Foreign Aid And Fiscal Federalism

Updated: Apr 5 2002, 05:30am hrs
There is much anguish in the national capital that the writ of the central government does not seem to run beyond New Delhis municipal limits. Defiant chief ministers, troublesome coalition partners, a disempowered fisc and a weak Prime Ministerial office. The statists in the Delhi durbar worry and their concerns get reflected in a Delhi-centric national media. So is this a crisis of federalism or just a reflection of a weak coalition being in office Can single party rule reverse the process or are there underlying centrifugal structural changes taking place Should one despair the disintegration of the nation or celebrate the decentralisation of governance

These questions are not new and will keep coming up again and again. India has been here before. Remember 1966 to 1969, when a charismatic opposition leader called Atal Bihari Vajpayee dubbed a diminutive and shy Prime Minister with a squeaky voice, whose party was out of power in most states across the country, as a goongi gudiya (dumb doll) This was before Indira Gandhi became Durga and Ma Shakti and Amma. The centrists of the Delhi durbar who had lived through the Nehruvian era and thought of it in Ashokan and Akbarian terms despaired at the sight of a frail woman unable to make her voice heard at a meeting of the National Development Council above the stentorian voices of an Annadorai, chief minister of Tamilnadu, a Mohanlal Sukhadia of Rajasthan, an E M S Namboodiripad of Kerala, a Kasu Brahmananda Reddy of Andhra Pradesh, a Kamalapathi Tripathi of Uttar Pradesh and such like.

That phase of de-centering of the union government gave way to an era of excessively centrist rule which reached its high point during the Emergency. Patriots and nationalists who cherished the idea of India worried equally at the time about excessive centralisation as many of them now do about what they perceive as excessive decentralisation. While in theory there could be some ideal mean, a balance of central and state authority, the reality will be shaped both by economic and political factors. If the country returns to single party dominance, may be this phase of excessive federalism will end. May be not, because even national political parties have become more federal internally and, more to the point, notwithstanding their fiscal weaknesses and dependence on central government support, many states have become more economically empowered.

It was a recognition of this underlying process that encouraged union finance minister Manmohan Singh to first agree to a World Bank proposal to negotiate aid programmes directly with state governments. This procedure has now come in for renewed criticism from the intellectual organs of the Bharatiya Janata Party, the publications Panchajanya and Organiser, which have slammed the union government for permitting Andhra Pradesh chief minister Chandrababu Naidu to borrow from and negotiate directly with the Bank and Britains Department for International Development.

It may be recalled that Dr Singh had agreed to the Banks proposal at the Madrid meeting of the International Monetary Fund and the World Bank in 1995, partly to make the point that administrative decentralisation was a part of the programme of economic reform and deregulation. When this writer asked a senior Bank official at the time whether India would be the first country where the Bank would be dealing directly with provincial governments, we were told that there was a precedent. Yugoslavia! Not a happy one, and perhaps that thought crossed Dr Singhs mind because after having agreed to a new arrangement, the union finance ministry did not in fact permit the Bank to deal with state governments directly.

That changed when the United Front government came to power. Union finance minister P Chidambaram gave the go-ahead to the Bank to please an insistent Mr Naidu and the rest is history. In fact, the DFID and other bilateral donors followed the example set by the Bank and by 1997 they were all strategising on how to pick and choose the winners from among the Indian states and undertake targeted aid disbursal to maximise the reform effect.

Of course aid is linked to conditionality. No one should be foolish enough to think it is not. Sometimes that conditionality may be onerous, sometimes not. Sometimes the policies advocated may run parallel to what democratically elected governments want to do anyway, sometimes they may not. If we are in the aid receiving business we cannot protest too much it is silly to look an aid horse in the mouth! At the global level there is a consensus among developing countries that developed countries should allocate more resources for aid. At the recent Monterrey Summit on Financing for Development, the dominant view was that developed industrial countries should stick to their earlier commitment made to the United Nations that they would devote 0.7 per cent of their national income to official development assistance to the developing countries.

If Western democracies make such allocations, the electorate in these countries is going to make a variety of demands on their governments demanding that they link this assistance to a range of policy conditionality. Activist groups in the West have demanded links between aid and human rights, environment policy and such like. Business lobbies do their bit by seeking a share of the pie and would like to see foreign aid linked to getting business for local firms. Indian companies do that too. In Afghanistan, for example, Indian companies are hoping that Indias aid to that country will yield new business opportunities.

So, the editors of Panchajanya and Organiser are getting worked up about the wrong issue. The issue is not whether the Bank and DFID are acting as agents of neo-colonialism and whether Mr Naidu is falling prey to foreign interests. The issue is, if we dont want foreign aid, and the conditionality that goes with it, how do we mobilise the financial resources so given up After all, Mr Naidu is not accepting Bank or DFID money because he loves them. He needs the cash and if he cannot get enough by raising taxes and user charges and from the central kitty, hell borrow as long as he remains creditworthy. Those who oppose aid must suggest alternative forms of revenue mobilisation, especially foreign exchange mobilisation. That would be a constructive way of making a point against aid.