BackTowards a truly federal India
Federalism is here to stay. India needs better coordinating institutions now
Premium(Jayachandran/Mint)
For a long time, financial relations between the Union government and the states were described derisively as municipal. The centre decided almost all aspects of public spending in states. That era has finally come to an end. The 14th Finance Commission has recommended that states be given 42% of central tax revenues. This is a 10 percentage point increase over what the last Finance Commission recommended.
The rationale for devolving a higher share of tax revenues has always been clear. Unless adequately funded, the ability of states to provide local public goods—from education to healthcare—will always remain cramped. These public goods cannot be provided by the Union government which does not have the local knowledge or the expertise to do so. Yet, for 58 years—from the start of the second Five-Year Plan to now—that is what was done and done badly.
In the Union budget this year states’ share of taxes and duties has been increased from ₹ 3.82 trillion in 2014-15 to ₹ 5.23 trillion in 2015-16, an increase of 37%. (Both figures are for budget estimates). It has been asserted that this figure is illusory. By this reckoning, on a net basis, the Union government has hardly increased the money given to states this year.
To say this is to misread what is happening or what is being attempted. The revolution lies in giving states money unconditionally, without the strings of schemes and plans. In the years ahead, as the country’s growth picks up, the quantum of taxes devolved to the states will rise. This is just the start.
In any transition from an existing system to a different one, some bumps are likely. This is all the more so in a system that has been so tightly centralized right from the start. Three problems are visible at the moment.
First, any drastic change right in the first year of the 14th Finance Commission period will be disruptive. The easiest thing would have been for the Union government to shut down 63 schemes that take the lion’s share of money. Instead, only eight schemes have lost support from the Union government. Thirty-one major schemes continue to be fully supported by the Union government and for the remaining 24, the sharing pattern between the Union government and the states has been changed (all these schemes are listed in the annexure to the Budget at a Glance document). But this limited change will also create problems: the abolished schemes will hit some states harder than others.
Two, even with more money in the hands of states, the coming years will be bumpy. The institutional capacities of states to spend money and provide goods and services is questionable. Some states (for example, Kerala, Tamil Nadu and Maharashtra) have well-developed institutions and the link between spending and welfare outcomes is good. In many other states this capacity is weak (Punjab and Jammu and Kashmir are two examples). Most troubling in this respect are states such as Bihar and Uttar Pradesh. These have hardly any institutions that can deliver. West Bengal has joined them now. Spending in these states is likely to be arbitrary and dictated by political priorities and not any effort to deliver public goods. India, for all purposes, is triangulated by these three poles. The challenge in the years ahead will be to move towards more capable states where spending priorities are dictated by the needs of citizens and not the interests of political parties trying to claw back to power. It is too early to say what will happen, but a smooth transition to a good institutional order looks unlikely at the moment.
Finally, in a country of India’s complexity, provision of public goods defies any neat division into local and central ones. There will be a thick intervening layer that ranges across matters as diverse as major irrigation projects (river-valley projects, inter-state canals) to public security (terrorism). This is a tricky subject that has the potential for trouble. To overcome friction on these issues, India needs different institutions from the kind it has so far had. Perhaps the Inter-State Council can be rejuvenated for that purpose.
But in all, India has begun another adventure. These are interesting times.
What should be done to improve the capabilities of Indian states? Tell us at views@livemint.com
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