The Political Economy of Fiscal Federalism and the Indian Judiciary – Law School Policy Review
Riya Yadav
Source: Magnific
Abstract: Indian judiciary operates under a single constitutional mandate but rests on a fragmented financial base, with states funding the overwhelming share of court expenditure, this creates significant funding disparities. With sector-specific grants recently discontinued, a formula-based devolution mechanism linking judicial financing to caseload, is the need of the hour.
Introduction
Fiscal federalism is the distribution of taxation and expenditure responsibilities across different levels of government. This article examines how fiscal federalism affects the judiciary, in which the Constitution assigns a single, nationwide mandate to courts but leaves their financing largely to state governments, each of which governs through its own fiscal capacity and spending priorities. This division is not strictly rule-based, but political economy factors shape how the Centre, the states, courts, and citizens bargain, negotiate, and make decisions under uncertainty, often without a fixed rulebook to follow. The analysis is important because judicial financing is not merely a technical exercise to divide revenue and responsibilities, but is equally shaped by political bargaining, institutional incentives, and the relative power of governments within the federal system.
As of 2024-25, 93.56% of India’s total judicial expenditure comes from the state governments, while the Centre spends just 6.43%. Overall, expenditure on the judiciary amounts to only 0.13% of India’s GDP, well below the global median of 0.27%, as reported by the World Bank (2024). This isn’t a one-off finding; the India Justice Report repeatedly confirms that no state or Union Territory, other than Delhi, spends even 1% of its budget on the judiciary, with average national spending recorded as low as 0.08% of GDP in earlier years.
Two imbalances can be identified here: a vertical one, between who raises revenue and who bears the spending burden, and a horizontal one, between states with unequal capacity to fund their courts. The Sixteenth Finance Commission, by discontinuing sector-specific grants, may further weaken earlier efforts to narrow inter-state disparities in judicial spending, since the judicial infrastructure funding category is not retained for the 2026-31 award period. This article examines that shift by analysing the vertical and horizontal imbalances in judicial financing separately, and proposes reforms designed to work in the absence of such grants.
Vertical Imbalance: Examining the Centre-State Contribution Ratio
Vertical fiscal imbalance refers to the mismatch between levels of government, e.g., the Centre having greater revenue-raising capacity (income tax, GST) relative to its spending responsibilities, while states have heavier spending obligations (health, education, social services) relative to their own revenue mechanisms. As shown in Figure 1.1, in 2022-23 states spent roughly six times more than the Centre on judiciary, but by 2024-25, that gap stood at nearly four-and-a-half times. This shows a structural imbalance whereby the Centre legislates, while states finance the institutions responsible for delivering on that mandate. The split is clearly visible under Article 229(3) of the Indian Constitution, where the Consolidated Fund of the State bears High Courts’ administrative expenses such as salaries, allowances and pensions of their staff. The State bears the cost but only collects court fees in return, not tax revenue. Under the Shirur Mutt test, a fee is a charge for a special service rendered to individuals by some state agency, while a tax feeds the general exchequer. Thus, the State has the primary financial obligation to maintain the judiciary, even though the Centre enacts the laws that courts are responsible for enforcing.
Figure 1.1; Source: Union Budget Demand No. 65 (Centre); India Justice Report, Budgets for Justice (2025) (State, 11 states only).
This systemic contradiction led to Chief Justice N.V. Ramana’s proposal to establish the National Judicial Infrastructure Corporation (NJIC), a central body to plan, budget, and allocate funds contributed by both Centre and States for trial court infrastructure based on assessed needs rather than each state’s individual fiscal capacity. Even at the joint conference of Chief Justices and Chief Ministers (2022), the Chief Ministers reached no agreement as they preferred to implement it as a state matter, and not through a national body.
