New Delhi, Feb. 24 -- In his book Increasing Returns and Path Dependence in the Economy, economist W. Brian Arthur explains how institutional outcomes often persist not because they are efficient, but because early deviations alter the payoff structure of future choices. Once a sub-optimal equilibrium is reached, coordination effects and adaptive expectations lock it in.

Fiscal federalism exhibits similar dynamics. When a constitutionally sequenced mechanism is repeatedly bypassed, actors internalize the bypass as the new norm. Procedural deviation then becomes institutional practice.

India's 73rd and 74th constitutional amendments inserted Articles 243-I and 243-Y, mandating quinquennial state finance commissions (SFCs) to recommend th...