India’s federalism as enshrined in the Constitution has proven to be remarkably resilient. In what is a masterly feat in political engineering, the Constitution skillfully blends federal characteristics such as division of powers, a written Constitution and an independent judiciary with unitary attributes like a strong central government, emergency provisions and centrally appointed governors. It is this unique federal structure with unitary features that has helped us navigate the governance of a large and diverse nation with distinct regional identities
India’s federalism as enshrined in the Constitution has proven to be remarkably resilient. In what is a masterly feat in political engineering, the Constitution skillfully blends federal characteristics such as division of powers, a written Constitution and an independent judiciary with unitary attributes like a strong central government, emergency provisions and centrally appointed governors. It is this unique federal structure with unitary features that has helped us navigate the governance of a large and diverse nation with distinct regional identities and challenges.
For sure, there have been Centre-state tensions. But which federal country hasn’t had problems? Canada has its long-standing Quebec separatist movement and Spain the Catalan independence movement. Amazon deforestation has been a source of centre-state friction in Brazil while Nigeria and Ethiopia have been roiled by ethnic tensions. And notably, East Timor separated from Indonesia entirely because of a deep-seated grievance about resource sharing. By comparison, we have been able to manage our tensions without allowing them to boil over which is a testament to the checks and balances instituted in the Constitution.
As much as our federalism has adapted to changes along the way, it’s disconcerting that it has also moved from being cooperative federalism to combative federalism. On the political dimension, the fault line has been the growing view of states governed by Opposition parties, including regional parties, that they get discriminatory treatment when it comes to central patronage.
The cleavage on the fiscal dimension is sharper. States contend that central resource transfers to them are not large enough to bridge the gap between their own revenues and their expenditure responsibilities. They also don’t have total autonomy over how they spend the money that the Centre gives them. Moreover, the Centre also controls how much they can borrow and from whom.
This contention of states is debatable. Our arrangements of fiscal federalism — even if not the best practice — are not necessarily skewed against them. Consider the following evidence.
As per the original constitutional mandate, states were getting a share in just two central taxes -- personal income tax and Union excise duties. That arrangement was changed in favour of states through a constitutional amendment in the year 2000 by giving them a share in the total taxes collected by the Centre on the ground that the states should enjoy the buoyancy of the entire pool of central taxes rather than just a couple of them.
The abolition of the Planning Commission too has increased the autonomy of states vis-à-vis the Centre. The introduction of the Goods and Services Tax (GST) has opened another battlefront. It is short-sighted for the states to see the GST as a central initiative in aid of which states have been forced to make compromises. For sure, states have surrendered some of their autonomy in raising taxes but so has the Centre. Eventually though, as the GST expands the tax base and arrests tax leakage, both the Centre and states stand to benefit. It is that promise of a positive sum game that must inform states’ stance on GST.
Even as there is no case for states to believe that the terms of our fiscal federalism are loaded against them, there is at the same time a strong case for the Centre to show greater sympathy for the states’ fiscal challenges and be more consultative.
Take, for example, the practice by the Centre of increasingly resorting to the levy of cesses and surcharges rather than raising taxes. When the Constitution was amended in the year 2000 giving states a share in the Centre’s total tax pool, the implicit understanding was that the Centre would resort only sparingly to cesses and surcharges, and not as a matter of routine as has become the practice. States feel aggrieved that they are being cheated out of their legitimate share of national tax revenue.
The Centre must also realise that the fiscal centre of gravity has decisively shifted in favour of the states. Ballpark estimates suggest that the Centre collects about 60% of the combined revenue (Centre and states) but gets to spend only about 40% of the combined expenditure. This asymmetry is mirrored on the states’ side. Together, they collect 40% of the combined revenue but have the pleasure of spending as much as 60% of the combined expenditure. What this implies at a big-picture level is that our macroeconomic stability, and hence our ability to generate investment and growth, will depend on collective fiscal responsibility by the Centre and states.
We aspire to be a developed country by the time of the centenary of our Independence in 2047. The agenda for getting there is large and complex if also familiar. What is clear is that we cannot become a developed country unless the Centre and states play according to a shared game plan.
That game plan must include the implementation of second-generation reforms aimed at improving the productivity of the economy. The first-generation reforms of the 1990s focussing on liberalising investment, trade and finance could be implemented by the Centre without consulting the states because they fell entirely within its domain. The second-generation reforms we now must implement focussing mainly on factor markets — land, labour, taxation — require not just the consent but the active cooperation and involvement of states.
Centre-state cooperation is vital for us to redeem the pledge we made to ourselves in the Constitution.
Duvvuri Subbarao, formerly governor of the Reserve Bank of India,is now visiting faculty at Yale.The views expressed are personal
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