The failure of NJIC is a case in point. The issue of vertical imbalance is not to increase the Centre’s contribution, but to address deeper questions about federalism: Should judicial financing be managed centrally (through pooling funds and then allocating them as needed), or is it better left dispersed (via individual state budgets)? For example, Australia’s vertical fiscal imbalance is larger than India’s. The Commonwealth collects far more tax than it needs, leaving states dependent on federal transfers. Yet since 1933, the Commonwealth Grants Commission has distributed the entire national GST pool (around AU$86 billion a year) using a fixed, needs-based formula, updated annually. This shows that a permanent, rules-based system can manage even a greater imbalance instead of one-off discretionary grants.
Horizontal imbalance: disparity between states
Horizontal imbalance is the difference in fiscal capacity between states, wherein richer states can spend more on justice delivery than poorer ones, despite sharing the same constitutional duty. Among the eleven highest-GDP states, spending on justice, both in absolute terms and as a share of the overall budget, varies considerably. States with larger economies do not necessarily allocate a greater proportion of their budgets to justice than smaller states do, and in absolute terms, one state’s allocation can be several times larger than
another’s (see Figure 2.1).
Figure 2.1: IndiaSpend’s “11 Richest States Allocate 4% Of Budget For Justice Delivery”, noting the underlying data originates from the Budgets for Justice report.
Furthermore, per capita spending on justice among these eleven states differs by more than double between the highest and lowest spenders. This indicates that a citizen’s practical access to a functioning justice system already varies meaningfully, even among the States best positioned to fund it (see Figure 2.2).
Figure 2.2: Budgets for Justice Reports
Lower funding means fewer judicial appointments, slower infrastructure development, and potentially faster backlog accumulation relative to better-funded states. Because backlog and judicial vacancy reinforce each other, it costs more to catch up later. Thus, horizontal imbalance continues to increase if not corrected.
Canada provides a model to address this sort of disparity. Its Equalisation program, now enshrined in the Constitution Act, 1982, under Section 36 (2), has ensured that every province could fund its public services at a “reasonably comparable” level, irrespective of its own tax base, since 1957. The program compares the fiscal capacity of each province against the national average and transfers funds to the provinces that are below average, according to a fixed formula, not annually negotiated. India has no equivalent mechanism for courts: without a formula-driven correction, the per capita gap between states gets perpetuated over time. But adapting this model would first require defining what “reasonably comparable” means for courts, and what it would be driven by, whether judge strength, caseload, pendency, or forward-looking judicial vision plans, since the formula’s fairness ultimately rests on how policymakers define that standard.
The Sixteenth Finance Commission and both imbalances
The 16th Finance Commission discontinued revenue deficit grants and did not recommend state- or sector-specific grants, which led to a decrease in States’ share compared to the 15th Finance Commission. This matters because the 15th Finance Commission’s sector-wise grants of ₹1.3 lakh crore included eight sectors, with an explicit mention of the judiciary. In the 16th FC, the grants-in-aid of ₹9.47 lakh crore was channelled almost entirely to local bodies and disaster management, leaving the judiciary without any dedicated allocation under the current grant structure. Critics argue that this policy could potentially jeopardise states with structurally weak revenue bases. The Commission’s perspective is consistent with the broader transition from an economic model based on “entitlements” to one based on “compliance and performance” fiscal transfers.
The discontinuation of sector-specific grants has implications for both the vertical and horizontal imbalances discussed in this paper, albeit in different ways. Vertically, these grants take away a major source through which the Centre made a direct contribution to strengthen judicial infrastructure. Their retraction implies that the States should tackle so many expenditures in the future without guaranteed support from the Centre, thus continuing the Centre-State financing gap shown in Figure 1.1. Horizontally, the impact seems to be stronger. Although sector-specific grants provided by the Centre were not sufficient to equalise differences in the fiscal capacity of the states, they helped create a separate fund for the judicial infrastructure from the states’ own resources. In their absence, the financially strong states are in a better position to find auxiliary funds on their own, whereas states with weaker fiscal capacity, working with less money to begin with, risk falling even further behind.
