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Photo: Mint
Photo: Mint

Redo seventh schedule to clarify Centre-state domains

This is necessary as dilutions over the years have led the Centre to encroach on state subjects too often

In 1972, Maharashtra was reeling under an unprecedented drought. The rainfall deficit was more than 50% across districts, and even large landowning families had come on to the streets. There was no fodder for cattle. Then chief minister Vasantrao Naik rushed to Prime Minister Indira Gandhi, requesting emergency assistance. Accompanying him was the speaker of the Legislative Council, V.S. Pagay. Mrs Gandhi turned down the request, presumably because of the Centre’s already-high fiscal burden after the Bangladesh war. Not dismayed by the refusal, Pagay turned to Naik and said they would find a way. The state would run a drought relief programme with its own funds. These prophetic words led to the genesis of the Employment Guarantee Scheme (EGS). It was funded by the state through a profession tax imposed on urban workers, and ran successfully for more than three decades, offering crucial help during droughts and times of rural distress. It was the inspiration behind the nationwide rural employment guarantee scheme launched through an Act of Parliament in 2005. The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) acts as a proxy for unemployment insurance, and is now more than 90% funded by the central government. States contribute very little. During the pandemic and lockdown, the budget for MGNREGS was increased to 1 trillion. It will act as a fiscal cushion to soften the blow of recession.

It is worth recalling this story of the NREGS’s inspiration not merely to extol the imagination of Maharashtrian folks, but rather to point out how a state subject of “employment" came to be so easily encroached upon by the Centre. Indeed, when this Act was passed, none of the states objected to Parliament having passed a law on a subject that was the domain of states. Besides, the one-size-fits-all approach of NREGS meant that not only could this labour-market intervention have unintended negative effects, but the discretion lost by state policymakers could also constrain its effectiveness. For instance, Maharashtra could extend EGS to schemes on private land or for horticulture, or Kerala may support coconut plantations, or some states may want to use NREGS in peri-urban regions. All these possibilities were foreclosed by a nationally-mandated scheme.

The same is true of several nationally legislated schemes or laws, such as the right to food, right to education, universal health insurance, our new education policy and now labour law changes. The seventh schedule of India’s Constitution features each of these subjects in its states’ list for legislation.The schedule has a separate list for the Centre, which comprises items like national defence, foreign affairs, monetary policy and currency management. There is also a concurrent list, which has domains in which both the Centre and states can enact laws. If there is a conflict, the Centre’s view prevails.

The intrusion by the Centre into the domain of states began with the formation of the Planning Commission in 1951, the so-called “original sin".Over the years, through a mechanism called “centrally-sponsored schemes", the Centre exercised de facto influence on many areas of development, ranging from water, education and forestry to employment and health, which were all in the policy domain of states. The states may not have complained initially, as the Planning Commission was seen as an additional conduit of funds, which supplemented their own budgeted outlays. But this was an illusion. In the aggregate, if a sum came through one channel, that much less came through another, i.e., the constitutionally-mandated Finance Commission. However, the dependence on central funds for development activities kept growing. Along with those funds came conditions. This had the effect of a straitjacket. For instance, in MGNREGS, the central scheme prescribes even the minutest details of how projects are to be implemented, leaving very little discretion to local authorities. If there is a central diktat that all payments are to be made into bank accounts, or that biometrics be used for attendance to prevent fake muster rolls, it would ignore local realities and all scope for local innovation. This overly centralized approach also reeks of a lack of trust. In 2013, the then chief minister of Gujarat once complained against this “Big Brother" attitude of the Centre and its disregard for the federal structure. He said that central schemes were too rigid, and often resulted in greater financial burden on the states. When money was needed for irrigation, the Planning Commission would give it for social schemes. This would rob states of their autonomy. It is symptomatic of how over the years the classification codified in the seventh schedule has got blurred in practice.

Well, the Planning Commission has been shut down, but the seventh schedule malaise has gotten worse. Centrally-launched schemes like universal health insurance have further increased the financial burden of states. And by signing up for the goods and services tax (GST) in 2017, states have fewer independent options to raise local revenues. Currently, they are battling the Centre to get their promised compensation for GST shortfalls. In the coming years, their share from the total divisible pool may go down,as the Finance Commission mulls how to fund a wider fiscal gap and carve out a non-lapsable fund for national defence (an item for the Centre). Clearly, the seventh schedule needs to be redrafted.

Ajit Ranade is an economist and a senior fellow at The Takshashila Institution, an independent centre for research and education in public policy.

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