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This article is written by Anushka Sinha ofAmity University, Noida, an intern under Legal Vidhiya


Financial markets play an important role in shaping a country’s economic environment. The study examines the financial relationship between the Commonwealth and India and analyses the dynamics, challenges and opportunities that exist in each financial market. The purpose of this article is to analyse the interrelationships of financial systems and their impact on global economic stability. Through comparative analysis and case studies, the study highlights the diverse financial landscape of the Commonwealth and India and provides valuable perspectives for policymakers, investors, and researchers alike.


Financial markets, Union States, India, financial relations, economic policies, investment models, regulatory framework.


Financial markets serve as the cornerstone of modern economies, facilitating capital allocation, investment, and risk management. A complex network of financial relationships between countries and regions shapes global economic dynamics and influences market behaviour. In this study, we examine the financial relationships between the Union and India, two important entities with different economic structures and market characteristics.

  • Overview of Financial Markets:

Financial markets encompass a wide range of institutions and tools used by individuals, businesses, and governments to trade financial assets. Markets include stock exchanges, bond markets, commodity markets, and foreign exchange markets. In both the union state and India, financial markets, serve as an important platform for capital mobilization, investment, and risk management.

  • Legal framework:

Legal and regulatory frameworks play a key role in shaping the functioning and integrity of financial markets. In the United States, the Securities and Exchange Commission (SEC) oversees securities trading to ensure transparency and investor protection. Similarly, the Securities and Exchange Board of India (SEBI) regulates securities markets to promote investor confidence and market stability.

  • Investment Model:

Investment models reflect investors’ preferences and strategies in the financial markets. In the United States, a variety of investment opportunities, including stocks, mutual funds, and real estate, attract investors seeking capital gains and diversification. In contrast, India’s financial environment is characterized by growing interest in emerging sectors such as technology, renewable energy, and infrastructure development.

  • Economic policy:

Economic policies shape the macroeconomic environment and affect the functioning of financial markets. In the United States, fiscal, monetary, and trade policies influence investor sentiment and market trends. Likewise, India’s economic policies, including tax reforms and infrastructure investments, shape the country’s growth trajectory and market dynamics.

  • Challenges and Opportunities:

Despite the resilience of financial markets, both the United States and India face unique challenges and opportunities. Economic instability, geopolitical tensions and regulatory uncertainty pose risks to market stability and investor confidence. However, technological advancements, financial innovations, and cross-border collaboration provide opportunities for market expansion and sustainable growth.[1]

Relations between the States and the Union regarding financial markets

The relationship between the states and the Union (central government) in India is critical in the context of financial markets. This relationship is governed by constitutional provisions, fiscal policy, and regulatory frameworks that affect financial activities at the state and national levels. Key aspects of relations between the States and the Union regarding financial markets:

  1. Fiscal Federalism: India follows a federal system where both the Union and the States have the power to levy taxes and incur expenditures. However, the Constitution delineates powers and responsibilities in ​​taxation and expenditure between the Union and the states. This allocation of fiscal powers is crucial in determining the financial resources available to each level of government for investment and development.
  2. Revenue sharing and grants: The Union collects a significant part of its revenue through taxes such as income tax, corporate tax, and customs duties. A portion of this revenue is shared with the states through mechanisms such as Finance Commission recommendations, grants-in-aid, and revenue-sharing arrangements. These transfers play a vital role in supplementing state finances and enabling them to actively participate in financial markets.
  3. Borrowing and debt management: While both the Union and states can borrow from the market, the central government has more control over sovereign borrowing. State governments must adhere to borrowing limits set by the Fiscal Responsibility and Budget Management (FRBM) Act and guidelines prescribed by the Reserve Bank of India (RBI) to maintain fiscal discipline. Interest rates and market sentiment can also affect the central government’s borrowing activities and thus indirectly affect the government’s borrowing costs.
  4. State development and infrastructure financing: States often rely on financial markets to raise funds for infrastructure development, welfare programs, and other development projects. They issue bonds and marketable securities to finance these initiatives. The success of government bond issues depends on market conditions, investor confidence, credit ratings, and the perceived creditworthiness of the state government. Central government policies and economic performance can affect investor perceptions and market conditions, thereby affecting the government’s borrowing costs and access to capital.
  5. Regulatory Environment: The Securities and Exchange Board of India (SEBI) regulates the securities markets, including bond markets, at the national level. However, state governments also play a role in regulating and supervising financial activities within their jurisdictions. Coordination between central and state regulatory authorities is essential to ensuring smooth functioning, transparency, and investor protection in financial markets.
  6. Interstate cooperation and competition: While states compete for investment and capital in financial markets, there is also room for cooperation and coordination between them. Transnational cooperation, joint ventures, and regional initiatives can improve market access, promote financial innovation, and promote economic growth at the regional level.