Suggested Reforms
Political economy is about how the Centre, states, and courts actually negotiate money, not what the rules say on paper. Judicial funding is not formula-based but negotiated annually, and states with more political weight or having clearer plans and stronger capacity to make a case for funding tend to get larger allocations, regardless of actual need. This creates unpredictability, as funding may change each year, and acts as a penalty for states that are already weaker and less equipped to compete for these funds. Judicial funding could be more stable if it were to move towards a rule-based, predictable mechanism as discussed above, such as the Equalisation formula in Canada or the Grants Commission in Australia, rather than being left to discretionary negotiation. This section proposes reforms in that direction.
First, this paper proposes introducing “judicial caseload” as a criterion to the horizontal devolution formula (the distribution of the states’ share in central taxes among individual states), besides existing factors like income distance, population, and demographic performance. The rationale here is the same one the 16th Finance Commission adopted when it added a new weight for a state’s contribution to GDP, if devolution can reward states for economic output, it can just as easily account for judicial strain. Policymakers could link a part of the formula to each state’s share of pending cases, weighted by the average judicial time historically required to dispose of each case type, following Daksh’s time-based weighted caseload model. This need-based logic is not unique to India’s judicial financing; the Centre, for example, allocates disaster management funds based on a state’s actual disaster risk rather than a fixed amount. This would also address the Uttar Pradesh problem, where a state carrying the country’s largest caseload does not receive a proper increase in judicial funding, would receive a larger share of devolution because its litigation demand is high and its courts are keeping pace with it, not because its backlog is large, closing off the incentive to leave cases unresolved for a bigger allocation.
Second, future judicial infrastructure may need a permanent co-financing framework pairing capital investment with dedicated maintenance funding, and the High Court Building Committees should have the power of actual project planning, procurement oversight, and implementation, rather than just an advisory role. Unlike the 15th FC’s sector-specific grants, this framework would address potential administrative constraints by pairing matching-fund compliance with technical assistance and linking disbursements to independently verified milestones rather than releasing funds upfront. This design draws on the World Bank’s Program-for-Results approach, which conditions disbursement on verified outcomes while building institutional capacity. In doing so, the framework would enable lower-capacity States to meet procurement, reporting, and implementation requirements before subsequent tranches are released. The need for stronger implementation authority is also evident from the Supreme Court’s own Judicial Infrastructure Advisory Committee (2026), which can only submit its findings to the CJI, who must separately approach the Centre and State, showing how at apex-level infrastructure bodies remain advisory by design. Hence, the system needs a regular, detailed planning process which includes stakeholders and external experts, rather than officials making decisions in isolation.
Moreover, the existing PWD-led model demonstrates documented delays. For example, in Punjab, judges of Moga, Mohali, and Pathankot are still waiting for their official residence after years of district creation, and Moga’s 2018 land demand remains unacquired even after eight years; in Himachal Pradesh, a court complex has been with the PWD for seven-plus years. Since the PWD holds a near-monopoly over this work and no alternative agency can easily replace it, a stronger, independent monitoring system may be just as important as giving building committees more power.
Conclusion
The paper explains why the Indian judiciary remains underfunded and unevenly funded even after repeated efforts to correct it. The Centre’s contribution is less than both what the states already contribute and the proportionate share of the national economy. When the Centre tried to fill these gaps through Finance Commission grants, states struggled with actual utilization of those grants as they lacked the administrative capacity for matching-fund and reporting conditions it came with. Consequently, large amounts of funding remained unreleased or unused, a problem severe enough that the 16th FC’s response was discontinuation, not reform. The lesson is not that co-financing itself is unworkable, but funding mechanisms must account for the capacity constraints that determine whether States can actually use the funds, as the reform framework proposed in this article does by linking disbursement to verified outcomes rather than releasing allocations upfront. The discontinuation of Centre-administered grants closes off that avenue for reform, opening a more important one: including judicial financing in the tax devolution formula itself, rather than treating it as a discretionary top-up depending on political will. Until that structural shift occurs, justice in India will be less a function of the merits of a case and more about which State has the capacity to hear it, hardly what the Constitution envisioned.
Riya Yadav is a second-year undergraduate student at the National Law University, Delhi.
