The future of Indian federalism

MADHAV KHOSLA

THE Indian federal model has always been heavily centralized.1 Yet, over the past half decade or so, the nature and form of centralization has grown exponentially, raising questions about the very character of federalism in India. The changes are perhaps captured most powerfully on fiscal-related matters. From the loss in the taxation powers of the states under the new Goods and Services Tax (GST) schema, with its tensions over the compensation to be given by the central government to the states, to the transfer of central funds to the states from the pool of centrally collected tax revenues, which have become linked to the formation and implementation of particular welfare schemes at the state level, India’s states have far less power today than they have previously enjoyed.2

Such a scenario naturally invites a question over how the formal constitutional scheme has accommodated such a profound shift in the distribution of power. In particular, federalism-related changes invited constitutional scrutiny, and, if so, how has the Supreme Court adjudicated such matters? This question has been relatively understudied for two reasons. First, a great number of federalism-related changes are yet to receive judicial attention, such as the Jammu and Kashmir Reorganisation Act in 2019 which divided the state of Jammu and Kashmir and placed the two new entities under the authority of the central government. Second, the rights-related controversies over the last half decade or so – and the broader approach of the Supreme Court that they have brought to light – have been so significant that commentary on Indian federalism has somewhat inevitably receded into the background.3

Given this, the closing of 2021 is an ideal opportunity to reflect on one crucial decision of the Supreme Court during this past year that has invited less attention than one might have expected. What might this case – the case of Union of India v. Rajendra N. Shah – tell us about the future of Indian federalism?4 This case dealt with the constitutionality of a 2011 amendment to the Indian Constitution which introduced a chapter on ‘The Co-operative Societies’ in the constitutional text. The regulation of co-operatives has, of course, long been a matter of legal interest in India. The Constitution mentions the matter in Entry 32 of List II of Schedule VII to the text, giving the states the exclusive power to legislate with regard to cooperative societies.

Over the past two decades, there has been a growing political interest in the better regulation of co-operative societies, and questions have been raised about their management, autonomy, and professional conduct. In due course, political momentum grew around a desire to amend the Constitution to include a new set of provisions that would guide, inform, and determine the functioning of co-operative societies. In furtherance of this, the Constitution (Ninety Seventh Amendment) Act was prepared in 2011. The constitutional amendment’s self-articulated aim was to initiate reforms within co-operative societies to ensure elections at regular intervals and address a growing lack of professionalism within such bodies.

The Constitution (Ninety Seventh Amendment) Act inserted a new Part (Part IXB) in the Constitution, as well as additional provisions such as a new clause within the Directive Principles of State Policy. As per Part IXB, rules were laid down with regard to the board of directors of a co-operative society; the terms of office for the board and office bearers; disciplinary action that would apply to the board; the rights that members may have to receive information; auditing requirements and the filing of returns; and so forth. Simply put, the new segment of the constitutional text included a diverse and detailed set of ways in which co-operative societies would be required to function.

An interesting question that arose as a result of this constitutional amendment was the following: Could these provisions in Part IXB be brought into being without the consent of the state governments? The question arises because of Article 368(2) of the Constitution. As per this provision, constitutional amendments that, among other things, alter the power of the state governments must be ratified by at least half of the state legislatures. In other words, the majority of states must assent to a constitutional amendment that alters the power of state governments. Such amendments cannot be brought into force merely by the power of Parliament. The requirement in Article 368(2) therefore raised the question of whether Part IXB had impacted the power of state governments – as we have noted above – as Entry 32 of List II of Schedule VII grants states the exclusive
power with reference to co-operative societies.

The central government’s argument in defence of Part IXB took three forms. First, there was an attempt to draw a distinction in the provisions contained in this Part. It was suggested that Part IXB deals with multi-state co-operative societies that might have an impact beyond a single state as well as co-operative societies that function within a single state; and at least with reference to multi-state co-operative societies, the impugned provisions would be valid.

Second, there was an effort to suggest that, de facto, states had essentially consented. This consent was evident both by the fact that a majority of states had enacted statutes in furtherance of Part IXB, thereby underlining their acceptance of the Part, and that states had been extensively consulted prior to the enactment of the impugned constitutional amendment. Finally, it was suggested that, on a substantive reading of Part IXB, no power had been usurped from the state legislatures: the Union had not been granted any additional powers under these new provisions.

