The 13th Finance Commission (TFC), which submitted its report last week, deals with the public finances of the nation. On the surface, its recommendation that the states gain more of the Centre’s tax pie may have little to do with the political philosophy of Thomas Hobbes. Yet, deep down, it’s the same question: Who should be more powerful—the whole, or the parts?

The frontispiece to Hobbes’ 1651 Leviathan suggests a large monarch that derives his power from the smaller subjects of the land—that idea of representation is now the cornerstone of modern government. It also happens to be the cornerstone of federalism that, in theory, should mean a Federal government deriving power from the states. In India, federalism means a far more powerful Union government, on whom states are forced to depend.

Illustration: Jayachandran / Mint

In a country where states’ expenditure is more than 60% of total spending, but where their tax collection is less than 40% of the total, TFC suggests increasing transfers from the Centre’s tax revenue to the states and including surcharge and cess in the Central pool that it shares with states.

Consider that the Centre gets to tax more potent sources of revenue (income, corporations) than states (goods). At times, states end up taxing what the Centre already has (factory goods)—a problem with India’s indirect tax system that TFC hopes to fix with its big-ticket goods and services tax (GST). And while we’re at it, perhaps we should also consider the Centre’s non-tax revenue—good money made from licensing telecom, or getting the highest private bidder in infrastructure.

A lot of these will surely require constitutional amendments, which makes the political process that much more fractious. Bargaining with states inevitably brings the likes of Jharkhand’s Shibu Soren to the fold—before you know it, the Centre will start getting too generous with crony politicians at the helm of failing states. A state too dependent on transfers from the Centre is often a state too profligate, since any incentive for fiscal prudence is destroyed (think Bihar during Lalu Prasad). For this to stop, fiscal prudence and performance must be conditions for TFC’s transfers.

Still, allowing states a greater part of the pie actually lives up to the Constitution’s aim for states to handle local issues (law and order, development). Compared with the Centre, there are natural limits to the states’ spending and borrowing power. And if the states are spending more—localized expenditure means fewer transaction costs than when done by the Centre—perhaps there will be one fewer excuse for the Centre’s profligacy. It’s time India’s Central leviathan was scaled down.

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