Geopolitical Shocks and the Resilience of India’s Fiscal Federalism

The implications for the social sector are profound. Under the Indian Constitution, states are responsible for the lion's share of public expenditure in critical areas like health, education, and rural development. When global disruptions occur, these essential services often face funding cuts or stagnation. This creates a governance paradox: the level of government closest to the citizens is the least equipped to protect them from the fallout of global headwinds. Furthermore, the increasing reliance of the Union on cesses and surcharges—which are not shared with the states—further diminishes the effective divisible pool of taxes. To strengthen the federal structure, experts suggest the need for 'shock-absorber' mechanisms within the fiscal framework. This could include more flexible borrowing limits under the FRBM Act during periods of global volatility or a dedicated fund to insulate state-level social spending from external economic shocks. Strengthening the role of the Finance Commission in addressing these emerging 'global-to-local' fiscal risks is also essential for maintaining the stability of the Indian Union. UPSC Relevance: This topic is vital for GS Paper II (Polity) and GS Paper III (Economy) as it explores the evolving nature of Union-State financial relations. It provides a contemporary lens on fiscal decentralization, the challenges of the GST regime, and the impact of global geopolitics on domestic social sector spending.