The Finance Commission, established under Article 280, serves as a constitutional bridge between the Centre and states, operationalizing cooperative federalism through equitable resource distribution and collaborative fiscal governance.

Promoting Cooperative Federalism

1. Constitutional Mandate: Recommends principles for distributing the divisible pool of taxes between Centre and states, embodying fiscal federalism enshrined in the Constitution.
2. Participatory Process: The 16th Finance Commission actively engages with states to gather devolution suggestions, demonstrating inclusive dialogue rather than unilateral Centre decisions.
3. Revenue Deficit Management: The 15th FC recommended ₹3 lakh crore revenue deficit grants to 17 states (2021-26), enabling weaker states to maintain essential services.
4. Equalization Principle: Uses criteria like income distance, area, and population to ensure horizontal devolution addresses regional disparities while promoting balanced development.
5. Institutional Dialogue: Regular consultations with state governments create platforms for federal negotiation rather than Centre-state confrontation on fiscal matters.

Recent Developments in Federal Cooperation

1. Goa’s Devolution Proposal (January 2025): Suggested increasing states’ share from 41% to 50% in vertical devolution, showing institutional channels for fair resource negotiation.
2. SDG Integration: Goa proposed 12.5% weightage for SDG compliance in horizontal devolution, illustrating multi-dimensional development priorities beyond income measures.
3. Tax Effort Recognition: Proposal to increase tax effort weightage from 2.5% to 5% incentivizes fiscal responsibility while maintaining federal equity.
4. Cesses Cap Demand: States requesting limits on Centre’s cesses reflects concerns about parallel revenue mobilization affecting state shares.
5. Performance-Based Allocation: Recent emphasis on linking devolution to governance indicators promotes healthy competition among states.

The Finance Commission operationalizes Articles 268-293 (taxation powers), converting constitutional federalism into functional fiscal architecture. It ensures resource scarcity doesn’t undermine state governance while maintaining macroeconomic stability through collaborative federal mechanisms.