The weakening of cooperative federalism

The government failed to give clarity of purpose to NITI Aayog. Centre-state relationships suffered as a result. The next finance commission faces a number of consequent challenges
Image used for illustrative purposes only. (Express illustration | Soumyadip Sinha)
Image used for illustrative purposes only. (Express illustration | Soumyadip Sinha)

In 2014, the first meeting of the newly formed NITI Aayog was held. I attended, along with the then Kerala Chief Minister Oommen Chandy, in my capacity as vice-chairman of the state planning board. Behind Prime Minister Modi’s seat was a poster with the words ‘TEAM INDIA’ emblazoned in bold letters.

In his first Independence Day address, Modi scrapped the 64-year-old Planning Commission, which he never liked as chief minister of Gujarat. He announced, in his usual impulsive style, the formation of a new institution with no name, no prior thinking or discussion. But he intended, in his words, to forge a “new direction to lead the country based on creative thinking, public-private partnership, optimum utilisation of resources, utilisation of youth power of the nation, to promote the aspirations of state governments seeking development, to empower the state governments and to empower the federal structure”. He was obviously dissatisfied with the Planning Commission’s role of promoting development through the federal structure.

While the PM started with the intention of cooperative federalism for development, the abolition of the Planning Commission and state and central planning had a negative effect. The Union finance ministry gained complete control over the resources of the country. While working in the finance ministry, I recall regular conflicts with the Planning Commission about the amount of money, called ‘gross budgetary support’, to be set aside for development, both for central ministries and for sharing with states. The conflict for resources used to be intense and was generally settled only at the end by diktat of the prime minister.

The planning mechanism at the Centre was replicated at the state level. Here, too, there would be conflicts between the finance departments and the planning mechanisms, be it commissions, boards or departments. Generally, the availability of resources for planned development would be decided in consultation with the Planning Commission. Where local governance is strong, as in Kerala, they too would be part of the consultation process. The plan itself would be drawn up in consultation with all implementing departments and the state cabinet would decide the priorities and allocations in line with their policy objectives.

While Modi started with the intention of strengthening cooperation between the states and the Centre, NITI Aayog, the organisation that replaced the Planning Commission, was never given a specific task to build Team India. It floundered, like a fish out of water, seeking to find a role for itself. This was no fault of its managers, who were competent and serious, but the simple fact that it was never given a meaningful role. It endeavoured to create the opposite of cooperative federalism, calling it competitive federalism, which was intended to create competition between states by drawing up national indices in various sectors to shame states that were not well placed in each index. This, in itself, is antithetical to the concept of federalism, which implies that each state can draw up its priorities and plans. Thus, while one state may give priority to human and social welfare, another may decide that industrial growth, particularly the growth of corporates, is its primary goal. Comparing the two is like comparing apples with oranges and is futile, except that it gives news media and opposition parties in states the opportunity to pick and choose indices to denigrate the establishment.

As the years went by, the situation became worse. Political rivalry intensified and authority was used to develop some states at the cost of others. Corporates were coerced to start big industrial units in certain states rather than others. The expression ‘double-engine sarkar’ was unashamedly used to encourage voting in one direction. The expression implies that the central government will favour some states at the cost of others. Not just federalism, democracy itself came under threat.

In public finance, too, federalism became the casualty. While the finance ministry had unrestricted access to resources, the states, particularly some, were put under rigorous checks. The 14th Finance Commission had raised the share of states by 10 per cent in vertical devolution of funds, but this, it said, was just a compositional shift. This enabled the Centre to claw back the increased allocations in various ways, including through reduction of the Centre’s share in centrally-sponsored schemes. There was also a significant increase in the number of such schemes. These schemes were designed in Delhi, without taking into account regional disparities and providing flexibility to states. The Jal Jeevan programme, for example, provided tubewells, overhead tanks, and distribution through pipes to houses in villages. In states such as Kerala which had large villages resembling urban sprawls with wells in almost every household, the scheme found no takers. Open defecation, likewise, is a serious issue in some states but not in others where hygienic practices have been traditionally followed.

The borrowing limits of states are capped at 3 percent of the gross domestic product (GDP). This cap was first introduced after the recommendation of the 12th Finance Commission, which calculated that only 10 percent of GDP, in the form of household savings, was available for investment as there were no government or corporate savings. Three percent would go to the states, 3 percent to the Centre, and the remainder would go to corporate investment. The situation has changed significantly now. Corporate savings have increased, particularly after the 10 percent cut in corporate tax rates in 2019. External borrowing is also more freely available to corporates. It is time to recalculate our borrowing limits, taking into account the new realities. Of course, debt sustainability will have to be built into the equation.

The parameters for horizontal devolution have to be calculated on factors prevailing at present. Since a substantial amount flows to local bodies directly from the Centre following different parameters based entirely on population and area, the actual allocation to the state as a whole would need to be worked out to achieve a balance.

Many issues, therefore, confront the 16th Finance Commission, which will be constituted shortly. This is another opportunity for the Centre, the states and the Finance Commission to work together to “promote the aspirations of state governments seeking development, to empower the state governments and to empower the federal structure”, as the prime minister desired.

(Views are personal)

K M Chandrasekhar

As Good as My Word: A MemoirFormer Cabinet Secretary and author of

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