The challenge to Part IXB offered a different set of claims. First, it was claimed that the provisions pertaining to multi-state co-operatives and those within a state were linked in ways that were inseparable. Second, it was argued that the requirement in Article 368(2) is a procedural and legal requirement: it is not a requirement, that is, which can be achieved by the states implementing the constitutional amendment and thereby expressing some form of consent. The consent that is demanded by Article 368(2) is of a specific and particular kind.

Finally, it was contended that the power of state legislatures had indeed changed by way of the new provisions. For example, the maximum number of directors that a co-operative society could have was now specified. The defence that the Union had not been granted any additional powers under Part IXB somewhat missed the point because the Union had already exercised powers through enacting the provisions and thereby reduced the power of the states. There was no need to directly transfer power, it was suggested, from the states to the Union, as the same was done by the very provisions of the amendment.

The Supreme Court assessed these varying positions by reflecting on the constitutional schema. As per Articles 246 and Schedule VII, the Constitution was clear in its demarcation of powers. The matters in List I of the Schedule are those on which the Union government has the exclusive power to legislate; the matters in List II of the Schedule are those on which the state governments have the power to legislate; and the matters in List III are those on which the Union and states governments can concurrently legislate. Where a matter falls under an item in either List I or List II, then there can be no conflict with another law in such a situation, because the applicable legislature has plenary power – if it has the power to enact legislation pertaining to a particular field, then it has the complete power to do so.

With regard to co-operative societies, there were three relevant entries. There was Entry 32 of List II, which granted states the exclusive power to legislation on the ‘Incorporation, regulation and winding up of corporations, other than those specified in List I, and universities; unincorporated trading, literary, scientific, religious and other societies and associations; co-operative societies.’5 And there were two entries in List I, dealing with the exclusive legislative power of the Union government. The first was Entry 43 which mentioned the ‘Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations, but not including co-operative societies.’6 The second was Entry 44, which read: ‘Incorporation, regulation and winding up of corporations, whether trading or not, with objects not confined to one State, but not including universities.’7

Upon a reading of these provisions, it was clear, the Supreme Court held, that co-operatives societies fell solely and fully within the domain of the state governments. In the case of multi-state co-operative societies, however, the power would lie with the Union government given Entries 43 and 44 of List I. Prior cases had, the court noted, underlined this division between co-operative societies and multi-state co-operative societies. As a result, there was no overlap between the powers of the central and state governments. As the court put it, ‘co-operative societies as a subject matter belongs wholly and exclusively to the state legislatures to legislate upon, whereas multi-state co-operative societies, i.e., cooperative societies having objects not confined to one state alone, is exclusively within the ken of Parliament.’8

The question was therefore whether the 97th Amendment had brought about a change in the power of the state governments – in the power granted by Entry 32 of List II. Would this amendment be invalid on the ground that the procedural requirement of ratification had not been complied with?

In answering this question, the court held that the ‘change’ that was specified in Article 368(2) is not one that had to be explicit and direct. That is to say, for a change to occur, it was not necessary that the textual language in a provision had to be altered. Rather, one needed to focus on the impact
and effect of the constitutional amendment, and how such an amendment would alter the power that states effectively had. Crucially, the requirement was not – as the central government had contended – that power needed to be transferred from the state to the Union government. Even if such transfer did not occur, there could still be a change if ‘there is enlargement or curtailment of the subject matter contained in a field of legislation exclusively reserved to the States.’9

Part IXB was to be analysed considering this test. The Part contained provisions where, as has been observed, requirements were laid down regarding the directors of a co-operative society; rules were listed with reference to elections; various specifications were mentioned in the context of the board; financial and auditing prescriptions were articulated; and so forth. Given these provisions, it was clear, the Supreme Court held, that ‘the exclusive legislative power that is contained in Entry 32 List II has been significantly and substantially impacted in that such exclusive power is now subjected to a large number of curtailments.’10 The power under this Entry could now ‘only be exercised subject to the provisions of Part IXB.’11

Even though the specific clause in the Constitution – Entry 32 of List II – had not been altered in any way, the impact on the provision and on the power that it granted state governments was clear. As a result, the court concluded that such a change would require ratification by at least half of the state legislatures; and that, in the absence of such ratification, such a change would violate the procedural requirements in Article 368(2). The telling contrast was with the 73rd and 74th amendments to the Constitution in 1992 where relatable provisions were included regarding panchayats and municipalities. In that case, however, unlike the present instance, the amendments were ratified by the state legislatures. (The court proceeded to hold that Part IXB was severable and that those provisions that pertained to multi-state co-operative societies would stand.)12

How might the Supreme Court’s opinion in Rajendra N. Shah – authored by Justice R.F. Nariman – inform the future of Indian federalism? Even though state power has been constrained and limited in new ways in the recent past, the court’s verdict is promising in important ways. What is crucial is not so much the interpretation of Article 368(2), but the broader principle that emerges – the principle that, in reviewing the power of the states under the Indian Constitution, one must not only consider the formal textual changes to the power that states enjoy, but the means by which new legal measures alter the use, meaning, and interpretation of those powers.

