Experts Explain | India’s federalism challenges, and how consensus building is the way forward
To address these serious challenges, the more powerful Centre needs to engage with the states through the democratic processes of wide consultation, accommodation, compromise and self-restraint.
The growing democratic deficit and rising fiscal transfers are in some ways only symptoms or manifestations of the challenges facing Indian federalism. Photo: File This is the first of two pieces on the federalism debate. It draws upon the authors’ recent book A Sixth of Humanity: Independent India’s Development Odyssey, especially Chapters XIV and XV.
Contentiousness has marked discussions around the recently defeated Constitutional Amendment Bill. But that has been true of the evolution of federalism since Independence, not least because federalism has been a critical instrument of nation-building. From the centralisation turn in the constitutional design in the aftermath of the horrors of Partition, to the never-ending debates on vertical and horizontal devolution in fiscal federalism, to the centralising effects of the Planning Commission, to the misuse of Article 356 and dismissal of state governments by the Centre and imposition of President’s Rule, to the partisan role of Governors, the language imbroglio, delimitation and the distribution of seats in Parliament, federalism has been a work in progress and never set in stone.
Our recent book, A Sixth of Humanity, which looks back on 75 years of India’s development journey, sheds light on some of these issues. It quantifies two proximate challenges, identifies the two deeper causes and ends with one anecdote that is both revealing and instructive for India’s politicians.
Proximate challenge 1. Rising democratic ‘deficit’
In democracies, equal citizenship requires that each citizen’s vote should have the same weight. As populations shift, periodic adjustments in the distribution of seats, both across states (between states with slower and more rapid growing populations) as well as within states (between slower growing rural areas and faster growing urban areas) is needed to ensure this equality. But principles in the abstract need to be adjusted with the pragmatism of political wisdom.
Constitutional amendments in 1976 and again in 2002, froze political representation on the basis of the 1971 Census until the first Census after 2026. As a result, as Figure 1 indicates, the “democratic deficit” — the gap between a state’s population share and its seat share — had grown from a relatively small amount in 1991 to such an extent that even in the 2024 elections, the four Southern states (Andhra Pradesh, Kerala, Tamil Nadu and Telangana) would have had 23 fewer seats and the four Northern states (Bihar, Madhya Pradesh, Rajasthan, and Uttar Pradesh) 31 additional seats had these been determined by the latest population estimates.
Figure 1 highlights that the problems are most acute between the Southern states (and to some extent the East) on the one hand and the Hindi heartland on the other, because fertility has diverged most sharply between these groups (the South and West Bengal are at or below replacement fertility rates). The West and North have had a stable share of the overall population, while that of the South has declined and that of the Hindi heartland has risen.
Figure 1. Wedge Between Actual Political Representation and Representation (Excess or deficit in number of Lok Sabha seats relative to population). Note: For every election shown on the x-axis, we calculate the difference between actual Lok Sabha seats allocated for each state and the seats it would have got based on its population share (from the most recent census). The figure presents this difference aggregated to the level of regions. For 2024, the government’s population projections for 2023 have been used.
Proximate challenge 2. Rising fiscal transfers
In a federal polity, fiscal resources would be generated and allocated across states in line with economic size and performance. In reality, this will and should never happen, and some redistribution will be essential. Transfers from richer to poorer states to ensure broadly comparable access to public goods and services to all citizens are a key instrument of nation-building. But redistribution that is open-ended and rising continually is an invitation to resentment and discontent.
Figure 2 plots the difference between a state’s contribution to the tax base and what it receives by way of Finance Commission transfers. An index greater than 1 implies a state is a beneficiary, while an index smaller than 1 implies it is a donor. In the early 1960s, the spread between the index was small. The Hindi heartland, for example, got 20 per cent more resources than the size of its economy. The South and West got 20 per cent less.
But because of growth divergence and highly redistributive policies, by 2023, the Hindi heartland received 90 per cent more Finance Commission resources relative to its economic base/contribution, while the South and West received about 44 and 58 per cent less, respectively, than their contribution. The wedge between contributors and beneficiaries has grown sharply over six decades, especially in the new millennium.
