Service Law | States Possess Fiscal Autonomy But Cannot Cite ‘Federalism’ to Evade Self-Imposed Statutory Rules: Supreme Court

While States are not automatically bound to follow Central Government pay structures under the federal framework, they become legally bound once they voluntarily incorporate Central standards (like AICPI) into their own statutory Rules. A State cannot plead "fiscal autonomy" to deviate from its own legislative choices.

“It is not open for the State to take the defence of separation of powers... for that would amount to having your cake and eating it too.”

In a latest judgement judgment with far-reaching implications for Centre-State service jurisprudence, the Supreme Court of India has drawn a sharp line between a State’s constitutional right to fiscal autonomy and its obligation to honor statutory commitments.

While directing the State of West Bengal to release arrears of Dearness Allowance (DA) to its employees for the period 2008-2019, the Bench comprising Justice Sanjay Karol and Justice Prashant Kumar Mishra dismantled the State's defense that judicial interference in pay scales violated the federal structure.

The judgment in State of West Bengal & Anr. v. Confederation of State Government Employees, West Bengal & Ors. (2026 INSC 123) clarifies that while a State is free to design its own pay structure, it cannot cite "autonomy" to ignore the standards it explicitly wrote into its own laws.

The Federalism Argument: Autonomy vs. Obligation

The State of West Bengal vehemently argued that under the Indian federal structure, it possesses exclusive legislative competence over its State Public Services (Entry 41, List II). The State contended that it has absolute fiscal autonomy to determine the salaries and allowances of its employees based on its financial capacity, and it is not bound to blindly follow the Central Government’s recommendations or the All-India Consumer Price Index (AICPI).

The State argued that compelling it to pay DA at rates linked to the Central pattern would amount to an encroachment on its executive and legislative domain.

The Nuance: Voluntary Adoption Creates Binding Right

The Supreme Court accepted the premise of the State's argument but rejected its application in this specific context. The Bench clarified a crucial nuance in federal service law:

No Automatic Binding: The Court affirmed that States are not automatically bound to follow Central Government pay commissions. A State is indeed free to devise its own pay structure independent of the Centre.
The "Self-Trap": However, the Court noted that West Bengal had enacted the West Bengal Services (Revision of Pay and Allowance) Rules, 2009 (RoPA Rules). In these Rules, the State voluntarily chose to define "existing emoluments" based on the AICPI, identical to the Central Government's formula.

Justice Karol, writing for the Bench, held that the State was bound not by the Centre's decision, but by its own legislative choice. Once the State exercised its autonomy to incorporate the AICPI standard into its statutory rules ("Legislation by Incorporation"), it could not subsequently claim autonomy to ignore that standard.

Executive Discretion Cannot Override Statutory Mandate

The Court observed that the State attempted to decouple the DA rate from the AICPI through subsequent executive memoranda, citing financial discretion. The Bench ruled that this was impermissible.

Article 309 vs. Article 162: The RoPA Rules were framed under the proviso to Article 309 of the Constitution. The Court held that executive instructions issued under Article 162 cannot supplant or override substantive statutory rules.
Manifest Arbitrariness: The Court termed the State's deviation "manifestly arbitrary." It held that while the State had the competence to frame different rules initially, it could not alter the statutory formula through administrative orders under the guise of policy decisions.

Financial Inability No Defense

The Court also rejected the State's plea that paying the arrears (estimated at over ₹41,000 crores) would cripple the exchequer. The Bench ruled that DA is a "pragmatic instrument" to combat inflation and a legally enforceable right, not a bounty.

“The least that is expected of a State in a democracy is that it honours its obligations... if such a ground of limited financial ability was readily available to the State Government... it would render these obligations illusory,” the Court remarked.

Compliance Mechanism

To ensure the execution of this "federal obligation," the Supreme Court has constituted a High-Powered Committee led by Justice Indu Malhotra (Retd.) to determine the exact quantum of arrears and ensure payments are completed by March 2026.

Date of Decision: February 5, 2026