The Constitution provides for the distribution of power between the Union and states, granting some subjects to the Union and others to the states. In some subjects, both the Union and states have power. When the Congress party controlled both the Union and states, the political equations overrode the constitutional balance. With coalition governments at the Union and other governments in the states, there was a restoration of the constitutional balance due to political considerations.
Union taxes devolved by the Finance Commission, Union’s share of national projects and other Union grants-in-aid make up 40% to 70% of total state revenues. Most state revenue comes from sales taxes, taxes on alcohol, and fees on land and property transfers. States are also allowed to borrow money by raising bonds based on the guarantee of the Union government. The BJP-led NDA government enacted the Fiscal Responsibility and Budget Management Act (FRBM) in 2003 to ensure financial discipline in the states. In 2017, to provide a uniform tax regime across different states, the BJP-led Union government implemented a national Goods and Services Tax (GST) that replaced all state sales taxes.
The lockdown of the national economy and society has changed this pre-Covid state of affairs. Several factors are responsible for this extraordinary situation.
First, the power to impose, vary and lift the lockdown is with the Union government. States cannot dilute the Union guidelines though they are permitted to adopt more severe steps. As a result, the general population as well as the commercial and industrial entities depend on the Union rather than their states for guidance. The Public Health (Prevention, Control, and Management of Epidemics, Bio-terrorism and Disasters) Bill pending since 2017 will probably become law through an ordinance and provide additional powers to the Union government to intervene in the states.
Second, elected leaders are not capable of handling a general crisis. Their general competence lies in their desire and ability to dispense state funds and other political favours. When there is a general crisis, the political leadership prefers to hand over its management to the bureaucracy. This will allow them to take credit for the success, if any, and to attribute failure to the bureaucracy, if and when that happens. In this present crisis, it is the bureaucracy dominated by the IAS, IPS and state services that is at the forefront. The bureaucracy will likely rise to the occasion and assert their integrity and independence even after the crisis.
Third, with the shutdown of economic activity, state revenues have collapsed. Some states have gone to the extent of cutting salaries, pensions and laying off contract personnel in their governments. The FRBM and the need for approval by the Union government restrict market borrowing by the states.
Taking into account these three factors, it seems clear that the post-crisis scenario of Union-state relations will see a “reset” in favour of the Union. The states need financial assistance as they are now bankrupt. The Reserve Bank of India has already debited state accounts for payments defaulted by some states.
In this context, the Union will likely have to assume financial responsibility for the states. Article 360 of the Constitution provides for the declaration of a state of financial emergency by the Union when the financial stability or the credit of the Union or any state is threatened. The Union government can then give directions to states, such as reduction of salaries and allowances of all government employees, including those of judges. During emergency, all state budgets passed by their Assemblies would need the approval of the Union.
The Union will take measures towards the bankrupt states, not unlike the steps IMF and the World Bank take to assist member nations that are in financial distress. This financial assistance to the states will be conditional on measures taken to reduce unproductive expenditure, increase taxes and stimulate economic growth and productive investment. The objective will be to produce surplus state budgets to pay off existing liabilities. In this scenario, the entire focus of the country will be on the actions and policies of the Union government, with the state governments playing a very minimal and subordinate role. It is also likely that the bureaucracy, especially the All-India Services, manning the states will be the instruments of the Union government.
In case of failure in governance in a state, its administration can be taken over by the Union. An opportunity for radical change within the constitutional framework has arisen due to an extraneous and massive event nobody was expecting. Time will tell how the “reset” evolves. All one can say is that things will change. (Email: gautam.pingle @gmail.com)
Gautam Pingle Head, Centre for Telangana Studies, MCR-HRD Institute of Telangana