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Federal and Strong?

Federal and Strong?

Writing under the pseudonym Publius, James Madison wrote in the most famous of the essays that make up the Federalist Papers (Federalist No. 10, November 1787) that the best way to manage against the negative impact of factions on the republic is to either eliminate the cause of factions or to control its effects. He went on to say that elimination is not an option because it impinges on liberty and concluded that the only way to manage factions is to establish a large and diverse republic.

Part XI of the Indian Constitution defines the power distribution between the central government and the states in India. For instance, defence, external affairs, currency and coinage are in the Union list. Public order, agriculture and land are state subjects. Contracts, education and electricity are concurrent list items. The two layers of federal government in India expanded to three with the 73rd and 74th amendments (1993) which decentralized power to rural and urban local bodies.

For about 30 years after independence India behaved almost like a unitary state. This “unitary" behaviour arose from both constitutional provisions and the fact that the party at the Centre and in the states was the same most of this time. Central public investment and expenditure dominated the economy: the “commanding heights" of the Indian economy were managed from the Centre. Gradually, with the advent of political competition and the private sector, demands arose for greater federalism. A high-powered panel on Centre state relations—the Sarkaria Commission—followed in 1983 when pleas for reversing the centralization that had marked the early decades in the country became strident. The Sarkaria Commission taken along with the 73rd and 74th amendments to the Constitution (1993) and the first non-Congress government to complete its full term (the National Democratic Alliance in 1998) constituted a partial reversal of the centralization of the prior decades.

Economically, India has been more “Union" and less “federation" for the entire period since independence. This is mostly because of the larger-than-life role played by the Planning Commission (PC), a body not envisaged in the Constitution. The “five-year central planning cycle" and the need for the PC to bless state budgets has offset the decentralizing role of the Finance Commission, an authority specifically charged in the Constitution with allocating resources between the Centre and states. The 13th Finance Commission (Feb 2010) took a bold step further by directly allocating resources to urban and rural local bodies. Over time, the ability of states to fund their own expenditures has reduced from approximately 80% to between 50-60%.

The only long-term solution for a heterogeneous, polyglot country such as India, which is subject to myriad pressures from within and without its borders, is to grant greater autonomy to states but at the same time strengthen the Centre. Paradoxical as this may sound, it is possible. The first step will be to economically “federalize" India. An essential ingredient in achieving that goal is to abolish PC and to restore greater powers of taxation and fund-raising with states (except in matters of efficiency related to interstate commerce such as the goods and services tax). The private sector will have to be the main agent of employment generation and capital formation in the states.

Politically, India is already federal and getting more so. Different parties run most of the major states. This diversity is playing havoc with stability at the Centre, with the prognosis no better for the future. We should consider a “vote threshold" for Union elections (only). This means that any “small" party that falls below a specified threshold of votes (say 5%) will not be allowed representation at the Centre. Such a system exists in Germany, Poland, New Zealand, and Turkey and is the topic of much recent debate in Indonesia. It is challenging to design a threshold system to co-exist with India’s first past the post system. But it can and should be done.

PS: “To the united nation belong our external and mutual relations; to each state, the care of our persons, our property, our reputation and religious freedom," said Thomas Jefferson.

Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at narayan@livemint.com

Also Read |Narayan Ramachandran’s previous columns

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