Centre-state ties: A new federal compact is key

Both politics and economics have forced Indian federalism into unchartered territory. The Centre and states need to work out a model that doesn’t let political competition lead to economic recklessness

Centre-state ties are back in the spotlight. At a meeting to discuss the Covid-19 situation with chief ministers (CMs), Prime Minister Narendra Modi’s appeal to states to cut taxes on fuel sparked a backlash from states ruled by forces other than the Bharatiya Janata Party (BJP). They alleged this was a ploy to deflect the blame of rising prices onto them even though the Centre was responsible for this, while BJP leaders pointed out that states ruled by their party had responded to the Centre’s move of cutting federal duties on fuel by reducing state levies on the commodity.

Notwithstanding the merits of the position of each side on this specific issue, the episode is a reminder that Centre-state ties are in unchartered territory and Indian federalism is under test — this is because of both politics and economics, and, of course, the interconnections between the two.

Indian federalism has gone through four distinct phases. The first lasted for close to four decades after Independence. The Constitution created a quasi-federal system with a powerful Centre. The hegemony of the Congress meant that the party was often in power in Delhi and most state capitals. And the national Congress leadership was more powerful than the state Congress leadership, even more so during Indira Gandhi’s time than that of Jawaharlal Nehru. This period, therefore, saw a tilt in favour of the Centre, with states largely — even if unhappily — abiding by Delhi’s diktats. And when they didn’t, the Centre didn’t hesitate to use Article 356 to impose its political preferences.

The second phase saw the rise of the coalition era post-1989. The Congress was no longer the hegemon. Forming a government at the Centre meant depending on regional parties, which, in turn, had become increasingly powerful in states. States assumed a greater say in policymaking, the use of Article 356 dipped, and India appeared to be moving towards a federal arrangement where the balance of power was tilting towards the states.

The third, brief, phase was between 2014 and 2018 when the BJP rewrote the political playbook and assumed power both at the Centre, with an outright majority of its own, and also won power in a range of states. This allowed the revival of a stronger Centre and states once again willing to abide largely by Delhi’s rulebook. It is no surprise that the Goods and Services Tax (GST) regime was passed in this period. Arun Jaitley’s remarkable interpersonal skills helped, but so did the fact that the Centre was powerful enough to use its powers of persuasion to bring together all the states on the same page.

And the fourth phase, in the last four years, has seen both a strong BJP at the Centre and in key states, but also the revival of strong regional parties taking over some of India’s most important states. Some of these smaller outfits have found ways to do business with the Centre — think of the Telangana Rashtra Samithi or Biju Janata Dal or YSR Congress Party. Others see the BJP as an existential challenge and, therefore, have an incentive in challenging the Centre, just as the BJP has an incentive in undermining their governance models. Think of the Shiv Sena in Maharashtra or the Trinamool Congress in Bengal or the Dravida Munnetra Kazhagam in Tamil Nadu or the Aam Aadmi Party in Delhi and Punjab or even the Congress, which is, at the moment, in effect, a regional party confined to power on its own in just Rajasthan and Chhattisgarh. In this fourth phase, a strong Centre is colliding with a set of assertive states, with both ruled by distinct political formations.

The post-2014 political context has been accompanied by a revised fiscal federal architecture. The 14th Finance Commission (FC) devolved greater resources to states, which was sustained by the 15th Finance Commission. The GST regime eroded the autonomy of states in key spheres of tax collection in return for the promise of fair distribution of resources, additional compensation and carve outs in areas such as fuel. But it has also seen the growing use of cesses and surcharges by the Centre, and these go into its kitty, not the divisible pool that is shared with the states.

It has also been accompanied by a dip in economic conditions in general, where growth witnessed a slowdown both due to structural and cyclical factors before March 2020, and the pandemic after March 2020.

The new political phase has been accompanied by a new model of welfare politics and intense competition between parties to be seen as the most effective vehicle of welfare delivery. With job creation a challenge, all parties have turned to distribution of state resources for public goods as a way to offset economic distress and lack of opportunities. The BJP has now positioned itself as the party of welfare with a robust track record in the direct transfer of resources for a range of goods (gas cylinders, housing, toilets and cash in the case of farmers) while state-centric parties are busy playing catch up by devising their own schemes (free electricity, pension for elderly and cash for women).

This has led to its own complexities. And no one has sounded the alarm bells on it more eloquently, for over a year-and-a-half now, than NK Singh — one of India’s most distinguished economic thinkers with unparalleled experience across policy institutions, including as chair of the 15th FC.

In an interview to HT in February 2021, Singh pointed out that the Seventh Schedule (which lays out subjects under Union, state and concurrent lists and provides a framework for the division of authority) needed a reset, given the transgressions that have taken place “from one end to another”, with most centrally-sponsored schemes in areas which would fall under the state list. In a recent lecture, Singh sounded another warning about sub-national bankruptcies, given the tendency of states to engage in what he called “freebie politics”. While distinguishing this from merit goods and public goods, Singh suggested that the freebie culture hurt India’s fiscal federalism framework, undermined macroeconomic stability, distorted expenditure priorities, created issues of intergenerational inequality, pushed governments away from environmentally sound practices and had a debilitating effect on manufacturing.

But to understand why this is happening, we must return to politics. With the BJP under Narendra Modi, perfecting a model of centralised welfare delivery and earning electoral dividends from it, its political competitors are tempted to use resources of states where they enjoy power to engage in their own model of welfare politics. The former still, it must be said, is done within a largely fiscally responsible framework; the latter, at a time when states are more constrained in raising resources, ends up veering towards irresponsibility. And when it comes to the issue of fuel price rise, which is politically contentious with huge inflationary consequences, non-BJP ruled states believe they have little room to cut duties while the Centre believes it has done its bit and would like states to act.

Political competition in a democracy is healthy. The distribution of power between different political formations at different levels of government, Union and state, and among states, is healthy too. But this can only remain healthy if political competition does not end up dangerously entering the territory of unsustainable economic practices which discards long-term public good and immediate relief for citizens. This is a tough balance, but it is a balance that must be found. And for that to happen, the Centre and states, irrespective of which party is in power, may want to seriously begin considering a new federal compact.

letters@hindustantimes.com

PRAFUL GANGURDE/HT When it comes to the issue of fuel price rise, which is politically contentious with huge inflationary consequences, non-BJP ruled states believe they have little room to cut duties while the Centre believes it has done its bit and would like states to act