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The State(s) Of The Nation (Cooperative Federalism)

Several issues such as trust deficit and shrinkage of divisible pools plague Centre-State relations. Together, they make total cooperation difficult

Photo Credit : Bloomberg


Federalism is no longer the faultline of Centre-State relations but the definition of a new partnership of team India. Citizens now have the ease of trust, not the burden of proof and process. Businesses find an environment that is open and easy to work in,” these were Prime Minister Narendra Modi’s words.Modi and his team that took centre stage in 2014, have aggressively been attempting to redefine the principles of cooperative federalism.

The Centre promised decentralisation of power and minimum interference in the State affairs. Modi’s prescription in building strong cooperative federalism included injection of healthy doses of competition among States in attracting FDI and improving ease of doing business. And now with the roll out of the GST, this federal structure will be further cemented, say central government officials.

In 2017, the Niti Aayog called out for competitive “cooperative federalism” stressing that this formula would redefine the relationship between the Centre and the States. Former vice chairman of Niti Aayog Arvind Panagariya put the onus on the States to reimagine brand India. Chief secretaries of States in one of the meetings even showcased the best practices being incorporated in their respective States, a move aimed at promoting cross fertilisation of ideas.

“Cooperative federalism, which also has an amount of healthy competition between States is the way forward. States must be armed with more power,” says Rajiv Kumar, vice chairman, Niti Aayog.

The Divisible Pool
Trust deficit between Centre and States is widening. Most state governments believe the thrust on federalism is limited to lofty ideas and big talks. Many States have shown their displeasure with the way the Centre has been dealing with the States.

Recently, the BJP-led NDA was left red-faced when one of its strongest allies Chandrababu Naidu, president of Telegu Desam Party and Chief Minister of Andhra Pradesh, walked out of the alliance in March. Naidu openly attacked the central government for its attitude towards his State.

In 2015, the 14th finance commission (FC) of India recommended a higher devolution of Centre’s divisible pool to the States. The central government accepted the recommendations and agreed to increase the share from 32 to 42 per cent. The Centre, of course, showcased this as a major move towards building a true federal framework by awarding more powers to States.  The move has failed to satisfy the States and several of them have been crying foul. A close study of data reveals that the Centre’s divisible pool of taxes has shrunk due to a rise in the share of surcharge and cesses, which can be used only for purposes specified and are not devolved to States.

“On one hand the Centre has increased the States’ share (of the divisible pool)... but in reality States are getting a lesser share. The allocation towards various social welfare schemes has also come down, affecting the States’ health in turn,” points out West Bengal’s finance minister Amit Mitra.

Reduced Share Of Booty
What has added fuel to fire are the terms of reference (ToR) of the 15th FC, set up under the aegis of eminent bureaucrat and former revenue secretary N.K. Singh. After the ToR were set, the southern states joined hands in pointing fingers at the Centre. Their fear? Reduced share of booty from the Centre and a strong bias towards a few States, which they feel is contradictory the basic framework of federalism.

Karnakata Chief Minister Siddaramaiah took to Twitter and called for unity among the chief ministers of the south Indian states over the ToR that proposes to take into consideration the 2011 census for arriving at population weightage for devolution of funds from the Centre. Earlier, the practice was based on the 1971 census. “This will further affect the interests of the south: we need to resist,” he tweeted in March.

Many experts have questioned the ToR of the FC. Some have even gone to the extent of terming this as coercive federalism instead of cooperative federalism.

Mitra adds that Centre-States consultations too have thinned down and most decisions are taken unilaterally by the Central government.

Sanjaya Baru, economist and media advisor to former Prime Minister Manmohan Singh, however, says a multi-party democratic federal structure can never be erected on 100 per cent cooperation. “There is always an element of cooperation and competition in a federal system in a multi-party democracy, where political parties too, are competing with each other,” says Baru.

South Versus Rest of India 
The socio-economic parameter and development of each State in India is different and while a few have made substantial progress in terms of employment, literacy and creating a conducive environment for doing business and investments, there are a few which are lagging. Niti Aayog CEO Amitabh Kant stirred up another controversy when he said that the southern and western parts of the country have shown healthy progress but the eastern region that includes States such as Bihar and Chhattisgarh were far behind in human development index (HDI).

Speaking at the first Khan Abdul Gaffar Khan Memorial Lecture at Jamia Millia Islamia University, Kant said, “Eastern part of India particularly Sates like Bihar, UP, Chhattisgarh, Madhya Pradesh and Rajasthan is keeping India backward especially on social indicators. While we have improved on ease of doing business, we have remained backward on human development index. We are still 131 out of 188 countries in HDI.”

The popular belief, no doubt, is that the southern states of the country have been the torchbearers in the overall socio-economic development quotient of the country. Sample this. Tamil Nadu has the second largest economy in the country, second to Maharashtra. Andhra Pradesh, Karnataka and Kerala feature in the Top 10 states, if gross state domestic product (GSDP) is taken into account. The Left party-dominated Kerala receives the highest remittances, though high unemployment, underemployment and low female participation in workforce continue to worry the State’s policy makers.

The Way Forward
“Cooperative federalism is the way forward and with GST – a one nation one tax structure – being implemented now, this will only strengthen that ethos. It is apparent that all states should come together and in that there may be a few states that are leaders and some that can be laggards but eventually the focus should be on strengthening the federal structure,” says State Bank of India’s group chief economic adviser Soumya Kanti Ghosh.

The passage of GST Bill does usher in a new era in cooperative fiscal federalism and a growing political consensus for economic reforms. Further, the government’s structural reforms in factor markets, particularly land and labour, are now widely seen as necessary for realising the potential of the economy, an SBI report has said.

While all policy-makers and economists believe that “true” cooperative federalism is the way forward, they underline the need for the Centre to include states more aggressively in the decision-making process. Most state finance ministers also feel that the Centre’s fund allocation to States must be done more judiciously.

A true federal structure is based on healthy relationship between the Centre and the States, Mitra says. “The states play an extremely critical role in the overall development of the country. But unfortunately what the current government is following is just the opposite,” he adds.