Home / Politics / Policy /  Writing a new script for centre-state relations

In 2012, on the eve of Republic Day, Narendra Modi, then chief minister of Gujarat, blogged about the Centre’s “systematic onslaught on the federal structure".

“It is high time the Centre realizes that giving to the states what rightfully belongs to them will not weaken the Centre. The states must co-ordinate with the Union Government and not remain subservient to it. Co-operative and not coercive federalism must be the norm in our country," he wrote.

True to this statement, cooperative federalism has been the mantra of the Prime Minister Modi-led National Democratic Alliance (NDA) government which came to power at the centre in May 2014.

Two years since assuming office, the government has taken many steps to economically empower states and make them key stakeholders in India’s development agenda. The sharp increase in share of untied funds to states from the pool of central taxes to 42% as well as giving states more say and flexibility in centrally sponsored schemes can be counted as a big push to cooperative federalism and Modi’s call for Team India.

But the NDA tenure has also seen a sharp increase in the central government’s conflicts with non-NDA ruled states. The government’s decision to impose President’s rule in Uttarakhand and Arunachal Pradesh and an enduring legal battle with the Delhi government have turned the Modi government’s relationship with non-BJP-run states rather bitter. The centre has also had to contend with criticism from its own allies ruling in different states, including Andhra Pradesh, over non-allocation of promised funds or some demands which were not met.

Analysts point out that the Modi government will have to remain on the path of cooperative federalism or risk losing the confidence of states, which may not bode well for its reform agenda.

The NDA government’s dependence on states has also increased because of its inability to push through land acquisition reforms at the national level. The government is now hoping that states will bring in the necessary changes in local laws to make it easier for businesses to acquire land. It is also vital that the states back the goods and services tax—a reform that will remove barriers and integrate India into one common market—for its successful implementation nationwide.

Balveer Arora, chairman at the Centre for Multilevel Federalism, New Delhi, said that the electoral promise of cooperative federalism was caught in the tension between the push towards decentralized governance necessary for economic growth and the desire to conquer power in the states which the ruling party does not control.

“The return of President’s rule as a political weapon is totally in contradiction with the federalism promises made two years ago. It has subordinated federal principles to the imperatives of the conquest of power in the states. It marks a setback in the journey towards a more federal Indian Union," he wrote in an email to Mint.

To be sure, there are more instances of the government working with states in harmony rather than acrimony. One example of decentralization is the Modi government’s efforts to mainstream the north-eastern region and correcting regional imbalances in economic growth. To this effect, it is trying to leverage the huge investment potential of state-owned energy companies to set up oil and gas highways and petroleum refining units that will, in turn, lead to the creation of several downstream petrochemical industries with large job creation opportunities. Public and private investments amounting to 1.3 trillion in the hydrocarbon sector in the north-eastern region have been projected, as the region accounts for about 20% of all national resources and over 50% of total onshore resources in the country, according to Crisil Infrastructure Advisory.

In the power sector, the Modi government framed policies by seeking views from states first rather than asking states to adopt a centrally designed scheme. One example is the turnaround scheme for state-run power distribution companies, the Ujwal Discom Assurance Yojana.

Going forward, to make cooperative federalism a successful concept, analysts reckon that the centre will have to do a bit more hand-holding rather than just handing more money to states.

The Fourteenth Finance Commission had favoured giving states more untied funds along with greater fiscal responsibility in implementing centrally sponsored schemes. To this effect, it increased the states’ share in central taxes to 42% from 32%. In addition, the centre also decided to bring down the number of centrally sponsored schemes to less than 30 from more than 72 at present, giving states more flexibility in modifying the schemes to meet their individual requirements. This leaves the decision of how to utilize these funds to the state governments.

N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, said that the centre has given states more fiscal responsibility with spending powers by giving them more untied funds. However, it has stopped there, he said, pointing out how some states still lack the capacity to effectively utilize these funds.

“The central government needs to handhold states which lack capacity to utilize funds to meet their development needs. The central government has given them the right through higher allocation of funds but not fixed responsibility on them," he said.

He added that there is a lot of ambiguity on how centrally sponsored schemes are going to be implemented at the state level.

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