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FEDERALISM in India is at an important juncture. In the last five years, India has witnessed significant changes in its political, fiscal and institutional landscape that have substantially influenced the dynamic of centre-state relations. These include the formation of a single-party majority government at the Centre, greater congruence between the Centre and state governments and the emergence of political ‘strong’ leaders at both the Centre and states. On the fiscal front, the 14th Finance Commission recommendations to enhance devolution to states, the dismantling of the planning commission, establishment of the NITI Aayog and the Goods and Services Tax have significantly altered the foundations of the fiscal federal architecture. With the dismantling of the Planning Commission and the creation of new institutions like the GST Council, the institutional architecture for negotiating centre-state relations too has undergone significant transformations.

What impact have these changes had on the overarching nature of India’s federal bargain and what does the future hold? Through a series of articles that traverse the wide range of changes in India’s federal set-up, both in the political and fiscal realm, this issue of Seminar hopes to better understand the new dynamics of federalism in India. We highlight a number of trends and questions that we believe are critical to deepening our understanding of the implications of current transitions for the future.

The BJPs emergence as the dominant single party in 2014 and its subsequent consolidation of political power across India, after decades of coalition governments and regionalization of politics, marked a turning point in India’s federal trajectory. In the 1990s regional political parties began to play an increasingly important role in reshaping India’s federal character. As Yogendra Yadav and Suhas Palshikar argued in Seminar a decade ago, voters in the 1970s and 1980s voted in the state assembly elections as if they were choosing their prime minister; since the 1990s voters began to vote for the Lok Sabha as if they were choosing their chief minister.1 With state dynamics dominating national politics, power too shifted away from Delhi. As state governments became the primary arena in the minds of voters, state governments were frequently able to claim credit for the implementation of flagship national policies, such as the National Rural Employment Guarantee Scheme. Even opposition ruled states frequently saw merit in improving the implementation of national policies through sponsored schemes, because they were able to claim electoral credit.2 This was also a phase of party system regionalization in which national coalition governments, which brought together national and regional parties, offered a platform for a degree of cooperation between the Centre and the states.

The emergence of the BJP as a dominant national party in 2014 was a challenge to this trajectory of regionalization, even though the share of seats won by regional parties did not fall.3 Rather, the political dynamics unleashed by the BJP’s dominance at the Centre and the party’s quest for a Congress-mukt Bharat heightened the zero-sum dimensions of competition between the Centre and the states. Opposition ruled states complained that they were not consulted or involved in decision-making at the Centre, while their incentives to cooperate with the Centre in policy implementation have also diminished as the prime minister directly claims credit for flagship national schemes. Political centralization has diminished the spaces for intergovernmental cooperation or negotiation between the central government and states.

An important feature of this new story is the tensions it has exposed in the existing institutional architecture for mediating centre-state relations and the ability to keep New Delhi’s centralizing impulses in check. Over decades, key constitutional authorities, like the governor, charged with mediating the federal bargain, have become an important instrument through which the goal of re-centralization can be fulfilled. Against the background of a single party majority government at the Centre, this tendency has remained unchecked in these last five years. From Delhi to Arunachal Pradesh, Uttarakhand and Jammu and Kashmir, the office of the governor has been increasingly used to impose New Delhi’s political will and encroach on state autonomy. This has pushed new attempts to defend states’ rights such as those made by the Delhi government for full statehood. These tensions have also resurfaced questions about whether the Rajya Sabha’s role as part of the federal architecture of the Indian Constitution might be strengthened to enable it to act as a space for regulating centre-state relations.

One of the greatest puzzles of India’s federal trajectory in the 1990s and 2000s was the coexistence of an increasingly decentralized polity with a centralized fiscal federal architecture. The delegation of fiscal powers and responsibilities specified in the Constitution as Rao and Singh argue, reflects a ‘centripetal bias with the Centre having "overwhelming and overriding" economic powers.’4 To put it in perspective, states incur 60 per cent of government expenditure but collect only 40 per cent of revenue.5 All state borrowing is subject to approval from the Union.

In the 1990s, even as India’s political landscape witnessed a shift toward greater state autonomy in political, economic and social policy spheres, the overall centralized nature of India’s fiscal architecture persisted and arguably deepened.6 To illustrate, calculations by the 14th Finance Commission reveal that between 2005 and 2012, central government spending on state subjects increased from 14 to 20 per cent and its spending on Concurrent Subjects increased from 13 to 17 per cent. The bulk of this spending took place through specific-purpose transfers or Centrally Sponsored Schemes financed and monitored through the Planning Commission’s plan funds, making CSSs one of the most important vehicles of central transfers to states. To illustrate, during the 11th Five Year Plan (2007-2011), scheme specific transfers accounted for over 40 per cent of central transfers to states.

