Last week, the Union cabinet formally signed off on the setting up of the 15th Finance Commission. On the face of it, this is a routine exercise carried out every five years to detail the fiscal relations framework—which needs to be tweaked in accordance with the changing economy—of a federal polity like India.
In particular, the Finance Commission, set up in 1951 under Article 280 of the Constitution of India, focuses on the vertical (division of revenues between centre and states) and the horizontal distribution (between states to ensure regional equity).
True, but this time, the constitution of the 15th Finance Commission can be potentially more than merely serving this broad mission objective. It actually comes about at a very interesting cusp in the evolution of India. With the passage of the goods and services tax or GST (and especially the setting up of the GST Council, India’s first genuinely federal institution where the centre and states are equal stakeholders) the story of India’s federal polity has undergone a significant transformation. Besides economically unifying the country—a first in itself—and increasing economic efficiency, the inherent design of GST favours the spread of regional growth—and consequently tax revenues.
The GST Council has demonstrated unequivocally that cooperative federalism is more than just a catchy slogan. In 23 meetings so far, despite deep differences in points of view, the Council has generated consensus on every decision. This is remarkable—just scan the headlines of newspapers, especially on news relating to the upcoming Gujarat elections and this will be more than just apparent.
Without tapping this spirit of cooperative federalism, India will continue to struggle to resolve the developing country handicaps it has struggled with over the last seven decades. Unresolved, the country will never be able to realise its potential economic growth rate of 8-8.5%. And this is a luxury which the country, with about 400 million people still living below the officially defined poverty line, can ill-afford any longer.
In a recent interview with Mint, Arvind Subramanian, the chief economic adviser, said as much while referring to the exemplary record of the GST Council. “I hope in the next five years we will see a GST type structure for development challenges. Health, education, maybe UBI (universal basic income), water, irrigation, agriculture, there are so many areas where we need stronger institutions of cooperative federalism."
One can add the challenge of urbanization to the laundry list furnished by Subramanian. As per the 2011 Census, a little less than a third of India has urbanized. Six years later, based largely on anecdotal information, it is clear that this trend has accelerated. The change is welcome; unfortunately, public policy has failed to keep pace. Consequently, what you see around us is urbanization through trial and error; given the scale of India’s population, this is an imminent man-made disaster in the making.
Significantly, each Finance Commission has recognized that India is transforming and made its recommendations accordingly. For instance, the 10th Finance Commission mooted the idea of pooling all revenue resources (except customs). Similarly, the 13th Finance Commission buried the idea of one-size-fits-all and laid out individual fiscal consolidation roadmaps for states. This is something the 14th Finance Commission took to the next level by nixing grants and also raising the share of states in tax revenues to 42%, thereby giving states unprecedented fiscal freedom.
It is then clear that the 15th Finance Commission provides an enormous opportunity in setting out a blueprint for India’s future that rests on the foundation of a strong federal polity. Presumably, the Union government, especially one which has championed cooperative federalism, is thinking similarly. The first clues will be made available when they make public the terms of reference of the next Finance Commission; the next signal will be the nomination of its chairperson and of course its members.
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 email@example.com.