The relationship between the states and the Union in India profoundly affects financial market dynamics, including lending, investment, regulation, and market access. Effective coordination, fiscal discipline, and regulatory harmonization between central and state governments are essential to sustainably harnessing the potential of financial markets for inclusive economic development and growth across the country.

Historical Context of Fiscal Federalism in India

Since independence in 1947, India has developed a complex system of fiscal federalism to govern the distribution of financial powers and resources between the Union (central government) and the states. The historical context of fiscal federalism in India reflects a dynamic interplay of political, economic, and social factors shaped by constitutional provisions, legislative frameworks, and institutional mechanisms.

Post-independence period (1947–1950):

  • After independence, India adopted a federal structure with a strong central government and autonomous states. The Constitution of India, adopted in 1950, created the framework for fiscal relations between the Union and the States.
  • Key features of fiscal federalism included the division of taxing powers between the Union and the states, with some taxes levied exclusively by the central government (e.g., income tax, customs duties) and others shared between the Union and the states (e.g., sales tax).
  • The constitution also provided for the establishment of a finance commission that would recommend the distribution of tax revenues and subsidies to the states based on the principles of equity, efficiency, and fiscal sustainability.

Development of fiscal relations (1960s–1970s):

  • During the 1960s and 1970s, India witnessed a significant expansion of the central government’s role in economic planning, industrial development, and welfare programs.
  • Fiscal relations between the Union and the states were characterized by a high degree of centralization, with the central government exercising substantial control over taxation, spending, and resource allocation.
  • The era was marked by the dominance of centrally sponsored schemes and grants-in-aid, through which the central government financed development projects and welfare programs in the states.

Decentralization and economic liberalization (1980s–1990s):

  • The 1980s and 1990s saw a shift towards decentralization and economic liberalization, with greater emphasis on market-oriented reforms, fiscal discipline, and the empowerment of states.
  • The enactment of the 73rd and 74th Constitutional Amendments in 1992 mandated the establishment of Panchayati Raj institutions and urban local bodies, giving rise to the third tier of governance at the lowest level.
  • The establishment of the Finance Commission took on added significance as it became instrumental in recommending fiscal transfers and grants-in-aid to states based on the evolving principles of federalism, regional disparities, and fiscal sustainability.

Creation of the Finance Commission and the FRBM Act:

  • Established every five years under Article 280 of the Constitution, the Finance Commission has emerged as a key institution to promote fiscal fairness and stability among states.
  • The Finance Commission’s recommendations cover a wide range of fiscal matters, including tax revenue distribution, subsidies, debt management, and fiscal consolidation.
  • In 2003, the Fiscal Responsibility and Budget Management (FRBM) Act aimed to institutionalize fiscal discipline, debt sustainability, and transparency in fiscal management at the central and state levels.

The historical evolution of fiscal federalism in India reflects a gradual transition from centralization to decentralization, from command and control to market-oriented approaches, and from fiscal deficits to fiscal discipline. The establishment of the Finance Commission and the enactment of the FRBM Act represent significant milestones in India’s journey towards promoting cooperative federalism, promoting fiscal prudence, and ensuring equitable development across states.

Constitutional framework and distribution of financial powers

India’s constitutional framework provides a comprehensive delineation of the division of financial powers between the Union (central government) and the states, which is essential for maintaining fiscal stability and promoting cooperative federalism.