It is important to note that the biggest contributors are not the Southern states but Gujarat, Maharashtra and Haryana; and that Odisha and West Bengal are also significant beneficiaries.
Figure 2. Wedge between Economic Contribution and Finance Commission Transfers (Index). Note: Index is the ratio of share in fiscal resources and share in gross state domestic product; index greater than 1 denotes net beneficiary, while index lower than 1 denotes net donor.
The growing democratic deficit and rising fiscal transfers are in some ways only symptoms or manifestations of the challenges. There are two, deeper causes.
Deeper cause 1. Divergent performance
One of the key, underlying problems afflicting federalism discussions has been the sharply divergent performance of the states, relating to fertility and economics, the latter shown in Figure 3.
Figure 3. Relative Economic Performance of States, 1960-2020 (Per capita GDP relative to Indian average in per cent). Source: Kapur and Subramanian (2025)
Since 1980, per capita gross domestic product (or GDP, proxy for standards of living and economic performance) in the South, West and Haryana has grown almost as rapidly as China and for as long and they have pulled away from the Hindi heartland states (and West Bengal). Any federal system would find it challenging to address such divergence, because the high stakes touch upon political representation and economic redistribution and are not easily reconcilable. The challenge is further heightened by the perception that contributing states are being penalised for their over-performance (on demography and economics) while the receiving states are being rewarded for the under-performance (as shown in Figure 2).
Deeper cause 2. Erosion of democratic sensibility
The elephant in the room, aggravating the challenges of fiscal federalism, is the growing divisiveness of Indian politics. From demonetisation to farm laws to the Citizenship Amendment Act, 2019, to the replacement of the Indian Penal Code with the Bharatiya Nyaya Sanhita to the Special Intensive Revision electoral changes and the introduction of the recent Constitutional Amendment Bill, the ruling party has acted unilaterally with minimal consultation and little respect for the democratic processes of wide consultation, accommodation, compromise and self-restraint.
Instead of treating politics as electoral competition, it is increasingly viewed as an existential battle to vanquish enemies. Cooperative federalism — the bedrock of nation-building — is curdling into contentious, even combative, federalism. This has led to mounting grievances — in Kashmir, Ladakh, Manipur, the South, and amongst religious minorities. The single biggest casualty is the erosion of the most potent and indispensable, if elusive, force of nation-building — trust — whether among citizens, between the state and citizens, between the Centre and states, and between states.
What is democratic sensibility? Around 2018, the Finance Minister of Kerala, T M Thomas Isaac, politely asked to walk out of the GST (Goods and Services Tax) Council meeting because he was in a minority of one relative to the consensus on gambling taxation. The Council could easily have moved forward because it was the Centre plus 28 states against one state, and that too a state in opposition to the ruling party at the Centre.
Instead, the then Union Finance Minister, Arun Jaitley, went out of his way to cajole him back and accommodate his position even while juggling to maintain the delicate compromise amongst the other 28 finance ministers. Kerala came on board. Unanimity was preserved. India triumphed.
Solutions galore — new compacts, grand bargains, complex voting principles, revised fiscal transfer arrangements — have been offered in the last few weeks to address the serious challenges of Indian federalism. But if performance diverges within India, no solution will succeed without the embrace of a basic democratic sensibility, especially on the part of the Central government which has the preponderance of power. With it, workable solutions will be possible for even the most exigent challenges. Without it, even simple problems risk spiralling into crises. Democratic sensibility prevents a dominant government from becoming domineering.
Devesh Kapur is a political scientist and the Starr Foundation Professor of South Asia Studies at the Johns Hopkins University School of Advanced International Studies, Washington DC.
Arvind Subramanian is an Indian economist and the former Chief Economic Advisor to the Government of India (2014-18). He is currently a Senior Fellow at the Peterson Institute for International Economics, Washington DC.
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