Federalism and India’s human capital

  • IASbaba
  • February 25, 2021
  • 0
UPSC Articles
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  • GS-2: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein. 

Federalism and India’s human capital

Context: Investing in human capital through interventions in nutrition, health, and education is critical for sustainable growth.

India’s Human Capital

  • In the World Bank’s Human Capital Index, the country ranked 116th. 
  • The National Family Health Survey-5 for 2019-20 shows that malnutrition indicators stagnated or declined in most States. 
  • The National Achievement Survey 2017 and the Annual Status of Education Report 2018 show poor learning outcomes. There is little convergence across States.
  • India spends just 4% of its GDP as public expenditure on human capital (around 1% and 3% on health and education respectively) — one of the lowest among its peers.

Various government initiatives in this regard -like Mission Poshan 2.0’ and the Samagra Shiksha Abhiyan – are not leading to better outcomes. One reason may be India’s record with decentralisation. 

  • Globally, there has been a radual shift in the distribution of expenditures and revenue towards sub-national governments. 
  • These trends are backed by studies demonstrating a positive correlation between decentralisation and human capital.
  • In recent years, India has taken some steps towards decentralisation. The Fourteenth Finance Commission increased the States’ share in tax devolution from 32% to 42%, which was effectively retained by the Fifteenth Finance Commission.


  • Lack of Devolution of Powers: Many States do not clearly demarcate or devolve functions for panchayats and municipalities 
  • Disparities in role of Local Bodies: The 73rd and 74th Amendments bolstered decentralisation by constitutionally recognising panchayats. However, the Constitution lets States determine how they are empowered, resulting in vast disparities in the roles played by third-tier governments.
  • Issue with Article 282: Article 282 of the Constitution is listed as a ‘Miscellaneous Financial Provision’, unlike Articles 270 and 275, which fall under ‘Distribution of Revenues between the Union and the State. Article 282 is normally meant for special, temporary or ad hoc schemes.
  • Issue with Centrally Sponsored Schemes (CSSs): These typically have a cost-sharing model, thereby pre-empting the States’ fiscal space. 
  • Third-tier governments are not fiscally empowered. The collection of property tax, a major source of revenue for third-tier governments, is very low in India (under 0.2% of GDP, compared to 3% of GDP in some other nations).
  • Institutional Failure: Many States have not constituted or completed State Finance Commissions (SFCs) on time.

Way Ahead

  • Centre should play an enabling role, for instance, encouraging knowledge-sharing between States. 
  • For States to play a bigger role in human capital interventions, they need adequate fiscal resources.
  • States should rationalise their priorities to focus on human capital development. 
  • The Centre should refrain from offsetting tax devolution by altering cost-sharing ratios of CSSs and increasing cesses.
  • Heavy reliance on CSSs should be reduced, and tax devolution and grants-in-aid should be the primary sources of vertical fiscal transfers.
  • Panchayats and municipalities need to be vested with the functions listed in the Eleventh and Twelfth Schedules.


  • Leveraging the true potential of our multi-level federal system represents the best way forward towards developing human capital.

Connecting the dots:

  • Competitive and Cooperative Federalism

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