This basically arises because of the limited powers assigned to the States, which are almost totally dependent on the Centre for their financial requirements. With the rise of strong regional parties and the emergence of coalition governments at the Centre, the political situation has drastically changed. This is reflected in the fiscal relations between the States (often governed by the Regional Parties) and the Centre as well, with States governed by alliance parties of the ruling coalition at the Centre often getting a better deal as compared to opposition-ruled States. This has therefore assumed great importance in the allocation of Central Funds and for releasing grants-in-aid.  In this context, it is necessary for the Finance Commission to work out a fund allocation formula which is equitable and not dictated by political expediency. Certain buffer funds should also be available to meet exigencies like natural disasters, floods, famine, drought, etc. Further, the respective State Finance Commission's reports should be promptly made available to the Central Finance Commission to enable it to take specific demands of States into consideration while making the allotments.

            In fiscal matters the existing criteria to fix allocation are not adequate and foolproof. There is an urgent need to fix a fair and equitable basis to decide the financial allocation. The distribution and devolution of resources should be commensurate with the responsibilities to be discharged. The then Gadgil formula for distribution of Plan Assistance by the Centre to the States should undergo a change and warrants modification. In this connection the guiding principles to be followed in dividing financial powers between the Centre and the States have to be considered from the point of view of efficiency, economy, fiscal discipline and adequacy. What is the principle or distribution mechanism between the States and the Centre in the net proceeds of taxes? As it is, there is no permanent mechanism for determining the financial adjustment  sharing to be done depending upon the changing economy and social conditions. This has given elasticity in allocation of resources and avoided friction. Different Financial Commissions have followed different criteria in determining the principle of distribution. It is to be determined whether to go for a set of objective, acceptable criteria instead of depending upon adhoc and flexible criteria. For example, all four Southern States are classified as middle-income States. They contribute more than a quarter of the output in India. Their tax bases are increasing and their contribution to the Central taxes is growing correspondingly. But, their share of tax devolution and the grants-in-aid given by the Centre has been coming down. This has significantly dented their capacity to offer services. So, the pattern of fund transfers should be redesigned.

          Similarly, though the share of the Central taxes for poor and non-performing States has gone up, their relative growth has not increased. On the other hand, the share of good performing States such as Maharashtra, Gujarat and Tamil Nadu has dipped. The transfer of funds from the Centre to the States should be redesigned, so that non-performing States are not rewarded at the cost of those that are doing well.

As regards local bodies, there should be separate allocation of funds to the local bodies by the Finance Commission. Not only should it be monitored by the State Governments but, to make it more effective, the allotment of funds should also be channelised through the State Government.

            The 73rd and 74th Constitutional amendments establishing a third tier of Governance for rural and urban local bodies and the process of economic reform commencing in 1990 created a new situation. Deregulation, disinvestment and a more relaxed form of indicative planning entailed a loss of central power. With the rise of numerous local and State parties, an era of coalition governments has ensued, not only in many States but also at the Centre, making governance at the Centre a far more federal enterprise than hitherto.

            The need of the hour is to establish a truly federal system ensuring co-operation and harmonious relationships between the Union Government and the States.  The All India Anna Dravida Munnetra Kazhagam firmly believes that by granting maximum possible fiscal autonomy to the States a much stronger India would emerge.