. The third is administrative feasibility – local taxes like property tax or land revenue work best at state or local level because that is where the information and enforcement sit.

How devolution actually works 🔗

Since revenue-raising powers are concentrated at the Centre, the Constitution provides for sharing. The Finance Commission, a constitutional body appointed every five years, recommends how central taxes should be shared with states and how grants-in-aid should flow. The 14th Finance Commission raised states’ share in the central divisible pool of taxes from 32 per cent to 42 per cent, boosting their fiscal autonomy. The 16th Finance Commission, chaired by Arvind Panagariya, will assume office on 1 April 2026 for a five-year period and will once again redraw the fiscal partnership.

The Goods and Services Tax experiment 🔗

The most radical innovation in revenue partnership is the Goods and Services Tax (GST), introduced through the 101st Constitutional Amendment in 2017. Before GST, the allocation of tax powers was rooted in a principle of separation with a clear distinction between the jurisdiction of each level; GST gave concurrent powers to both the Centre and State governments to levy the tax. The GST Council, where the Centre and all states sit together, is now the nerve centre of this shared tax. While GST has simplified the indirect tax system, it has also reduced state autonomy over tax rates and caused revenue shortfalls that states regularly raise with the Centre.

Fiscal needs: matching money to mandates 🔗

Even a well-designed tax assignment cannot eliminate the vertical fiscal imbalance – the mismatch between what states spend and what they earn. Partnership must therefore include a mechanism to transfer money downward while keeping states accountable for outcomes.

The vertical gap 🔗

India’s vertical fiscal imbalance is large and persistent. States’ reliance on central transfers has grown, with 23 to 30 per cent of states’ total revenue coming from central transfers between FY16 and FY25, up from 20 to 24 per cent in the preceding fifteen years. Several factors drive this dependence – rising social sector costs, debt servicing, and state-specific disasters. States currently spend over 60 per cent of public expenditure on health, education, and infrastructure but only retain 41 per cent of the tax collections.

Grants, cess, and the politics of transfers 🔗

Transfers from the Centre take three broad forms – tax devolution recommended by the Finance Commission, grants-in-aid under Article 275, and discretionary grants under Article 282, including those routed through Centrally Sponsored Schemes. Each form carries its own tension. A growing concern is the rise of cess and surcharges, which the Centre does not share with states. The share of cess and surcharges grew from around 5.9 per cent of the Union government’s tax revenue in 2015-16 to 10.8 per cent in 2023-24. This effectively shrinks the divisible pool, even as states’ responsibilities expand.

Accountability in spending 🔗

Partnership is not just about sending money; it is about making sure the money reaches its purpose. The Fiscal Responsibility and Budget Management (FRBM) Act requires both the Centre and states to follow deficit and debt targets. Conditionalities attached to central grants are designed to push states toward reforms in health, education, power, and urban services. The trade-off is between state autonomy and national priorities – too many conditions reduce states to implementing agencies, while too few conditions weaken accountability.

Industrial policy reforms: a shared agenda for growth 🔗

Industrial policy is perhaps the most visible arena where Union-State partnership shapes economic outcomes. Since the historic reforms of 1991, the basic philosophy has been to reduce bureaucratic control and invite private investment. But implementation depends on both levels of government pulling in the same direction.

The 1991 reset 🔗

The New Industrial Policy of 1991 was a turning point. It abolished the License Raj by removing licensing restrictions for all industries except for eighteen related to security, strategic concerns, social reasons, safety, or overriding environmental issues. Foreign direct investment was opened up, public sector monopolies were dismantled, and the MRTP regime that capped the size of large companies was scrapped. These reforms were led by the Centre, but their success depended on states clearing land, providing power, and approving projects quickly.

