Correct Answer: `Both a and b` (Option 3)
Detailed Analysis:
Regarding Centre-State financial relations and fiscal autonomy:
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Analysis of Statement a: *"Since independence, the Centre has been gradually extending its functions in such a way that the states remain completely dependent upon it."*
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The constitutional design envisioned cooperative federalism with statutory devolution of resources under Article 280 to foster state capacity rather than deliberately keeping states in absolute subservience. Hence, this assertion is considered not objectively true.
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Analysis of Statement b: *"The financial resources of the Centre are inelastic."*
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In public finance theory, the Centre's fiscal resources are highly elastic and buoyant (e.g., corporation tax, personal income tax, customs duties, GST), expanding rapidly with economic growth. Conversely, it is the states whose tax bases (stamp duty, land revenue, agricultural taxes) are relatively inelastic. Therefore, stating that the Centre's resources are inelastic is factually incorrect / not true.
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Both statements being untrue in relation to fiscal federalism, Option 3 (Both a and b) was designated as the official key.
⚠️ Note / Question & Answer Key Clarification:
Central revenue streams possess high elasticity (buoyancy), whereas states bear extensive welfare and development responsibilities with comparatively inelastic revenue bases. Statement b is demonstrably false economically, and statement a contradicts the constitutional objective of financial partnership, making Option 3 the correct response.
Article 280 mandates the constitution of a Finance Commission every fifth year to recommend the distribution of net tax proceeds between the Union and the States.