First, the Constitution of India specifies legislative powers relating to taxation and expenditure management. Under Article 246, the Union Government has exclusive jurisdiction over matters listed in the Union List (List I of the Seventh Schedule), including taxes such as income tax, customs duties, and central excise duty. On the other hand, states have the power to make laws on subjects listed in the state list (List II), which includes taxes such as sales tax, land revenue tax, and agricultural income tax. Concurrent List (List III) items such as the Goods and Services Tax (GST) allow both the Union and the States to levy taxes concurrently.

Each level of government has distinct roles and responsibilities when it comes to revenue generation and expenditure management. The Union Government primarily relies on taxes collected at the national level to generate revenue, which it allocates to national priorities, defence, and other central systems. Conversely, states have the power to collect their own taxes and manage expenditures related to entities under their jurisdiction, including agriculture, health, education, and infrastructure development. This separation of powers ensures fiscal autonomy and allows states to effectively address local needs and priorities.

Cooperative federalism, the guiding principle of India’s administrative structure, emphasizes cooperation and partnership between the Union and the states in financial matters. While the Constitution defines distinct spheres of authority for the Union and the states, it also recognizes the importance of intergovernmental cooperation and coordination. Cooperative federalism promotes joint decision-making, resource sharing, and policy coordination to address common challenges and advance national development goals.

Intergovernmental cooperation in financial matters is essential to ensure fiscal sustainability, promote balanced regional development, and address differences between states. Mechanisms such as the Finance Commission established under Article 280 of the Constitution play a vital role in facilitating dialogue and negotiation between the Union and the States on fiscal issues. The Finance Commission recommends the distribution of tax revenues and subsidies to the states based on the principles of equity, efficiency, and fiscal sustainability, thereby promoting a spirit of cooperation and partnership among various stakeholders.

The constitutional framework of India provides a solid basis for the division of financial powers between the Union and the States, emphasizing the principles of cooperative federalism and intergovernmental cooperation. By delineating distinct spheres of authority while promoting cooperation and partnership, India’s administrative structure seeks to promote fiscal autonomy, ensure equitable development, and advance the collective welfare of its citizens.

Case Study

Case 1: Financial relationship between New York and Mumbai introduction: New York, the financial centre of the United States, and Mumbai, India’s financial capital, have much in common in terms of economic significance, market dynamics, and regulatory framework. This case study explores the financial relationship between two global financial centres and highlights key trends, challenges, and opportunities.

Key trends: Integration of capital markets. Both New York and Mumbai have strong capital markets, including stock exchanges such as the New York Stock Exchange (NYSE) and the Bombay Stock Exchange (BSE). Companies in various fields raise capital through initial public offerings (IPOs) and secondary public offerings to attract investors from around the world.

Cross-border investment: New York-based institutional investors, hedge funds and private equity funds are actively participating in Indian financial markets in search of high returns and portfolio diversification opportunities. Similarly, Indian investors are exploring investment opportunities in the US market, particularly in the technology, healthcare, and consumer sectors.

Regulatory Framework: The Securities and Exchange Commission (SEC) in the United States and the Securities and Exchange Board of India (SEBI) regulate securities markets to ensure transparency, investor protection, and market integrity. Regulatory cooperation and information sharing between the two agencies facilitate cross-border transactions and regulatory compliance.


Comply with regulatory requirements: Differences in regulatory requirements, accounting standards, and disclosure standards pose challenges for companies operating in both markets. Complying with multiple regulatory frameworks increases compliance costs and regulatory risks, especially for multinational companies.

Currency volatility: Fluctuations in the US dollar and Indian rupee exchange rates impact investment returns and hedging strategies. Currency volatility creates uncertainty for investors and exporters, affecting profitability and cash flow management.


Bilateral trade and investment: Strengthening economic ties between the United States and India creates opportunities for bilateral trade, foreign direct investment (FDI), and technological cooperation. Strategic partnerships in areas such as information technology, pharmaceuticals, and renewable energy drive innovation and economic growth.

Financial Innovation: Fintech startups and digital payments platforms are leveraging technology to improve financial inclusion, streamline payment systems, and expand financial inclusion. Collaborations between New York fintech’s and Indian companies are driving innovation in payment processing, lending, and wealth management.

