Time to deepen the federal dialogue

Our fiscal architecture will have to navigate tension between the imperatives of redistributive transfers and rewarding efficient development
Kerala chief Minister Pinarayi Vijayan and finance minister Thomas Isaac with Union Finance Minister Arun Jaitley.(Sonu Mehta/HT PHOTO)
Kerala chief Minister Pinarayi Vijayan and finance minister Thomas Isaac with Union Finance Minister Arun Jaitley.(Sonu Mehta/HT PHOTO)
Published on Apr 25, 2018 11:59 AM IST
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ByYamini Aiyar

The fracas over the Terms of Reference (TOR) of the Fifteenth Finance Commission (FFC) highlights important tensions in Centre-state relations today. It also serves as an urgent reminder of the need to strengthen the institutional mechanisms through which these relationships can be mediated and ultimately re-negotiated.

The rallying point in the current dispute is the mandate given to the FFC to use the 2011 rather than 1971 census data as the basis for determining revenue share across states. This, southern states argue, will serve to penalise their success in controlling population growth by reducing their share in the overall resource pool. Despite its political salience, this argument has little conceptual validity. For one, it undermines the core redistributive principle that underpins general purpose revenue transfers. As economist Govind Rao has argued, these transfers are meant to enable states to provide comparable levels of public services and must be provided at current population rates. Given India’s wide regional disparities, richer states subsiding poorer ones is inevitable. But the ongoing debate does bring to the fore a critical challenge that our fiscal architecture will have to navigate — the tension between the imperatives of redistributive transfers and rewarding efficient development. Balancing this tension is going to be the FFCs greatest challenge and will likely shape the future of fiscal federalism in India.

This dispute also highlights a second tension inherent in Centre-state relations — an increasingly decentralised political economy coexisting with a deeply centralised fiscal architecture. Constitutionally, India’s fiscal federal arrangement has several centralising features. Over time, this centralisation has deepened with New Delhi increasingly encroaching on subjects that are the purview of the states. In 2015, the 14th Finance Commission attempted to reverse this trend, but with limited impact. In fact the real problem with the FFC TOR is the attempt to bias the commission towards undermining this decentralisation effort.

States have long complained, from as far back as the Sarkaria commission report to the recent 14th Finance Commission, about fiscal centralisation. In 1996 a meeting of chief ministers in Hyderabad issued a statement titled Federalism Without a Centre, a slogan that gained fame when the scholar, Larwence Saez, used it as a title for his book on the evolving nature of Centre-state relations. But these complaints never translated in to a political push for greater fiscal decentralisation. And here’s the puzzle. Since the 1990s, states have actively used their political bargaining power at the Centre to renegotiate their political and economic relations. Yet the centralised fiscal architecture has persisted.

One explanation is offered by TN Srinivasan and Jessica Seddon in an insightful essay. They argue that India’s economic and political structure discourages collective action by states. I would add another argument. Inter-governmental transfers are viewed as a technocratic issue best left to bureaucrats. And our bureaucrats are great centralisers. This is not to suggest that centralised transfers have not been used politically. Studies on planning commission transfers demonstrate this well. The argument is that the centralised nature of fiscal transfers is not a critical bargaining point in the evolving federal dialogue.

It is against this backdrop that the recent meeting of southern finance ministers in Kerala is significant, even if the articulation of the problem as a north-south issue is flawed. First, the issue of fiscal transfers is finally entering the political debate on deepening federalism. If harnessed well, this could result in nudging the fiscal architecture toward greater decentralisation. Second, it highlights the possibility of collective action from states. But for this to translate in to a meaningful engagement that goes beyond political posturing, the Centre needs to open up institutional spaces for a meaningful Centre-state dialogue. Karnataka Chief Minister Siddaramaiah’s now viral Facebook post on federalism emphasises this in his demand for an institutional mechanism akin to the GST council.

In this government’s early days, when the PM repeatedly invoked the idea of co-operative federalism and dismantled the Planning Commission, many had suggested that a co-operative federalism agenda would be best served through a revitalised Inter-State Council (ISC) tasked with creating a deliberative space for Centre-state dialogues. Instead, the NITI Aayog was created. But the NITI Aayog is not a platform for dispute resolution and political deliberation. Rather, it is a technocratic space for idea generation and developing a monitoring framework to guide Centre-state fiscal relations. Moreover, early attempts to revitalise the ISC were abandoned, resulting in an institutional vacuum.

Federalism in India is at a crossroads. To manage the current fracas, New Delhi must strengthen mechanisms for institutionalised deliberation with states. But can this be done by a PM whose instinct is to centralise?

Yamini Aiyar is president and chief executive, Centre for Policy Research

The views expressed are personal

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