One of the better things that has happened since Narendra Modi came to power in May 2014, is the promotion of cooperative federalism. Cooperative federalism is essentially a system in which the governments at the central, state and local level cooperate with another to solve common problems. The system is not dominated by the central government.
The Indian Constitution gives pre-eminence to the central government. As the former finance minister and senior leader of the Bhartiya Janata Party explained in a speech: “The first Article of the Constitution talks about India that is Bharat being a Union of States. It is not a federation of states. It is described as the Union of states and there are a number of articles in the Constitution which emphasise the overwhelming character, the unitary character of our polity. Article 3 gives the power to the Parliament of India to create a new state, to bifurcate states, to change the boundary of states, to change the name of a state. Now can you do it in a federation of states? This is a power which gives pre-eminence to the Centre, to the Union, through its Parliament.” There are several other articles which give pre-eminence to the central government.
Or take the case of the Planning Commission. It was not a constitutional body and was set up only by an executive order of the central government. The Commission had a huge role to play in the money that the states received from the central government over the years.
The Indian Constitution was framed in the late 1940s and came into effect on January 26, 1950. The challenges that a newly independent country faced were very different from what it faces now. As Sinha said: “When the Constitution was framed and given to the people of this country in 1950, all this was very well, because we had challenges and those challenges had to be met and therefore we created a Union of States and not a Federation of States because India had to remain united. Over a period of time, as these threats and dangers have receded.”
Also, a country as diverse as India is, cannot be governed out of New Delhi. Currently there are 66 central government schemes. But does every state need all of these schemes? Does one state need one scheme more than the other? And at a more basic level does this one size fits all approach really work? These are questions that need to be answered.
In fact, in his first independence speech Modi dissolved the Planning Commission. It has been replaced by the NITI Aayog. At the first meeting of the NITI Aayog’s governing council some interesting questions were raised by the chief ministers of various states. The chief minister of Kerala, Oomen Chandy, rightly pointed out that schemes like Jan Dhan Yojana and Beti Bachao, had little relevance in his state, which has very good social development indicators.
Manohar Lal Khattar, the chief minister of Haryana, suggested that central government schemes should be done away with totally. Vasundra Raje, chief minister of Rajasthan suggested that number of such schemes should be limited to ten.
The central government allocates funds to these schemes and then monitors them (hopefully). But they need to be managed at the local level. And how is it possible for the bureaucracy at the local level to manage 66 schemes at the same time? So, there is no denying that the number of central government sponsored schemes need to come down. A committee of chief ministers has been formed to study these schemes.
Another interesting thing that has happened is that the fourteenth finance commission has increased the states share of central taxes to 42% from the earlier 32%. As the commission said in its report: “increasing the share of tax devolution to 42 per cent of the divisible pool would serve the twin objectives of increasing the flow of unconditional transfers to the states and yet leave appropriate fiscal space for the Union to carry out specific purpose transfers to the states.”
Increasing the flow of unconditional transfers to states also goes a long way in strengthening cooperative federalism. The dependence of the state governments on central government grants will come down. Along with this, the central government has also decided to hand over all the money coming from the auctioning of coal blocks to the states in which the blocks are located.
One question that crops up here is whether the states have the systems in place to spend this money that is likely to come to them in the years to come. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research ask in a recent research note: “The question is whether the states have the administrative capability and willingness to be able to spend the increased allocation, productively and transparently. This remains an open question at this stage.”
Further, it needs to be pointed out that the combined fiscal deficit of the states has been falling over the years. In 2009-2010, it amounted to 2.91% of the gross domestic product(GDP). In 2014-2015, it is expected to be at 1.90% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends.
But the overall average number does not tell us the complete story. Within this, some states have done well on the fiscal front whereas some haven’t. As State Finances: A Study Of Budgets Of 2013-14 authored by the RBI points out: ““Many state governments have accumulated sizeable cash surpluses in recent years, reflecting the fiscal consolidation process as well as their precautionary motive of building a cushion for their expenditures.”
“On one end of the spectrum, there are states such as Orissa, Maharashtra, Tamil Nadu and Karnataka whose fiscal position is in better shape, while at the opposite end there are states such as Bihar, West Bengal and Uttar Pradesh which fare poorly in terms of fiscal prudence,” Baig and Das point out.
States which haven’t done well on the fiscal front are also the ones which have a larger population and at the same time they lag behind the country when it comes to per capita income. This means that they will get a higher share of central taxes as can be seen from the following table.
As per the formula Uttar Pradesh (18%), Bihar (9.7%) and West Bengal(7.3%) will corner 34% of the central government taxes. These are the states where money actually needs to be spent. Nevertheless, the question is whether these states have the mechanisms in place to spend the extra money that will come to them. As Baig and Das point out: “States which are poor and populous (but fiscally weak), such as Uttar Pradesh, Bihar and West Bengal would be receiving a higher allocation of the increased transfer of funds from the central government. Transferring larger share of resources to states which have historically been fiscally imprudent, could prove to be counterproductive.”
This is something which could hold back the benefits of cooperative federalism in the years to come and needs to be set right. Ultimately the state governments are much closer to the people and have a much better understanding of where the money is best spent.
The column originally appeared on The Daily Reckoning on Mar 25, 2015