Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Opinion | NITI Aayog 2.0 should be built on the idea of fiscal federalism

Rahul Gandhi wants to scrap the NITI Aayog and revert to the Planning Commission it replaced, but this is inadvisable

The Congress has sparked a firestorm of debate ever since it said it would offer a guaranteed basic income to the 50 million families at the bottom of the Indian income pyramid. Another election promise has received less attention, for obvious reasons. Congress president Rahul Gandhi has said that he will scrap the NITI Aayog if his party comes back to power, and bring back the Planning Commission.

The Narendra Modi government pulled the plug on the Planning Commission for good reasons. It was initially set up in 1950 as an agency to direct investment activity in a country that had just thrown off the shackles of colonialism. The body’s original mandate became irrelevant after the 1991 economic reforms. Industrial investment is now led by the private sector. The Planning Commission ended up as a dispenser of patronage through its power to approve state development plans as well as distribute money for social sector schemes floated by New Delhi.

The NITI Aayog has had an uneven start. It is too early to write it off as a failure. It is useful to remember that it took six years before the Planning Commission came into its own with the landmark Second Five-Year Plan in 1956. However, there is a strong case to rethink the role of the NITI Aayog. The priority is to redefine its tasks against the emerging backdrop of new fiscal federalism rather than as an investment planning agency.

The Planning Commission and Finance Commission were the two institutional stools on which Indian fiscal federalism stood. The former gave money to the states based on a variant of the famous formula designed by D.R. Gadgil. The latter is constitutionally empowered to decide how tax collections are to be shared between New Delhi and the states. One of the two stools has now been taken away. Meanwhile, the GST Council has emerged as a new federal institution based on the radical premise that the Union government and state governments should jointly decide the country’s indirect tax structure.

Three influential policymakers have touched upon some of these themes in the past few weeks. The former Reserve Bank of India governor and head of the 14th Finance Commission Y.V. Reddy has recently written a new book on Indian fiscal federalism in collaboration with G.R. Reddy. Their book has a chapter on the NITI Aayog. They point out that the NITI Aayog has been confined to writing reports on the Indian economy, preparing draft laws for the Union government, evaluating central schemes and holding conferences with state government officials. They end their chapter with a sobering observation: “The scope and the remit of the Niti Aayog has been expanded and its stature reduced…This has resulted in a vacuum of institutional and procedural arrangements for the interactions between the Union and States. That vacuum has been unfortunately occupied by the ministries in the Union government."

Vijay Kelkar, chairman of the 13th Finance Commission, called for a NITI Aayog 2.0 in his Sukhamoy Chakravarty Memorial Lecture on India’s new fiscal federalism in January. Kelkar has argued that a restructured NITI Aayog should be given a funding role so that it can help deal with the development experience between states. He has clarified that this does not mean a return to the micromanagement of the old Planning Commission, and the transfers to states should be conditional and based on a formula rather than discretion. Kelkar has proposed that the NITI Aayog should get annual resources of 1.5-2% of gross domestic product (GDP). The restructured NITI Aayog will provide a national perspective on policy, which is much needed since individual ministries tend to take only a sectional view.

Another possibility is to convert the Finance Commission into a permanent body that can oversee fiscal transfer mechanisms rather than just give a tax sharing formula every five years. Reserve Bank of India governor Shaktikanta Das said in a speech, his first since moving to Mint Street: “Increasingly, therefore, it is felt that there is a need to give permanent status to the Finance Commission. The commission can function as a leaner entity in the intervening period till the next Finance Commission is set up in a full-fledged manner." Article 280 of the Indian Constitution says that the government has to set up a Finance Commission every five years to recommend vertical and horizontal distribution of financial resources. It does not specifically say that the Finance Commission has to be a temporary committee, as has been the case till now.

Indian fiscal federalism is at a crossroads. The question of how money is to be shared between New Delhi and the states on one hand, and among different states on the other, will continue to resonate. There is a lot of talk about the importance of federalism as well as calls for greater centralization. Decentralization is needed because India is too complex a country to have a uniform approach to development. Centralization is necessary because of the risk that important national public goods, including regional equality, could be underfunded. These tricky questions of federal balance need an institutional mechanism that entails either a more effective NITI Aayog or a permanent Finance Commission.

A return to the old Planning Commission will be a step in the wrong direction.

Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute. Read Niranjan’s previous Mint columns

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