States must become engines of growth, with the Centre facilitating them.
By Himanshu Gupta
The GDP growth rate for the first quarter showed that the Indian economy grew at its slowest pace in over six years. It became a point of debate as to who is responsible for this slowdown. Majority of the people targeted the Centre and its policies in the recent past for this sharp deceleration. However, problems in the economy are structural in nature that require a change in thinking by both the Centre and states.
If we look at the Budget 2019 and 14th Finance Commission Report, we find 42% of the divisible pool of taxes are given to states. Many states are demanding to the 15th Finance Commission that this vertical devolution should further increase. These untied grants to states are over and above the funds provided under central sector and centrally-sponsored schemes by the Union government. While central sector schemes are 100% financed by the Centre, centrally-sponsored schemes are partly financed by the Centre and state governments in the ratio varying from 90:10 (in the case of Northeast states) to 50:50 in other states.
Some important schemes in key sectors running in states are Integrated Samagra Shiksha Yojana (education), National Health Mission (health), National Rural Drinking Water Program (water), Saubhagya and Integrated Power Development Scheme (power), Pradhan Mantri Gram Sadak Yojana (rural roads), Pradhan Mantri Krishi Sinchayee Yojana (agriculture), National Programme for Dairy Development (animal husbandry), etc. In fact, all the key flagship schemes running in states are centrally-sponsored schemes.
If we wish to become a $5-trillion economy by 2024, we need to improve the capability of states to drive as engines of growth. A paradigm shift is required while doling out funds to states. Each scheme must have a component of performance-linked funds so that states compete for improving their performance. Funds must be linked with conditionalities so that states bring reforms. As an example, under the Integrated Samagra Shiksha Yojana, some states have improved their school results effectively. But there are also others where learning outcomes have not improved despite huge funding.
The primary reason is shoddy recruitment process followed in states and thereafter unionisation of such teachers to get regularised. There are also instances of teachers putting political pressures to stay in headquarters, thereby making the student-teacher ratio skewed in remote schools. Thus, there is a need of invoking conditionalities like recruitment of teachers through independent service board/commission, maintaining ideal pupil-teacher ratio in schools, etc, before releasing funds to states.
GST is an important step towards cooperative federalism where states and the Centre come together to form common policies and adopt uniform tax rates. In the short term, this may lead to some slowdown, but it is an important course-correction legislation that will bring structural reforms in the economy in the times to come.
To improve productivity in agriculture and allied sector, we must change our approach of giving piecemeal funds to cover maximum beneficiaries. The Centre should guide states to identify progressive farmers, give them comprehensive training, technology and enhanced financial outlays so that the income of progressive farmers increases considerably, thereby motivating others to replicate. Investment in value-chain addition should be increased by forming cooperatives and incentivising state governments to set up primary and secondary processing units and provide seamless logistical support for realising the optimum cost of produce. Waiving off agriculture loans or increasing the limits for priority sector lending alone will not boost agriculture. Till the time states are forced to bring reforms and invest in this sector, we cannot double farmers’ incomes by 2022.
To increase industrial output, we need to create enabling infrastructure for industries. It requires a coordinated effort of both the Centre and states. Majority of the enabling infrastructure like reliable power supply, external utilities, law and order, etc, is the responsibility of state governments.
We often find short-term solutions and give instant relief to the problems that crop up. However, it will be prudent to identify structural issues that our federal set-up is facing and bring reforms so that our economy comes on track in the long term, with states becoming engines of growth and the Centre facilitating them.
The author, an IAS, is secretary, Planning, Arunachal Pradesh. Views are personal