Cooperative federalism is a two-way street

By: | Updated: February 24, 2015 8:06 PM

Ironic that as Centre keeps its word on freeing up state finances, latter play politics on Land Act

Narendra Modi, Arun Jaitley, land actBy agreeing to implement the 14th Finance Commission’s report which revolutionises centre-state finances, Narendra Modi has passed his first test. (PTI)

While prime minister Narendra Modi talked of genuine cooperative federalism during his election campaign, by agreeing to implement the 14th Finance Commission’s report which revolutionises centre-state finances, he has passed his first test. Ironically, as power diversified over the years with coalition governments getting elected, the centre’s stranglehold over states became more complete in financial terms. While a rapidly growing economy meant more money for states, a lot more of this began to come with strings attached. Even a decade ago, unconditional transfers comprised around half of all ‘central assistance to state and union territory plans’ – in FY04, ‘normal central assistance’ or untied assistance was Rs 22,484 crore of the total central assistance of Rs 47,458 crore. In FY15, of the total central assistance to state/UT plans of Rs 330,743 crore, normal central assistance is a mere 28,514 crore. Another 26-28% of the central pool of tax revenues is transferred without conditions to the states, based on the recommendations of Finance Commissions that are set up every 5 years.

While the untied aid reduced over the years, the balance was made up by more and more centrally sponsored schemes and other central government interventions in how states were to spend their money. Over the years, photographers captured the humiliating picture of state chief ministers making their annual pilgrimage to Delhi to get the Planning Commission to approve their Plans for the year – the chosen few chose to brag that their close ties with the centre got them a few crumbs more. Extensive micro-management ensured states spent in areas the Centre wanted them and, more often than not, the scheme designs were also central ones. If, say, a Kerala didn’t want more money on child education schemes given its universal literacy and wanted to build better roads instead, too bad. Over the previous decade, around 65% of the divisible pool of central revenues was given to states, but the lion’s share of this was tied.

Over the years, the BJP-ruled states in particular, demanded their share of the divisible pool be increased from 32% to around 50%. The 14th Finance Commission has not done this, but as compared to earlier Commissions that raised the rate by a few percentage points, it has gone all the way to 42%. Given the 5-6% share of untied Finance Commission grants, this means around 48% of all central transfers will now be untied. If Modi-Jaitley decide to remove what is derisively called the Indian Cess Service, the share will go up further – most taxes have a cess/surcharge that is not part of the divisible pool of revenues; while these comprised 7.5% of gross tax revenues in FY01, they rose to 13.1% in FY14.

As for the rest of the funds which continue to be tied in one form or another, this is where the Niti Aayog comes in. While increasing mineral royalties paid to states is something that needs to be done – a beginning was made in the recent coal auctions where states were given the proceeds of the auction – as Modi’s letter to state chief ministers on Wednesday reiterated, states are equal partners of Niti Aayog’s Governing Council. The Finance Commission has recommended states be consulted more in designing the other schemes as well. Happily, this is something Modi has promised as well.

Apart from raising the untied portion of central transfers, the Finance Commission has done well to include, for the first time, a 7.5% weightage – transfers to individual states, from the overall 42% kitty, are based on this formula – for ‘forest cover’ since preserving forests implies a cost for states; hopefully, states will pass on more funds to indigenous communities who take care of such forests. Purists will argue that more untied funds to states will just encourage waste, but it needs to be kept in mind that decades of tied spending hasn’t done much to alleviate poverty either.

The fact that the Finance Commission report and the NDA’s Land Acquisition Act were placed in Parliament on the same day highlights the twin responsibilities of cooperative federalism. It is ironical that while the centre is playing fair on state finances, the states which got together in June – rural development minister Nitin Gadkari had invited comments from states on the UPA’s Land Act – to trash the UPA’s Land Act are playing politics, and it remains to be seen how the NDA will get it passed in the Rajya Sabha. And this is when, as FE’s page one graphic shows, small and marginal farmers/labour across the country are more dependent upon industry/services than they are on farms – indeed, as 300 mn more Indians pour into urban spaces over the next two decades, it is not clear how the Opposition thinks they are going to be accommodated. Cooperative federalism is a two-way street. If states don’t help the Centre achieve its goals of speeding up economic growth, the divisible pie and their revenues will get smaller; if GDP and high-quality jobs don’t grow, poverty levels in states can’t come down. The cooperative federalism ball is no longer in Narendra Modi’s court.

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