Federalism, Funding, and Autonomy: Navigating India’s Governance Challenges
Introduction
The Indian federal system is a dynamic and complex arrangement where power, funds, and responsibilities are shared among the Centre, states, and local bodies. However, tensions often arise when the Centre seeks to influence state policies through conditional funding, and in turn, states impose similar restrictions on municipalities. The controversy surrounding Tamil Nadu’s opposition to the National Education Policy (NEP) 2020 and the Centre’s subsequent withholding of ₹3,796 crore in funds brings this issue into sharp focus. At the same time, the failure of the Smart Cities Mission highlights the mismanagement and inefficiencies in urban governance, revealing how state governments often neglect their municipalities. The problem, therefore, is not merely one of Centre-state relations but a multi-layered governance failure. This essay examines the interwoven themes of conditional federalism, state autonomy, urban governance, and performance-based funding, ultimately arguing that a more cooperative and competitive model is necessary for equitable development.
The Politics of Conditional Federalism: Tamil Nadu vs the Centre
Tamil Nadu’s opposition to the NEP 2020 stems from its historical resistance to Hindi imposition, dating back to the anti-Hindi agitations of 1965. The NEP recommends a three-language formula, which Tamil Nadu sees as an indirect attempt to promote Hindi at the expense of Tamil linguistic identity. The DMK-led government has categorically rejected the policy, reaffirming its long-standing two-language system (Tamil and English), which has been credited with contributing to the state’s high literacy rates and global employability.
The Centre, however, argues that the NEP is flexible and not compulsory. Yet, by tying ₹2,152 crore in Samagra Shiksha Abhiyan (SSA) education funds to the policy’s adoption, the Union government is seen as coercing compliance through financial means. This raises serious concerns about fiscal federalism. While Article 282 of the Indian Constitution allows discretionary grants, the spirit of cooperative federalism suggests that states should have greater autonomy in deciding education policies without financial penalties. Critics argue that such conditional grants violate the principles outlined in the Sarkaria Commission Report, which warned against excessive centralisation of financial power.
The issue here is not just about language policy but about the broader tendency of the Centre to use financial leverage to influence state policies. Tamil Nadu is not alone in its concerns—West Bengal has also rejected the NEP, though it managed to avoid financial penalties through political negotiations. This contrast shows that the problem is not merely legal but political, with financial power being used as a tool for policy enforcement.
Urban Governance Failures: The Smart Cities Mission as a Case Study
While states criticise the Centre for imposing financial conditions, they themselves often restrict urban local bodies (ULBs) from functioning independently. The Smart Cities Mission, launched in 2015, was meant to transform urban governance and infrastructure across 100 cities. However, as of 2025, about 7% of the projects remain incomplete, and many cities have failed to utilise funds effectively.
One major flaw in the mission’s implementation is the reliance on Special Purpose Vehicles (SPVs), which bypass elected municipal councils, contradicting the 74th Constitutional Amendment that empowers ULBs. In Tamil Nadu, for example, only 28% of smart cities submit audited financial statements, and 39% lack climate action plans. Such mismanagement points to a deeper governance failure, where state governments fail to devolve power and resources to local bodies.
A 2024 Parliamentary Standing Committee report criticised the Smart Cities Mission for “reckless spending” and lack of accountability. The Comptroller and Auditor General (CAG) noted that Tamil Nadu’s ULBs have unresolved financial audits dating back to 2004–05, highlighting serious transparency issues. This is in stark contrast to cities like Indore, which have consistently ranked #1 in cleanliness and urban management due to better financial discipline and citizen engagement.
The lesson here is that decentralisation must not stop at the state level—municipalities must also be empowered to govern effectively. If states demand autonomy from the Centre, they must also extend the same autonomy to cities and towns.
Balancing Autonomy and Accountability: A Path Forward
To resolve these governance challenges, India must embrace a model that balances autonomy with accountability. Three key strategies can help achieve this balance:
- Competitive Federalism and Performance-Based Funding
Instead of imposing strict conditions on grants, financial support should be linked to performance. Just as the central government expects states to follow national policies in return for funding, states should also encourage cities to improve governance by rewarding efficiency. A competitive ranking system could evaluate cities based on key factors such as financial transparency, infrastructure development, environmental sustainability, and citizen satisfaction. Cities that perform well would receive additional funding and technical assistance, while those struggling would be given structured support to help them improve. This method would create a fair and transparent system, where cities strive to enhance their administration and services to secure better financial aid. By linking funding to measurable progress rather than forcing policies, this approach would encourage accountability and self-improvement at every level of governance, leading to better urban development and a higher quality of life for citizens.
- Strengthening Urban Local Bodies
For cities to function effectively, they need real financial and administrative autonomy. Kerala provides a successful model—through its People’s Plan Campaign, nearly 40% of state funds are allocated directly to local bodies, ensuring grassroots participation in governance. Similarly, Chennai’s recent ₹500 crore green municipal bond initiative shows that cities can independently raise funds if given the right policy environment.
- Cooperative Federalism: From Conflict to Collaboration
Instead of using funds as a coercive tool, the Centre and states should engage in meaningful dialogue to resolve policy differences. The NITI Aayog could facilitate structured negotiations where states propose alternatives to national policies while ensuring alignment with overall development goals. A system of “policy flexibility grants” could allow states some leeway in implementing national programmes in ways that suit their regional needs.
Conclusion
The Centre-state conflict over the NEP 2020 and Tamil Nadu’s withheld funds is not an isolated case but part of a larger pattern where financial power is used to enforce policy compliance. However, states are not entirely innocent either—they often centralise power within their own jurisdictions, depriving cities of the autonomy needed for effective governance. The failure of the Smart Cities Mission exemplifies this contradiction, where local bodies remain underfunded and poorly managed.
A more balanced approach is needed—one that encourages both cooperative and competitive federalism. By linking funds to performance rather than policy compliance, decentralising power to urban local bodies, and fostering structured negotiations instead of financial coercion, India can create a governance system that is both efficient and equitable. The future of Indian federalism depends not on rigid hierarchies but on dynamic, adaptive governance that empowers every level of government—from the Centre to the states to the cities.
