It was the Planning Commission earlier and now the NITI Aayog that presides over India’s economic federalism. While political federalism has been a resounding success, the Centre-state fiscal relations have always been strained, posing a great challenge to the Constitutional guarantees of democracy based on federalism. The recent meeting of the Governing Council of NITI Aayog witnessed boycott and mounting criticism from non-BJP (Bharatiya Janata Party) states. On the issue of extending Goods and Services Tax compensation mechanism demand, even the BJP-ruled states joined the opposition chorus.
There are a number of reasons why states are unhappy with the Centre on revenue sharing. In its efforts to provide economic relief and meet GST shortfall, in 2020, the Centre announced two options of borrowing to be repaid via an extension of the compensation cess beyond the June 2022 deadline. While some BJP-ruled states agreed to consider the proposals, non-BJP states were unwilling to bite the ‘borrow from market at a higher interest’ bullet. Interestingly, while states do not have to share political power with the Centre, every rupee they earn goes to the central kitty, which is rerouted by the Finance Commission to the states based on certain parameters. This fiscal relationship has never been a happy one.
Identify hiccups first
In the era of transition from a centralised planned economy to a market economy, it has become necessary to identify the challenges before the policy makers both at the Centre and in the states under a federal political structure. Economic federalism and coordinated reform process at all levels of the government are the prime tools to accelerate growth, reduce poverty, remove disparity, and guarantee human development. Such an effort will help offset the disabilities and the disadvantages of new and smaller states.
Smaller states have some unique features — large tribal and marginalised population, mountainous terrain — that ensure a level-playing field in terms of sharing resources, compensation for providing raw material, and access to market. Failure to comprehend these concerns is germane to issues relating not only to economic woes and political bickering but also to serious national security threats. The economic disparity and faulty benefit-sharing mechanism result in social non-equilibrium, thus posing challenges such as political destabilisation and secessionist and insurgency menace. The solutions to these challenges are, besides political, economic in nature and have to emanate from the political framework through calibrated changes.
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A horizontal, vertical fiscal divide
The Seventh Schedule of the Constitution specifies the powers and functions of the Centre and the states in the Union and State lists, and those falling under the joint jurisdiction are mentioned in the Concurrent list. There is a clear division of fiscal powers between the Centre and the state governments. The fiscal arrangements have evolved in a quasi-federal system to meet the requirements of centralised planning in a mixed economy structure. Sources of revenue for both the Centre and states were clearly demarcated with regard to the financial relationship and the responsibilities between them.
Two main challenges in the fiscal transfer system pertain to tackling the vertical and horizontal imbalances. So far, the share of the states emanating from the combined revenues has remained more or less stable, thus taking care of the vertical balance. As far as horizontal balance is concerned, some Finance Commissions have addressed the issue of equalisation. With the introduction of the GST, revenue collection and sharing have been further streamlined. Yet, there are concerns relating to the revenue sharing criteria used by the Finance Commission where the relative weights assigned to different criteria remain, by and large, ad hoc. There is an urgent need to develop a more objective framework for determining suitable weights for the alternative revenue sharing criteria, preferably in consultation with the states.
State governments, especially those in South India, feel that criteria like population, forest coverage, poverty and unemployment index are not ideal barometers to decide financial allocation. Tamil Nadu has successfully implemented family planning programmes. But the decline in population will now result in lesser allocation compared to, say, a state like Bihar or West Bengal. Prime Minister Narendra Modi has intervened and suggested that the efforts of southern states in successfully implementing social welfare schemes should be given due weightage.
But the larger question is finding a viable solution by making fundamental changes in the resource allocation process. The constitution of the Finance Commission also can be reworked to include more members and consultative bodies. Alternatively, the mandate of the GST Council could be expanded to include discussions on resource allocation and make suggestions, though such recommendations are not binding.
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Onus lies with the Union govt
Given the political advantages of a strong and stable central government, it is possible that the Union government is, at times, tempted to bypass some of the state governments by centralising expenditure on items earmarked in the Concurrent List. While the states can do little to correct this anomaly, the onus of course correction rests on the central government. Successive governments in New Delhi have felt that decentralisation will directly limit their control over the economy. Experiences of different economies, be it controlled, laissez-faire or mixed, suggest that the contrary is true. In the case of China and Indonesia, a politically strong Centre was good for everything except the economy in the last two decades. China had to decentralise its economy and recalibrate its fiscal relationship with states. When it comes to handling economic issues vis-à-vis states, New Delhi too can take a leaf out of decentralised economic architecture under a politically strong Union government.
It is time to reset Centre-state relations lest we should prove B.R. Ambedkar right when he said, “In politics, we will have equality, and in social and economic life, we will have inequality”.
The author is the former editor of ‘Organiser’. He tweets @seshadrichari. Views are personal.
(Edited by Humra Laeeq)