Friday, April 27, 2012

TO UNTIE THE STRINGS - The debate on federalism is now focused on fiscal powers

By Swapan Dasgupta

Liberal and ‘progressive’ opinion has been inclined to view the question of states’ rights with both suspicion and distaste. To a very large extent this wariness has originated from the themes that divided the Union and the Confederacy in the American Civil War some 150 years ago. In the popular imagination, states’ rights is seen as a platform of bigotry and associated with either slave owners or politicians such as Strom Thurmond and George Wallace who did their utmost to prevent the passage of Civil Rights legislation. By implication, the opposition to excessive autonomy for states of Union have become associated with forces intent on top-down social engineering to rectify local wrongs. Over time, the issue of states’ rights have also influenced the recurring disputes between big government and small government—an issue that has resonated in the grassroots activism of the Tea Party.

That India and the US have different experiences with Constitution making is not in doubt. The US initially came into being as a consequence of individual states joining the Union in a voluntary federation. The Republic of India, despite being a nominal ‘Union of States’, evolved as the successor regime of British India (minus the parts that made up Pakistan). To this was added the many hundred Princely States whose rulers signed the Instrument of Accession and were effortlessly subsumed into the new Republic. With the states being regarded as mere administrative units, there was a basis to B.R. Ambedkar’s assertion in the Constituent Assembly that the Constitution did not acknowledge any right of secession. If the Union had created the states, how could the states see themselves as founder members with a right to withdraw?

The Constitutional denial of secession is worth reiterating if only to set at rest the uninformed fear that the recent political battles over federalism in India are a precursor to the weakening and eventual disintegration of the Indian Union. Admittedly this was a lurking fear in the first two decades after Independence but following the creation of a national market, the rise in inter-state mobility and the unifying effects of the media, Bollywood and cricket, the fear of India coming apart has virtually become a non-issue. It would be preposterous to suggest that those in the forefront of the demand to review Centre-state relations harbour separatist ambitions. Indeed, it is noteworthy that the recent political strains between the non-Congress-ruled states and the Centre have not been accompanied by sectarian strains involving locals and outsiders.

The movement for more equitable federal relations has undergone a profound change since the last years of Indira Gandhi’s Government. In those days, much of the controversy centred on the powers of the Governor and the partisan use of Article 356 to dismiss state governments. It was primarily these political concerns that led to the appointment of the Sarkaria Commission to review the whole gamut of Centre-state relations.

The Sarkaria report and the Supreme Court judgment in the S.R. Bommai case succeeded in substantially preventing the misuse of the Centre’s discretionary powers. While many states continue to be unhappy with the Centre’s de-facto veto over state legislation—witness the fury of Gujarat over the Centre’s persistent refusal to approve its anti-terror bill—it would be fair to say that the debate has shifted to the more pressing issue of fiscal powers.

What has triggered this move is India’s economic growth. The rapid growth of the country’s Gross Domestic Product since the process of liberalisation began in 1991. In recent years, the gross tax revenues of the country as a whole have increased exponentially. In 1960-61, it amounted to 7.8 per cent of GDP, and rose to 15.5 per cent in 1990-91 and 18.6 per cent in 2008-09. In the corresponding period, the tax revenues of the states was 2.6 per cent of GDP in 1960-61, 5.3 per cent in 1990-91 and 6.3 per cent in 2008-09. In short, while the exchequers of the states have swelled, their growth has not been commensurate with the phenomenal expansion in the tax revenues of the Centre. By 2010-11, the total receipts of the Centre amounted to 16 per cent of the GDP. The Centre has been the principal beneficiary of India’s growing prosperity.

The associated outcome of the burgeoning of the Centre’s kitty has been the United Progressive Alliance’s endorsement of mega-welfarism. Under Indira Gandhi and Rajiv Gandhi the Centre did experiment with modest anti-poverty projects. On its part, the National Democratic Alliance threw its weight behind schemes to upgrade India’s creaking infrastructure. The Manmohan Singh Government, backed by the political clout of Congress President Sonia Gandhi, has shed modesty and embraced projects on a scale never witnessed before. The Mahatma Gandhi National Rural Employment Guarantee scheme covers the whole country and the proposed Food Security Bill is aimed at providing subsidised foodgrain to every family reckoned to be below the poverty line. In addition, the annual Plan outlay rose to Rs 5,92,457 crore in the Budget of 2011-12. Of this Plan expenditure, nearly one-third was meant for social services and rural development.

The Cabinet Mission proposal that the Centre should confine itself to defence, public finance, foreign policy and communications was never accepted by the Congress. However, today’s enlarged Centre is increasingly viewing itself as the only motor of state intervention, including involvement in spheres that are the preserves of the state governments. The Constitution-makers had envisaged that a redistributive Centre should aid the states through a revenue sharing process determined by the Finance Commission. Today, however, more than 60 per cent of the disbursement is being done through the Planning Commission, a body that was created outside the Constitution in 1950.

The growing powers of the Planning Commission have meant that expenditure by the states comes with strings attached and is in line with the priorities of the Centre. The MNREG scheme, for example, is thought to be superfluous by the state governments in Punjab, Gujarat and Tamil Nadu. Yet, they are obliged to participate in it. Successful food security schemes are already operational in Chhattisgarh and Orissa. Now both these states are confronted with the possibility of local initiatives being supplanted by a Central scheme based on the one-size-fits-all principle.

The move towards homogeneity is fuelling resentment in the states. India is a diverse country with vastly different levels of development. By attempting to mould development according to an architecture drawn up in Delhi, the Centre is creating distortions and fuelling waste and inefficiency. It is not that the states don’t want additional resources: they are seeking local controls over the pattern of expenditure.

Politically, the idea of a Federal Front has got a fillip with the steady decline of the two national parties. However, the opposition to an over-intrusive Centre is yet to be crystallised around definite demands. In the coming days this is bound to be rectified. It is possible to envisage a situation where the forthcoming debate on federalism is likely to be along two broad lines.

First, there is likely to be a demand for the primacy of the Finance Commission in the matter of resource allocation. By implication this will entail a considerable dilution in the powers of the Planning Commission and the emergence of empowered state planning bodies. Secondly, the distribution of powers between the Centre and states will sooner or later have to be renegotiated keeping in mind the growing importance of market forces.

The general election of 2014 could be the trigger for a shift of the political centre of gravity.

The Telegraph, April 27, 2012

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