No one can deny that the Planning Commission was an integral part of the development history of India’s federal republic for nearly six and a half decades. The legacies of this institution presided over by prime ministers from Jawaharlal Nehru to Manmohan Singh, whether for good or for bad, need to be addressed if one seriously seeks to reform or restructure India’s economic management. One vital issue that cries for reform in India’s fiscal federalism is the problem of intergovernmental transfers. India has over the years created multiple channels of transfers with diverse objectives and sometimes with conflicting priorities and distorted end results.
Before the 73rd/74th Constitutional Amendments, India was a dual federalism comprising the Union and the states where the local governments had no constitutional status. India’s “co-operative federalism” is different from the interdependent variety in Germany or South Africa where the federal government decides major policies and the different levels of government are at best implementing agencies. It is also different from the independent model of Brazil where all three tiers of government enjoy autonomous and equal status and co-ordinate their policies horizontally and vertically. India also cannot be called the “marble cake” model of cooperative federalism where various levels of government have shared and overlapping responsibilities and where all tiers are treated as equal partners.
India is a multi-level federation that demands rational, equitable intergovernmental transfer arrangements. The raison d’être of a federation, indeed, is equity. The Finance Commission (FC), the Planning Commission and many centrally-sponsored schemes (CSSs) initiated by the central ministries form a bewildering multiplicity of channels of transfers. The rapid growth of parallel agencies (notably the MPLAD) transgressing the assigned domains of panchayati raj institutions and urban local government has posed not only a serious threat to efficient fiscal decentralisation, but also encouraged endemic corruption. In the context of dismantling the Planning Commission, it is pertinent to examine de novo the role federal transfers played in reducing regional inequalities and promoting convergence. No reform in the design of transfers following the Planning Commission’s exit can ignore this. Though not directly relevant, from a wider perspective it is important to evaluate the subsidised lending to the private sector by long-term refinancing institutions, and assistance from banks for priority activities and several other flows of resources that affect economic activities.
Although FC is the constitutionally authorised body to share Union taxes and grants to the states, over the years the Planning Commission became a powerful factor in allocative decisions and dispensing assistance to the states to finance development activities. A real confrontation over the jurisdictions of the two panels arose when the third FC made recommendations that took into account 75 per cent of the plan requirements of the states (strictly within their terms of reference 4(a)(1) mandating to meet “the requirements of the Third Five Year Plan”) and the Centre rejected the recommendations accepting instead the member-secretary’s recommendations that stayed within the non-plan domain. This precedent compelling the FC to confine its jurisdiction to non-plan has created problems of efficiency, redistribution and equity in the intergovernmental transfer of resources. The Planning Commission during the first two decades resorted to schematic transfers exercising considerable discretionary powers. It was due to the protests of states like Kerala that the Gadgil formula with accent on population, tax efforts, state income below national average etc., was introduced from 1969 onwards. Although the Gadgil formula specified that the size of CSSs and ACAs (Additional Central Assistances) should not exceed one-sixth of central assistance, this was seldom followed. Besides, the process of central assistance, ACA, central sector schemes, CSSs, et al have not been strictly governed by normative criteria, transparency and accountability.
Significantly, the 73rd/74th Constitutional Amendments changed Article 280 that established the FC adding two sub-clauses mandating it to supplement the resources of the panchayats and municipalities which are expected to deliver “economic development and social justice” at the sub-state level. It is also mandated that the FC has to act taking into account the recommendation of the State Finance Commission (SFC), which in a way acknowledged the organic linkage of public finance in the country. SFC is a unique institution modelled on FC meant to rationalise the state sub-state level fiscal system. The District Planning Committee (however inept and inadequate it may be) is a constitutional body, (Article 243ZD) unlike the Planning Commission needs to be revived to form a viable part of sub-state level development process and may have to include so-called small towns planned under the new dispensation. SFC holds tremendous potential to play a vital role in fiscal decentralisation and has been given a subordinate status except probably in states like Kerala. It may have to be restored to a place of greater importance. It is constitutionally mandated to review the finances of local governments vis-à-vis their functional responsibilities and design an equitable and efficient transfer system at the sub-state level.
The underlying rationale of decentralised governance is to provide reasonable standards of public services like drinking water, sanitation electricity, health care, primary education and good connectivity to citizens irrespective of residential location. One can maintain that in delivering basic public services all levels of governments have failed the common man. CSSs implemented through local governments reflect the Centre’s preferences and not those of the locals. Also, these schemes which compel a state government to fall into the Centre’s straitjacket of conditionalities in a country with great diversity in social and economic progress are untenable. Admittedly for Kerala, many CSSs are irrelevant. The message coming out most prominently is that all local governments should have the fiscal capability (through a relevant transfer system) to offer comparable levels of public services at reasonably comparable levels of taxation. The striving for new architecture of intergovernmental transfers will have to keep these goals fully in view. If some of these aspects are ignored the dismantling exercise will turn out to be another political gimmick, signifying nothing.
The writer is honorary professor, Centre for Development Studies (CDS), Thiruvananthapuram.
Email: maoommen09@gmail.com