Article 354

Article 354 of the Constitution of India empowers the President to modify the financial arrangements between the Union and the States during the period of a National Emergency declared under Article 352. This provision ensures that the financial framework of the nation remains adaptable and responsive during crises such as war, external aggression, or armed rebellion, when normal revenue distribution may not be feasible.

Constitutional Context

India’s Constitution establishes a carefully structured division of financial powers between the Union and the States through Articles 268 to 279, ensuring fiscal balance within the federal system. However, in exceptional circumstances—such as a national emergency—the economic priorities of the country may shift, requiring temporary adjustments to this fiscal relationship.
To accommodate such situations, Article 354 authorises the President to make modifications in the financial distribution mechanisms to ensure adequate resources for national defence, administration, and public welfare during emergencies.
This article forms part of Part XVIII (Articles 352–360) of the Constitution, which deals with Emergency Provisions and their implications on governance, federal relations, and financial administration.

Scope and Operation of Article 354

Article 354 becomes operative only when a Proclamation of Emergency under Article 352 is in force. It enables the Union Government, through the President, to alter the constitutional provisions that determine how revenues and taxes are shared between the Centre and the States.
This flexibility ensures that during emergencies, when national security or stability demands extraordinary expenditure, the central government can reallocate financial resources swiftly and effectively.

Powers Granted Under Clause (1)

Clause (1) of Article 354 provides that:

• The President may, by order, modify or make exceptions to the provisions of Articles 268 to 279, which regulate the distribution of revenues between the Union and the States.
• Such modifications may be made as the President deems necessary to address the financial exigencies arising during the emergency.
• The changes remain in effect until the end of the financial year in which the Proclamation of Emergency ceases to operate.

In essence, Clause (1) temporarily empowers the executive to reconfigure fiscal arrangements to ensure that the Union Government has sufficient financial authority to manage the crisis effectively.

Parliamentary Oversight: Clause (2)

Clause (2) establishes a crucial mechanism for legislative accountability and oversight. It mandates that:

• Every order made by the President under Clause (1) must be laid before both Houses of Parliament as soon as possible after its issuance.

This requirement ensures that emergency financial decisions do not bypass democratic scrutiny. It reflects the constitutional principle that while the executive enjoys enhanced powers during emergencies, such powers remain subject to parliamentary control and review.

Relevant Constitutional Articles

Article 354 is closely linked to several constitutional provisions that together regulate India’s financial and emergency governance framework:

• Articles 268 to 279: Define the normal structure of revenue sharing between the Union and the States, covering taxes such as excise duties, customs, and income tax.
• Article 352: Authorises the Proclamation of National Emergency on grounds of war, external aggression, or armed rebellion.
• Article 356: Allows for the imposition of President’s Rule in a state in case of constitutional breakdown.
• Article 360: Deals with the Proclamation of Financial Emergency, under which the Union can take direct control of financial matters.

Together, these articles illustrate how India’s Constitution integrates financial flexibility with constitutional accountability during crises.

Historical Context

The importance of Article 354 was most prominently observed during the 1975–1977 National Emergency, declared under Article 352. During this period, the Union Government exercised extensive control over the finances of the States. This centralisation of fiscal authority, though intended to maintain national stability, triggered debates over the erosion of federal autonomy and the potential for misuse of emergency powers.
Following this experience, subsequent constitutional reforms—especially the 44th Amendment Act (1978)—introduced stronger checks and balances to prevent arbitrary or politically motivated invocation of emergency provisions.

Judicial Interpretation and Case Laws

Although the Supreme Court has not directly interpreted Article 354 in isolation, several landmark judgments have addressed its broader constitutional context, particularly concerning emergency powers and financial governance:

• Keshavananda Bharati v. State of Kerala (1973): The Court propounded the Basic Structure Doctrine, holding that essential features such as federalism and separation of powers cannot be destroyed even during emergencies. This doctrine implicitly limits the scope of Article 354 by ensuring that emergency powers cannot permanently alter India’s federal character.
• Indira Gandhi v. Raj Narain (1975): This case highlighted the potential misuse of emergency powers and reaffirmed the importance of maintaining constitutional checks on executive authority.
• Minerva Mills Ltd. v. Union of India (1980): The Court reinforced that even during emergencies, the Constitution’s basic structure—including judicial review and federal balance—remains inviolable.

These rulings collectively underscore that while Article 354 grants flexibility in financial arrangements, it must operate within the boundaries of constitutional integrity and federal principles.

Implications of Article 354

The invocation of Article 354 has significant administrative and constitutional consequences:

1. Centralisation of Financial Power:
   • The Union Government gains temporary authority to modify financial allocations and taxation arrangements, potentially reducing state-level fiscal independence.
2. Flexibility in Crisis Management:
   • Enables rapid reallocation of financial resources to address defence, disaster relief, or other urgent national priorities.
3. Temporary Suspension of Fiscal Federalism:
   • The normal constitutional framework for tax distribution is suspended, reflecting the priority of national unity over regional autonomy during crises.
4. Legislative Accountability:
   • The requirement for laying Presidential orders before Parliament ensures that emergency powers remain democratically supervised.

Legislative Oversight and Checks

Despite granting extraordinary powers to the Union, Article 354 upholds India’s constitutional ethos of accountability through multiple safeguards:

• Parliamentary Review: Every Presidential order must be presented before Parliament, allowing members to question or debate the financial changes.
• Judicial Review: Courts retain the authority to assess whether such modifications adhere to constitutional principles.
• Temporal Limitation: The financial adjustments automatically lapse at the end of the financial year in which the emergency ceases, preventing their indefinite continuation.

These safeguards collectively ensure that emergency powers under Article 354 remain temporary, proportionate, and accountable.

Criticism and Concerns

While Article 354 serves a pragmatic purpose, it has also attracted criticism:

• Erosion of State Autonomy: Frequent or prolonged use may weaken the fiscal independence of states, leading to excessive centralisation.
• Potential for Misuse: The broad discretion vested in the President could be influenced by political considerations rather than genuine financial necessity.
• Reduced Transparency: Emergency financial orders, though subject to parliamentary review, may not always receive detailed scrutiny in times of national crisis.

These concerns highlight the ongoing tension between administrative efficiency and the preservation of India’s federal spirit.

Significance of Article 354

Despite its potential risks, Article 354 remains a vital constitutional tool for ensuring financial stability during emergencies. Its significance can be understood in several dimensions:

• It empowers the Union to act decisively in crises requiring rapid fiscal coordination.
• It preserves continuity of governance by adapting financial mechanisms to national priorities.
• It maintains a balance between flexibility and accountability through the requirement of parliamentary oversight.