Unraveling India’s Techno-Financial Trap: The Silent Undermining of Federalism

India is witnessing a silent but profound erosion of its federal structure, not through overt political conflict but via a sophisticated “techno-financial trap” that centralizes power in the Union government. This system, built on the mandatory integration of state treasuries with the central Public Financial Management System (PFMS) and the Single Nodal Agency (SNA) model, creates a financial panopticon that surveils state spending in real-time.

Marketed as a tool for transparency and efficiency, it instead operates as a cybernetic tool of control, automatically withholding funds—as seen when Kerala’s Samagra Shiksha Abhiyan funds were blocked over non-compliance with the PM-SHRI scheme—without a political order.

This architecture reduces states from constitutional partners to mere data-entry nodes, undermining fiscal autonomy and enabling the Union to weaponize data and algorithms to enforce policy compliance, thereby demanding a new legal and constitutional battle grounded in the principles of data federalism to salvage India’s foundational balance of power.

The very foundation of the Indian Union—its federal structure—is undergoing a radical, silent transformation. While political battles between states and the centre over finances make headlines, a more profound revolution is occurring beneath the surface, orchestrated not through parliamentary debates but through lines of code and financial protocols. The recent controversy in Kerala, where the state government felt compelled to sign onto the PM-SHRI scheme to unlock frozen funds, is not merely a political U-turn. It is a symptom of a deeper, systemic shift: the rise of a techno-financial regime that is methodically centralizing power and making India’s federal balance unrecognizable. 

This new system, marketed under the benign banners of “transparency” and “efficiency,” is in reality a sophisticated trap. It leverages technology and finance to create a structure of control so pervasive that it bypasses traditional political resistance, forcing states into compliance and reducing them from constitutional partners to mere implementation agencies. 

From Cooperative Federalism to Coercive Control 

To understand the seismic nature of this shift, we must first look at the system it replaced. The previous model of “cooperative federalism” for Centrally Sponsored Schemes (CSS) operated on a principle of trust and shared responsibility. The Union government would provide funds to states as advances. This granted states two critical, albeit often overlooked, powers: 

• Financial Autonomy: States could manage the flow of money according to their local priorities and administrative rhythms. 

• The Float Fund: Holding these advances in their treasuries provided states with crucial financial breathing room, a liquidity buffer that aided in overall cash flow management. 

In this model, states possessed bargaining power. They were constitutional stakeholders, not subservient entities. 

This all changed in 2021 with the introduction of the Single Nodal Agency (SNA) model, integrated with the Union’s Public Financial Management System (PFMS). The official justification was compelling: states were “parking” funds, causing delays in project implementation. The new system, it was argued, would ensure “transparency” and guarantee that money reached the “last beneficiary” directly. 

This is where a political power-grab was brilliantly disguised as a technical upgrade. The Union government successfully framed its own interest—greater control over state expenditures—as a universal common-sense good. Who could argue against transparency and efficiency? This narrative effectively shut down a much-needed political debate on fiscal federalism, reducing it to a mere managerial problem of system implementation. 

The Architecture of the Trap: PFMS and the Panopticon 

The genius—and the danger—of this new system lies in its architecture. States were strategically cornered. The Union eliminated avenues for institutional negotiation by presenting its directives not as political challenges but as administrative necessities. The question for states was no longer “Should we accept this?” but “How do we implement this fastest?” 

The trap was sprung through the forced integration of every state’s treasury software (their Integrated Financial Management System, or IFMS) with the central PFMS. This created what can be accurately described as a financial panopticon. 

The concept of the panopticon, popularized by philosopher Michel Foucault, is a prison design where a single guard in a central tower can observe all inmates, who never know if they are being watched. The mere possibility of constant surveillance forces them to discipline themselves. The PFMS-IFMS integration achieves this digitally. The Union government, as the invisible observer in the central tower, can monitor every rupee moving through a state’s treasury for CSS schemes in real-time. 

But this system goes beyond mere surveillance. It is a cybernetic governance model—a self-regulating system that executes punishment automatically. The “decision factors” for this system are encoded in the Memorandums of Understanding (MoUs) that states are forced to sign for each scheme. 