States have long complained about fiscal centralization. From as far back as the 1969 National Development Council meeting to consultations with the 14th Finance Commission in 2013, state governments’ have always argued strongly against the centralized nature of CSS and encroachment by the Centre on the constitutional mandate of state governments. Chief ministers’ in particular, resented having to seek Planning Commission approval for state plans. Several commissions noted the negative consequences of the proliferation of CSSs and recommended reduction in their quantity and greater flexibility in their design. However, these recommendations were rarely implemented and despite complaints, centralization of India’s fiscal architecture has never been a political fault line.

An important feature of this centralized approach is that it has tended to undermine the states’ own innovation and practices, particularly in welfare delivery. The provisions in the National Food Security Act (NFSA), for instance, were far less ambitious than practices followed in states like Chhattisgarh and Tamil Nadu. In fact, in the political debate that preceded the passage of the NFSA, Chief Minister Modi, argued strongly against the ‘centralizing’ character of the proposed law, which he claimed sought to ‘impose’ requirements on states and ran the risk of destroying centre-state relations. This increasingly centralized approach to financing welfare created new lines of tension in centre-state relations that posed an important challenge for the architecture of welfare delivery.

As a chief minister, Modi had been at the receiving end of this centralization and was a great votary for more fiscal devolution to the states. In fact, in his submissions to the 14th Finance Commission, before he became the prime minister, he had suggested that the central government should provide 50 per cent of its tax revenues to the states instead of 32 per cent.7

Perhaps because of his experience as CM, greater fiscal decentralization and deepening federalism formed an important part of his political narrative. On taking office as prime minister in 2014, Modi repeatedly stressed the pivotal role of state governments as ‘drivers of transforming India’, appealing to states to ‘imbibe the spirit’ of cooperative federalism. Early in his tenure, Modi initiated two critical changes to India’s fiscal architecture.

First, in 2015, the Modi government accepted the recommendations of the 14th Finance Commission (FFC) to enhance sub-national (state) government’s share in the divisible pool of taxes by 10 percentage points from 32 per cent to 42 per cent. The stated objective of this recommendation was to strengthen fiscal decentralization to states and reduce discretion in transfers to states. This inevitably opened up the opportunity for restructuring (and even reducing) centrally sponsored schemes.

Second, in his first Independence Day speech, the PM announced his plans of dismantling the Planning Commission. In January 2015, through a cabinet notification, the commission was replaced with the NITI Aayog. The NITI Aayog was mandated to move the country away from centralized planning and financing for development and instead, create a platform to ‘bring states to act together in national interest and thereby foster Cooperative Federalism.’8 The primary mandate of the NITI Aayog was to reshape the fiscal federal compact. The cabinet resolution establishing the Aayog made the case: ‘States of the Union’, it argued, ‘do not want to be mere appendages of the Centre’ and it was for NITI to reshape this relationship such that states became ‘drivers of national development.’ Perhaps in response to this mandate, one of the Aayog’s first tasks was to set up a chief ministers’ sub-committee to develop recommendations to restructure the design of CSS. Both these changes marked an important, arguably historical, step toward decentralizing India’s fiscal federal architecture. But these two steps also raised important concerns and tensions in the nature of centre-state fiscal relations.

First, how does greater decentralization to states address regional inequity and what should the role of the Centre be in fulfilling its responsibility of ensuring quality public services? In a federal system, national governments have a legitimate responsibility to ensure all citizens receive minimum standards of public services. In India, widespread regional disparities or what economist Vijay Kelkar defines as the ‘development imbalance’ between states, makes central funding of this nature particularly critical.9 One of the biggest concerns expressed on the Union governments’ acceptance of the 14th Finance Commission recommendations (and subsequent budget cuts to CSS in the 2015 budget) was related to the impact this would have on pursuing national development goals like health, education and nutrition.

But the dismantling of the Planning Commission created a new challenge. One of the most critical roles played by the Planning Commission was related to development (plan) expenditures. State plans were approved by the commission which also advised the Union government of resource transfers to states through plan funds. The bulk of these transfers were done through discretionary central schemes. These schemes were administered by line departments but the commission played a critical policy coordination function linking schemes to state plans and determining resource availability. Moreover, because the commission oversaw the allocation of plan funds, states could broadly predict the quantum of monies they were likely to receive, enabling somewhat predictable expenditure. The NITI Aayog was created without any resource transfer responsibility and with that the process of transferring plan grants, linked to a broad development plan, as a policy instrument, was eliminated.

Central schemes, however, survived raising a critical question of who would perform the crucial policy coordination function that rested with the erstwhile Planning Commission. The challenge also lay in creating fiscal instruments that ensured autonomy to states and got away from the failings of the commissions administration of funds. In the institutional vacuum thus created, the finance ministry and central line ministries took over. They all but ignored efforts by the NITI Aayog, including a chief minister-led sub-committee’s report on reforming CS and contributed to deepening rather than weakening centralization.

Importantly, in 2017, the 15th Finance Commission’s Terms of Reference, mandating the commission to use the 2011 census in place of the 1971 census, to determine revenue share across states, exposed a new fault line in centre-state relations. State governments, particularly in southern India, protested loudly against what they perceived as a fiscal penalty that they would have to pay for their developmental success. This challenge of managing growing fiscal needs of poorer states with demands of relatively richer states is likely to be a critical factor that will shape federal fiscal relations in the next decade.

