The constitution of the 15th Finance Commission or rather its terms of reference has kicked off an unusual storm. Something that is rapidly transforming into a political slugfest reflecting the present national narrative: the Bharatiya Janata Party (BJP)-led coalition versus the others (a combination driven mostly by the zero sum logic of my-enemy’s-enemy-is-my-friend).
Last week, former finance minister of Jammu and Kashmir Haseeb Drabu weighed in on the debate, pointing out a refreshingly new insight. In a panel discussion telecast on CNBC TV18, Drabu argued that the ongoing debate was ignoring a new evolving context about India—the growing role of states as an equal stakeholder in the growth process and the transformative effect this is entailing on the relationship between the centre and states.
“Constitutionally speaking, India is a Union of states but the way I would like to see the new economy is that it is a federation of economies. We should stop seeing India as one economy. This I am saying from the perspective of businesses particularly. Don’t see India as one large economy," he said, before adding, “India is 30 economies with 30 levels of skill endowments and resource endowments. Centre-state relations should now provide a framework for these 30 economies with 30 level of skill endowments and resource endowments."
Drabu is not making out a case for anarchy, as is being perceived in some quarters. Instead, he is making a very important point that in the new economy—defined by disruptions of every hue—states will need to be equipped with policy flexibility to optimize the peculiar endowments of a state. For instance, the topography of hill states like Kashmir, Uttarakhand, Meghalaya and so on, leave them particularly vulnerable to infrastructure constraints and also extreme weather conditions. A top-down uniform approach—the maxim for long—ordained by the Union government won’t work if these states have to play catch-up with mainland India in an era where increasingly markets, chasing customers, will determine resource allocation.
The 14th Finance Commission had actually laid the basis for this transition, when it cut back on grants (often leaving states vulnerable to the political discretion of a hostile Union government) and instead bumped up the share of states in taxes to 42% from the existing 32%—in the process giving states greater flexibility to design programmes.
“We have not categorised states for the purpose of devolution (of tax revenues). We have minimised the use of conditionalities and incentives. We have also increased untied transfers. This reflects our trust in all tiers of governments," the report of the Finance Commission said.
The Finance Commission, a key institution in the federal governance structure, is a constitutional body; its recommendations are meant to bridge the gap between the resources of states and the cost of funding their responsibilities.
Thereafter, the launch of the goods and services tax (GST) only further cemented the role of states in the emerging cooperative federalism model. The GST Council, made up of the Union finance minister and his counterparts in the states, is probably the country’s first federal institution—especially since a decision can be taken only by a three-fourth majority with the centre accounting for a third of the votes and the states the remaining two-thirds; so far all decisions have gone by consensus.
Apparently then a new ecosystem of cooperative federalism is already falling in place. Drabu’s suggestion opens up a new possible line of reasoning for the next Finance Commission headed by N.K. Singh. An out-of-the-box idea which far outweighs the quibbling unleashed by a clutch of southern finance ministers—a claim demolished by Indira Rajaraman in a well-argued piece published in Mint .
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus. Respond to this column at firstname.lastname@example.org