The correct answer is option 2 - Sarkaria Commission. The Inter State Council was indeed set up in 1990 based on the recommendation of the Sarkaria Commission.

The Sarkaria Commission was a central government-appointed body that was established to examine the relations and responsibilities between the states and the central government in India. It submitted its report in 1988, which included recommendations for improving the functioning and coordination between the central and state governments.

One of the key recommendations of the Sarkaria Commission was the establishment of an Inter State Council to foster better cooperation and coordination between the states and the central government. The Inter State Council serves as a platform for discussion and consultation on issues that affect both the center and the states, such as law and order, economic and social planning, and inter-state disputes.

The setting up of the Inter State Council has helped in strengthening the federal structure of India and promoting cooperative federalism by providing a forum for the center and the states to discuss and resolve their differences and work together for the betterment of the country.

Overall, the correct answer is option 2 - Sarkaria Commission, as it was this commission`s recommendation that led to the establishment of the Inter State Council in 1990.