The 60/40 Union That PM Modi Speaks Of

Published: May 11, 2015 23:16 IST
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The conversation about dividing up the treasury pie, currently occurring under the banner of "cooperative federalism," distracts us from the deeper issue of constitutional balance between State and Central governments. It positions the States as begging-bowl conduits of Central largesse rather than real engines of growth.

But federalism is about more than mere fiscal bean counting. It's about getting politics and institutions aligned in order to drive our continent-scale union of states forward.

Prime Minister Narendra Modi has claimed that we now have a "cooperative federalism" where Delhi has 40 percent of the "the country's wealth" and the States 60 percent:

"Now, look, we just accepted the recommendation of the 14th Finance Commission and see the result. There was a time when 60-65% of the country's assets went to the central government treasury. Around 35-40% was with the States. Since we came to power, 62% of India's wealth is with the states and the rest (38%) is with the Centre," he said.

This is clearly a political form of poetic licence. Perhaps the PM was referring to the divisible pool of central resources rather than "the country's wealth" as a whole? Yet even this is still short of the headline figure of 42 percent outlined in the Finance Commission's report, which represents a relatively unchanged share of the States' in the central tax pool.

The Commission's innovation is that about 10 percent of that 42 percent is no longer a conditional transfer but can be used at the State's discretion. It has arrested the trend for Delhi to imperiously dole out largesse at its discretion and recommended a more automatic devolution of shared funds even while keeping the total funds dispersed fairly static.

This is fine as it goes, but we are far from the land of 60/40. At the moment, in terms of shares of the "Gross Revenue Receipts of the Union," i.e. how much the Central Government treasury receives in all forms, we are more the land of 50-50 revenue-sharing between Central and State governments. And 50-50 is clearly not working for us.

Yet the Commission notes that 50-50 is where we are likely to stay: "...aggregate transfers accounted for around 50 per cent of the gross revenue receipts of the Union...we do not see the scope for increasing the transfers beyond the current level."

The only way forward, it seems, is to give meaning to the PM's words and truly make Delhi much smaller. This goes beyond the scope of the Commission's well-meaning bean counting to more constitutional terrain.

The resource-sharing problem bespeaks a more fundamental imbalance in our union of states, a deep constitutional imbalance. Institutional power rests with the Centre, while effective power lies in the States. This creates a constitutional logjam that was exaggerated by a series of coalition governments at the Centre. Now free of large coalitions, we can see the our problems are at base those of constitutional design.

Several lines of expenditure responsibility lie with the States, yet they lack the commensurate revenue-raising powers; this happened by design. States were meant to be routinely reduced to begging Delhi for resources. With the rise of coalition politics, Delhi's darbar became a game of coalition-management, paying off State-based parties while maintaining the fossilized rhetoric of the Plan.

The appeal of Modi was pitched as a release from this debilitating and degrading coalition dharma. But we might have looked in the wrong direction. Real federalism, not the false hope of faux-presidentialism, is the path of out this cul-de-sac.

Up to the last election, the Central Government was confined to acting like a dog in the manger, holding all the institutional cards but hamstrung by the compulsions of coalitions. It was unable to act decisively, but unwilling to devolve critical levers of government.

Yet if even Modi, with his thumping majority, cannot get things done, then perhaps there are deeper institutional features that hold the Centre in check? We can no longer blame coalitions.

Modi's ascension has clarified the nature of our problem. Beyond coalitions, it is the very balance of our institutions that is out of whack. Modi's fragility has made it clear that we are too centralized for the continent-sized job at hand.

The real sinews of power of any government are the ability to tax and spend. Yet the Centre monopolizes the privilege to tax incomes of both individuals and corporations, and indeed to incorporate companies in the first place.

Consequently, without a robust source of revenue, States find it harder to borrow from the market, and fall back on the Centre for their borrowing needs. The Finance Commission has not fundamentally altered this basic imbalance and might even have made it worse, as Nitish Kumar notes today on ndtv.com. This post-imperial arrangement is well past its sell-by date.

To be sure, States could definitely build more fiscal muscle even within our current institutional frame. But even a fuller development in this line would leave intact the imbalance between a weak Centre and incapacitated States.

What is needed, therefore, is a real devolution of revenue-raising power to the States. We ought to think broadly about the details, but some directions are clear.

States could be empowered to issue tailor-made licences for corporations, charging for the privilege. They could tax personal incomes as they do in the United States. They could run individualized industrial policies that eschew a cookie-cutter approach handed down from Delhi.

While there are certainly risks of races to the bottom, and poorer States being left behind, we need to think about serious experiments in fiscal federalism to bring our institutional design in line with real political power.

The result would be to get over our unhealthy obsession with a strong government at the Centre that is the deep source of the collective push towards Presidentialism and runs the risk of authoritarianism.

The Modi experiment should prove that an effective Centre is simply not on the cards. We need to start thinking now about how we might move around the constitutional furniture to reflect this fact.

Realpolitik favours this constitutional rebalancing. Political entrepreneurs in the States now face a clear dilemma: do they want to be a weak emperor in Delhi or a strong king in their State? Why capture Delhi if you're only going to be tied down? Why not shrink Delhi down to size instead?

And for us citizens, draining Delhi of its power means that the poison of corruption is not concentrated in one place, making it easier to tackle.

Federalism, not presidentialism, is the way forward.

(Anush Kapadia is a lecturer on political economy at City University in London)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

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