It is possible to see this principle informing battles over legislative competence in important ways. Consider a matter of growing political controversy: the role of the central government in matters that one regards as falling within the exclusive power of state governments. Two instances come to mind. The first is the role of central investigative and crime-related agencies within states. The battle between state and central law enforcement agencies is not new. It has been the subject of much constitutional contestation in the case of anti-terror legislation. Whereas the Constitution grants the Union exclusive legislative powers with reference to the Defence of India, it grants the state government exclusive legislative power with regard to public order.

A case like Rajendra N. Shah encourages us to ask not only whether the actions of central agencies might encroach upon the powers in List II in formal terms, but more thoughtfully, what the practical and effective impact might be on the public order and policing power of the states.

A very different instance are the farm laws and the battle over agricultural reform. Here, again, there is a legal contest – that between the state’s authority over agriculture and the central government’s authority over the right to regulate inter-state commerce. Though the agricultural laws appear to have been stalled for the moment as a result of their political fallout, Rajendra N. Shah’s emphasis would be equally useful – and promising – in such a case. Here, again, the case would ask us to focus not necessarily on the distribution of power between the central and state governments, but rather on whether the legal changes effectively alter the ways in which the states can exercise their power. Such a shift in orientation is, to be sure, a subtle one, but it holds the promise of seeing India’s federal schema through the lens of the state governments, and is focusing on the use of power rather than on its textual formulations.

In the ongoing debates over Indian democracy, much has been said about the role of federalism, and the ways in which this system of government may enable new political allegiances and possibilities. How the relationship between democracy and federalism unfolds in India will in part depend on how federalism will be understood as a legal principle that distributes power. In a time when the Supreme Court’s authority and role has been questioned in profound ways, Justice Nariman’s opinion in Rajendra N. Shah is among the most significant and hopeful interventions of this past year.

Footnotes:

1. See C.H. Alexandrowicz, ‘Is India a Federation?’ International and Comparative Law Quarterly3(3), July 1954, pp. 393-403; Madhav Khosla, India’s Founding Moment: The Constitution of a Most Surprising Democracy. Harvard University Press, Cambridge, 2020, pp. 72-109; Louise Tillin, ‘Building a National Economy: Origins of Centralized Federalism in India’, Publius: The Journal of Federalism 51(2), Spring 2021, p.161.

2. See 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, p. 187; Yamini Aiyar and Louise Tillin, ‘“One Nation”, BJP, and the Future of Indian Federalism’ 19(2), India Review, 2020, pp.117-135; Madhav Khosla and Milan Vaishnav, ‘The Three Faces of the Indian State’, Journal of Democracy 32(1), 2021, pp. 117-118.

3. On the Supreme Court’s recent history, see Gautam Bhatia, ‘The Troubling Legacy of Chief Justice Ranjan Gogoi’, The Wire,16 March 2019; Anup Surendranath et al., ‘Justice Arun Mishra and the Supreme Court’s Rule of Whim’, Article 14, 5 September 2020, www.article-14.com/post/justice-arunmishra-the-supreme-court-s-rule-of-whim.

4. Union of India v. Rajendra N. Shah,2021 SCC OnLine SC 474.

5. Entry 32, List II, Schedule VII, Constitution of India.

6. Entry 43, List I, Schedule VII, Constitution of India.

7. Entry 44, List I, Schedule VII, Constitution of India.

8. Rajendra N. Shah, note 4, at para 26.

9. Rajendra N. Shah, note 4, at para 60.

10. Rajendra N. Shah, note 4, at para 65.

11. Rajendra N. Shah, note 4, at para 65.

12. There is an important debate to be had here, as Justice K.M. Joseph’s partly dissenting opinion reveals, about the conditions under which severability can apply, but we shall leave this aside for the present moment.