The shifting dynamics of Centre-state relationship

Evolution of federalism in India is best understood as a continuous yet changing process in the entire realm of the political economy rather than just one event

When India became independent from British Raj, its political map was not what it looks like today. There were provinces that were directly under British control, and there were independent princely states. The Constituent Assembly, on December 31, 1947, had 299 members from 12 provinces and 70 Indian states.

Today, India has 28 states and 9 union territories (UTs); 2019, interestingly, was the first time when the number of states actually went down in independent India, as Jammu and Kashmir was broken into the UTs of Jammu and Kashmir, and Ladakh.

What is also unprecedented is the fact that the government has promised to return statehood to the UT of Jammu and Kashmir at an “appropriate time”. That the Centre has been able to diminish a state into a UT, without its consent — Jammu and Kashmir was under Presidents’ Rule, so the assembly did not get to voice its opinion at the time — might appear to be a symbol of weakening of the federal structure enshrined in our Constitution. However it will be erroneous to decide on the fate of Indian federalism on just one such development.

Let us look at the implementation of the Goods and Services Tax (GST), another landmark policy reform that has been implemented under the current government. GST entailed a surrender of significant amount of fiscal autonomy by the Centre and, especially the states, as rates are decided by the GST council rather than individual state or central governments.

Because, the Centre still gets to decide on direct tax rates, such as income tax, and indirect taxes such as customs duty, states ended up losing a larger part of their fiscal autonomy. It was because of this reason that the states extracted a significant commitment from the Centre.

The latter had to guarantee 14% growth in baseline revenues that existed before the roll-out of GST for five years. As GST collections look to disappoint for the second consecutive year, it is the Centre which will be left with the shorter straw once again, unless it wants to precipitate a constitutional crisis by not paying states. The Centre has said it will honour all commitments.

That these contradictory developments vis-à-vis India’s federal structure have come from the same political dispensation, are proof that the evolution of federalism in India is best understood as a continuous yet changing process in the entire realm of the political economy rather than just one event. Another factor which will add to this tension in the days to come is the growing demographic divide between Indian states. Let us look at politics first.

The re-election of the Bharatiya Janata Party (BJP) in 2019 with an even bigger majority than what it had in 2014 signifies the emergence of a dominant political hegemon in India after a long time. The BJP’s growth has also come at the expense of nonCongress parties in a large number of states. This is best seen in the squeeze in vote share of non-BJP non-Congress parties in the 2014 and 2019 Lok Sabha elections. (See Chart 1) While the signs of political centralisation at the national level are unmistakable, we are also witnessing a discernible resistance towards similar centralisation at the level of the states.

In important assembly elections, both before and after the 2019 Lok Sabha polls, the BJP’s performance has been much worse compared to how it has performed in the Lok Sabha elections. It has won back states in Lok Sabha polls it lost in previous assembly elections and vice versa.

(See Chart 2)

These statistics signify a remarkable degree of differentiation by voters — between national and local polls. What eventually comes out of this recent federal rupture in Indian polity remains to be seen.

It is worth reiterating that India has seen a turbulent past in terms of relations between central and state governments, with the former resorting to the use of Article 356 to dismiss elected state governments frequently in the 1970s.

To be sure, the present period is very different from the 1970s in terms of economic relations between the Centre and the states. With the liberalisation of the Indian economy in 1991, state governments have significantly more freedom in terms of economic policies. Most state controls on capital have been removed unlike the pre-reform period when the Centre had the final say in granting industry licences.

In fact, state governments now actively compete with each other to attract capital in various ways. This competition has also percolated in terms of attracting voters through populist polices such as farm loan waivers. Yet, this freedom is not absolute as state governments are more dependent on the Centre for their revenue receipts than ever.

If GST receipts do not live up to their expectations after the expiry of the five-year period until when the Centre is committed to compensating states, India’s fiscal federalism could enter a tumultuous phase. It is no wonder that the Fifteenth Finance Commission, the constitutional body for sharing of resources between the Centre and the states has had to postpone the submission of its report last year.

(See Chart 3)

It will be a mistake to infer from the discussion above that Centre-state tensions are the only strain on India’s federal structure. Inter-state differences have changed significantly in the past few decades, the most prominent among them being population. While southern states such as Tamil Nadu and Kerala have seen a sharp decline in population growth, this has not been the case in the northern and eastern region.

It would be a different matter if the disparity in growth and demographics were to have no institutional impact on fortunes of the states. But at least two imminent changes in India’s federal arrangement — the use of 2011 population in deciding the awards of the 15th Finance Commission and possible delimitation and reassignment of Lok Sabha seats in 2026 — means that the demographic divergence could end up penalising the southern states, which will have to see a decline in their revenue share as well as political say in the Parliament.

One could argue that such realignment will only be fair. Northern states have seen a steeper decline in their per capita representation in Parliament between 1991 and 2011. However, the fact that the north and the south are also different in terms of language, culture and history could end up triggering a sense of insecurity and possible protests.

India’s federal structure has generated a lot of interest, research and criticism.

As the republic completes its 70 years, it can be said that the biggest tests still await Indian federalism.