Deregulation and incentives 🔗

Industrial policy today works through a combination of deregulation and targeted incentives. Modern industrial policy uses financial incentives such as production-linked incentives, subsidies, tax exemptions, favourable laws, and infrastructure or R&D expenditure by the government. Programmes such as Make in India, Startup India, and the Production Linked Incentive scheme are designed at the Centre but land in states. A state’s willingness to offer single-window clearances, competitive land rates, and dependable power supply determines whether a factory comes up in Gujarat, Tamil Nadu, or Odisha.

Competitive and cooperative federalism 🔗

Industrial policy has produced two dynamics at once. On the one hand, states now compete to attract investment – publishing their own industrial policies, offering tax holidays, and wooing global companies. On the other hand, large projects such as the Delhi-Mumbai Industrial Corridor require coordination across multiple states. Cities and regions along the Delhi-Mumbai Industrial Corridor are being developed as investment centres in partnership with State Governments. This is cooperative federalism in action – a shared infrastructure project that no single state could deliver alone.

Administrative decentralisation: building capacity at every level 🔗

Money and policy mean little if the administrative machinery cannot deliver. The fourth field of partnership is administrative decentralisation – transferring not just functions but also the capacity to perform them to state and local governments.

From functions to functionaries 🔗

The 73rd and 74th Constitutional Amendments of 1992-93 formally empowered panchayats and municipalities and made them the third tier of government. But as scholars have long noted, transferring subjects on paper is easier than transferring funds, functions, and functionaries – the famous “3 Fs”. According to a Reserve Bank of India report, local bodies generate only 30 per cent of their expenses and rely heavily on state government transfers and grants. Without revenue autonomy, local decision-making remains shallow.

Civil service reform as a partnership task 🔗

Administrative decentralisation also requires reforming the civil service itself. The Second Administrative Reforms Commission, the Surinder Nath Committee, and NITI Aayog have all recommended recruitment reforms, domain specialisation, performance-linked promotions, and better training. Mission Karmayogi recognises that governance today requires adaptability and innovation, and initiatives like National Learning Week are extending this culture of capacity building to states, districts, municipalities and panchayats. Since recruitment, training, and posting are split between the Union Public Service Commission, state public service commissions, and local cadres, capacity-building is a joint responsibility.

Improving social service delivery 🔗

The real test of administrative decentralisation is whether citizens actually receive better schools, health centres, drinking water, and social security. Joint programmes like the Jal Jeevan Mission, Ayushman Bharat, and the National Health Mission are designed at the Centre, financed jointly, and implemented by states and districts. Their success depends on trained staff, working information systems, community oversight, and quick feedback loops between the three tiers.

Resistance and the road ahead 🔗

Decentralisation has its opponents within the system. The Administrative Reforms Commission observed that over 60 per cent of civil servants resist the devolution of power to local self-governments. Overcoming this resistance requires not just rules but also incentives – reward structures, career tracks for municipal cadres, and genuine political support for mayors and panchayat presidents.

Making the partnership work 🔗

Looking across these four fields – revenue assignment, fiscal needs, industrial policy reforms, and administrative decentralisation – a clear pattern emerges. Effective Union-State partnership rests on three foundations. First, a clear division of roles that minimises overlap and duplication. Second, reliable fiscal arrangements that match revenue means to spending responsibilities. Third, institutional mechanisms like the GST Council, the NITI Aayog Governing Council, and the Inter-State Council that provide forums for dialogue, negotiation, and dispute resolution.

When these foundations are in place, partnership produces tangible benefits – faster growth, better public services, and citizens who feel that governance is responsive to their needs. When they break down, the costs are felt in delayed projects, underfunded schools, and angry politics. For a country of India’s scale and diversity, getting this partnership right is not a technical exercise. It is the daily work of democracy.

What do you think? If you had to choose one reform to strengthen Union-State partnership in India – a bigger share for states in the divisible pool, deeper administrative decentralisation to local bodies, or a more predictable industrial policy framework – which would you pick, and why? And do you think cess and surcharge revenues should be shared with states on the same terms as regular taxes?

References

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