A superb note on the topic by Govind Rao and Nirvikar Singh.

The idea of building fiscal union in Europe and sharing examples from other countries is being keenly discussed. This blog has expressed deep interest in the subject from an Indian perspective.

Here is a superb paper on how fiscal federalism in India is asymmetric. What does asymmetric mean:

“Asymmetric federalism” is understood to mean federalism based on unequal powers and relationships in political, administrative and fiscal arrangements spheres between the units constituting a federation. Asymmetry in the arrangements in a federation can be viewed in both vertical (between centre1 and states) and horizontal (among the states) senses. If federations are seen as ‘indestructible union of indestructible states’, and centre and states are seen to exist on the basis of equality; neither has the power to make inroads into the defined authority and functions of the other unilaterally. However, such ‘purists’ view of federalism is rarely, if at all, seen in practice. Even when the constitution guarantees near equal powers to the states, in the working on federal systems centre dominates in political, administrative, as well as fiscal spheres.There is considerable volume of literature on central domination in Indian federalism in the assignment system in the constitution and central intrusion into the states’ domains in the working of the federation.

Unlike the classical federations like the USA, Indian federation is not an ‘indestructible union of indestructible states’. Only the union is indestructible and the states are not. Article 3 of the Constitution vests the Parliament with powers to constitute new states by separating territories from the existing ones, alter their boundaries, and change their names. The only requirement for this is that the `Bill’ for the purpose will have to be placed in the Parliament on the recommendation of the President and after it has been referred to the relevant state legislature for ascertaining their views (their approval is not necessary). The federation is not founded on the principle of equality between the union and states either. The central government in India has the powers, and it actually does invade the legislative and executive domains of the states (Chanda, 1965; Rao and Sen, 1996; Rao and Singh, 2000). However, the nature and basis of relationship between the centre and states is not the objective of this paper.

The paper looks at this asymmetric federalism in India:

The focus of this paper is the usually understood aspect of asymmetry in fiscal arrangements in Indian federalism, namely, unequal arrangements and special treatments for some units within a federation. Such an arrangement is quite feasible in an arrangement evolved from bargaining and accommodation. It may also be desirable to have special powers and asymmetric arrangements to accommodate diverse group interests and identity and therefore, has an important role in ‘coming together’ federalism as well as ‘holding together’ federalism. But such accommodation can only be at the margin and cannot violate the basic fabric of equality and fair treatment of jurisdictions. This would also require transparency in the arrangements.

In India asymmetry is both rules based and discretionary:

It is important to make a distinction between unequal arrangement or asymmetry that are (i) transparent and rule based

evolved to facilitate the smooth functioning of the federation; and (ii) those that are opaque and discretionary caused by the balance administrative and political power and expediency. The first may be built into the constitutional arrangement itself or may be evolved through conventions for the smooth functioning of the federation. This type of asymmetry is transparent and rule based and play an important role in building the nation. In contrast, the second type of asymmetry can simply be the result of administrative and political power play in a federation. In India for example, the dynamics created by the end of single party rule in the centre and states, emergence of coalition government at the centre, and regional domination of regional parties in the coalition and welding power in the states can create asymmetries in the functioning of the federation on political considerations. This can have serious repercussions for the future of federalism.

A must read paper.