Second, a new tension that has emerged in federal relations in these last five years comes from increased administrative centralization. This government and the prime minister’s personal penchant for grand announcements and ambitious targets with close monitoring of flagship schemes has resulted in a centralized administrative style. Aided by political alignment between the Centre and states, administration under this government has been about bypassing state governments to establish direct lines of communication and control with state administrators resulting in entrenching centralization rather than promoting federalism. This strategy is particularly visible in efforts led by the GoI like the Aspirational Districts Programme, a flagship scheme aimed at improving welfare in 117 poorest districts through ‘competition and collaboration’, and the Gram Swaraj Abhiyan, a campaign under which central government employees (over 1200 in April and 800 in July 2018) have been sent out to achieve ‘100 per cent saturation’ across seven flagship schemes, including Ujjwala, Saubhagya and other insurance schemes.10

This, the argument goes, will improve efficiency. After all, direct interactions with the PM can be motivating and increased central monitoring can only improve delivery. But behind this veneer of efficiency is a larger issue of accountability and potential sub-version of the federal bargain. As Reddy and Reddy argue, there is a danger today of cooperative and competitive federalism being replaced by coercive federalism.

Finally, as this discussion highlights, the setting up of the NITI Aayog and the implementation of the FFC recommendations raises important questions about the institutional architecture needed for negotiating federal fiscal relations in this new environment. When the Planning Commission was dismantled, several commentators argued that the cooperative federalism agenda would be best served through a revitalized Inter-State Council (ISC) tasked with creating a deliberative space for centre-state dialogues. Instead the NITI Aayog was created. But the NITI Aayog has emerged not as a platform for dispute resolution and political deliberation. Rather it is a technocratic space, responding to a mandate set by the Union government rather than with political cooperation from states. At the same time, as discussed in the previous section, key constitutional bodies charged with mediating the federal bargain like the governor’s position and the Rajya Sabha have come under significant stress. There is today an urgent need to reform (and renew) the institutional landscape for negotiating centre-state relations in India.

This brings us to the final transition in India’s fiscal federal institutional landscape – the passage of the Goods and Services Tax (GST) and setting up of the GST Council. The GST Council is now a critical new institutional mechanism for shaping centre-state relations and its functioning will need to be closely studied. However, it is also important to recognize that the GST marks an important trade off, one that state governments’ have willingly made, between state autonomy and the financial benefits of tax harmonization. Even though the broad consensus is that the GST, in its current design, is deeply flawed, that states and the Union have been able to negotiate a complex set of issues to enter in to a GST model and create a GST Council suggests the possibility of developing new institutional pathways to renegotiate and arguably deepen the centre-state compact. This capability is likely to shape the future of India’s federalism in years to come.

YAMINI AIYAR and LOUISE TILLIN

 

Footnotes:

1. Yogendra Yadav and Suhas Palshikar, ‘Ten Theses on State Politics in India’, Seminar 591, November 2008, pp. 14-22.

2. This dynamic in centre-state relations and its impact on subnational implementation of centrally sponsored schemes is explored in Louise Tillin and Anthony W. Pereira, ‘Federalism, Multi-Level Elections and Social Policy in Brazil and India’, Commonwealth and Comparative Politics 55(3), 2017, pp. 328-352.

3. Louise Tillin, ‘Regional Resilience and National Party System Change: India’s 2014 General Elections in Context’, Contemporary South Asia 23(2), 2015, pp. 181-197.

4. M. Govinda Rao and Nirvikar Singh, The Political Economy of Federalism in India. Oxford University Press, Delhi, 2006.

5. Y.V. Reddy and G.R. Reddy. Indian Fiscal Federalism. Oxford University Press, Delhi, 2019.

6. See T.N. Srinivasan and Jessica Seddon Wallack, ‘Inelastic Institutions: Political Change and Intergovernmental Transfer Oversight in Post-Independence India’, India Policy Forum, National Council of Applied Economic Research 7(1), 2011; Also, Yamini Aiyar and Avani Kapur, ‘The Centralization Vs Decentralization Tug of War and the Emerging Narrative of Fiscal Federalism for Social Policy in India’, Regional and Federal Studies 29(2), 2019, pp. 187-217 for a detailed discussion on the political economy of fiscal centralization.

7. Yamini Aiyar, ‘Maximum Schemes, Minimum Welfare’, in Niraja Gopal Jayal (ed.), Re-Forming India: The Nation Today. Penguin Viking, Gurugram, 2019.

8. NITI Aayog (National Institution for Transforming India), ‘Overview’. niti.gov.in/content/overview

9. See Vijay Kelkar’s lecture reproduced in this issue.

10. See the review in this issue of Seminar of Sara Niedzwiecki’s book Uneven Social Policies which studies the implications of centralized credit-claiming for social policies on subnational policy implementation in Latin America. These questions are very important for India to take on board at this juncture.

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