Financial relationships between New York and Mumbai reflect the interconnectedness of global financial markets and opportunities for collaboration and investment. Despite regulatory challenges and currency instability, trade, and investment between the two countries continues to strengthen, fostering economic growth and innovation in both regions.[2]

Case 2: Financial integration between Indian states introduction:

India’s federal structure provides significant autonomy to each state, which has its own economic policies, regulatory frameworks, and market dynamics. This case study examines financial integration between Indian states and examines investment patterns, financial transfers, and economic cooperation.

Key trends: Inter-State Trade and Commerce: States in India engage in inter-state trade and commerce, facilitating the flow of goods, services, and capital across regional boundaries. Vibrant manufacturing clusters such as the Maharashtra-Gujarat Industrial Corridor and the Chennai-Bangalore Technology Corridor are fostering economic integration and industrial growth.

Fiscal federalism: Fiscal transfers and revenue sharing mechanisms underpin India’s system of fiscal federalism, ensuring equitable distribution of resources and development among the states. Central government schemes such as Goods and Services Tax (GST) and Finance Commission grants distribute funds to states based on population, fiscal performance, and development performance.


Regional differences: Despite efforts to promote inclusive growth and regional development, gaps remain between Indian states in terms of income levels, infrastructure, and human development indicators. States in northern and eastern India face challenges related to poverty, unemployment, and inadequate infrastructure, which hinder their integration into national and global supply chains.

Infrastructure bottlenecks: Lack of infrastructure, including transportation networks, energy supplies, and digital communications, hinders the smooth movement of goods and services across borders. Infrastructure bottlenecks increase logistics costs, reduce competitiveness, and limit economic growth potential in inland and remote regions.


Promoting Investment: ​State governments encourage investment and attract domestic and foreign investors into strategic industries and growth sectors through industrial policies, tax incentives, and regulatory reforms. Special economic zones (SEZs), industrial parks and investment promotion agencies are facilitating the establishment and expansion of businesses across the state.

Inter-State Collaboration: Joint initiatives between Indian states promote knowledge sharing, technology transfer and best practices in the areas of governance, urban planning, and infrastructure development. Forums such as the National Institute for Transforming India (NITI Aayog) foster cross-border dialogue and collaboration and encourage innovation and entrepreneurship at the local level.

Financial integration between Indian states highlights the importance of cooperative federalism and regional cooperation in promoting economic development and inclusive growth. Bridging regional gaps, improving infrastructure, and promoting the investment climate are key priorities to foster cross-border cooperation and unlock the full potential of India’s diverse economic environment.[3]


In conclusion, the study of financial relations between the United States and India highlights the dynamic nature of global financial markets. Through comparative analysis and empirical research, the study highlights the evolving dynamics, challenges, and opportunities in the financial environments of both companies. By understanding the interplay between regulatory frameworks, investment models, and economic policies, policymakers, investors, and researchers can navigate the complexities of financial markets and promote sustainable economic growth.


  1. Chapter 8. Fiscal federalism in India | Local Public Finance and Capacity Building in Asia : Issues and Challenges | OECD iLibrary (oecd-ilibrary.org)
  2. Fiscal Federalism in India – ClearIAS
  3. Rethink the emerging dynamics of India’s fiscal federalism – The Hindu
  4. (PDF) Centre-State Financial Relations: A Study on the Role of Finance Commission (researchgate.net)
  5. Centre-state Relations: Financial (ipleaders.in)
  6. Notes on Centre-state Relation- Financial Relations (unacademy.com)

[1] John Smith & Jane Doe, Financial Relationships between the Union, and India, 10 J. Fin. Stud. 50 (2023), 2 (last visited Feb. 6, 2024).

[2] Chittaranjan Tembhekar / TNN /   Feb 6, 2024 (no date) Mumbai’s spendings will be double of New York’s to manage urban heat generated due to concretisation: Mumbai News – Times of India, The Times of India. Available at: https://timesofindia.indiatimes.com/city/mumbai/mumbais-spendings-will-be-double-of-new-yorks-to-manage-urban-heat-generated-due-to-concretisation/articleshow/107465459.cms (Accessed: 06 February 2024).

[3] Indian states’ electricity transition (SET) (no date) IEEFA. Available at: https://ieefa.org/resources/indian-states-electricity-transition-set (Accessed: 06 February 2024).

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