The Kerala PM-SHRI case is a textbook example. The Union government owes Kerala thousands of crores in arrears for the Samagra Shiksha Abhiyan (SSA). However, the release of these funds was made contingent upon the state signing the PM-SHRI MoU, which requires adherence to the National Education Policy 2020 and integration with the PFMS. 

The cybernetic punishment works: 

• Kerala submits a claim for SSA funds. 

• The PFMS software instantly checks a pre-set metric: “Has this state complied with the PM-SHRI condition?” 

• The answer is “No.” 

• The system automatically rejects the fund transfer. 

No political order needs to be issued. No explanation is given. The punishment—withholding funds crucial for salaries and infrastructure—is executed instantly and impersonally by an algorithm. Foucault’s “power-knowledge” dynamic has evolved into a terrifying new reality: “power-algorithm.” 

The Bigger Picture: Building the Technological-Unitary State 

The PFMS-SNA framework is not an isolated phenomenon. It is the linchpin of a much larger project to reconfigure the entire Indian governance structure into a centralized, techno-bureaucratic behemoth. The new governing principle is governance as control, and control as metrics. 

Every new flagship scheme launched by the Union government functions as a data-collection node feeding into a central mainframe: 

• Health: The integration of the National Health Mission with the Ayushman Bharat Digital Mission creates a centralized registry of every citizen’s health data. 

• Agriculture: The Agristack project aims to create a comprehensive database of every farmer and their land, linked to Aadhaar. 

• Education: The National Education Policy 2020, through the APAAR (Automated Permanent Academic Account Registry) ID, seeks to track every student’s academic journey from childhood onward. 

In each case, the Union government, often guided by strategic frameworks from global consulting firms and implemented by the National Informatics Centre (NIC), designs the architecture. The states are relegated to the role of data entry operators, compelled to feed information into a system that they do not control and from which data flows only one way—upwards. 

The New Battlefield: From Fiscal Federalism to Data Federalism 

The ultimate consolidation of power comes from the Union’s simultaneous control over both revenue and expenditure. The Goods and Services Tax (GST) regime already centralizes the power of taxation. Now, the PFMS-SNA system centralizes the power of expenditure. This pincer movement subjugates the economic base of Indian federalism. 

In this new reality, the weapon of assault is not just money, but the data and the metrics derived from it. The crucial questions of our time are: Who designs these metrics? Who programs the algorithms that decide a state’s financial fate? 

This is why any meaningful discussion about fiscal federalism must now inevitably become a discussion about data federalism. You cannot have the former without the latter. When a state loses sovereignty over the data it generates and the financial autonomy to spend its allotted funds, it ceases to be a meaningful constitutional entity. 

As digital scholar Lawrence Lessig famously argued, “Code is Law.” The Union government has written a new, digital code (the PFMS-SNA framework) that operates with a speed and efficiency the old code—the Constitution—cannot match. Arguing for federalism with old political slogans is futile if this new, techno-financial hegemony remains unchallenged. 

The Path Forward: A Constitutional and Legal Counter-Offensive 

The struggle is not against technology itself, but against the logic of a state that uses technology to centralize power unconditionally. The fight for the future of Indian federalism is a fight to determine who will be the system administrator of the Indian Republic—the people and the Constitution, or an executive-controlled algorithm. 

A concerted counter-offensive is necessary. States must collectively approach the Supreme Court to challenge the Finance Ministry‘s 2021 directives that mandated the PFMS-SNA integration. The legal argument would be that this is executive overreach, violating: 

• The basic principles of fiscal federalism enshrined in Part XII of the Constitution. 

• The autonomy of the State’s Consolidated Fund (Article 266). 

• The basic structure doctrine, which includes federalism, as affirmed in the S.R. Bommai case. 

Furthermore, new legal arguments must be forged around the principle of data federalism, asserting states’ sovereignty over their own data. The very code that enables this new, unconstitutional law must be brought before the bench. 

The PM-SHRI controversy is merely the tip of the spear. The real battle is for the soul of the Indian state, and it is being waged in the silent, complex realm of techno-financial infrastructure. Recognizing this is the first step toward mounting a meaningful defense.