2 years of Modi: Cooperative federalism more a slogan than reality

Despite the Fourteenth Finance Commission providing a different framework, “cooperative federalism” has remained more a slogan than a reality

2 years of Modi: Cooperative federalism more a slogan than reality
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It was hoped that elevation of Narendra Modi as the Prime Minister of the country two years ago would be a harbinger of a new era in Union-State relationships. With his rich experience as the chief minister of Gujarat, it was hoped that the Prime Minister will lead the country into a harmonious and unencumbered relationship with the states to march towards economic progress. It was expected that the empowerment of the states in a frictionless framework would enable them to compete with one another to achieve dynamism through “laboratory federalism”. The faith was justified as the Prime Minister himself stated, “Let us forge a model of cooperative, competitive federalism; chart a common course to progress and prosperity.”  How far has this been accomplished?

The initial events under the NDA rule justified the hope of furthering cooperative federalism. In particular, the abolition of the planning commission and doing away with the patronage system—the ritual of chief ministers’ annual pilgrimage to the Yojana Bhavan to get their plans approved was important. Centralised planning is negation of federalism and in a federation, there is no reason why the Union government should “approve” the states’ plans. Of course, there is a need for strategic planning both for the macroeconomy and for different sectors and this could very well be done by the NITI Aayog. Also, the Aayog can and should coordinate the policies and programmes of the states with those of the Union government, just as it has the mandate of ensuring inter-departmental coordination at the Union level. This, of course, is a work in progress and we will have to see how the institution will evolve. Perhaps giving the NITI Aayog a constitutional status and merging it with the Inter-State Council could create the much needed institution for intergovernmental bargaining and conflict resolution and help the cause of cooperative federalism better.

The subsequent actions of the government, however, belie the expectation. On the political front, invoking Article 356 of the Constitution to dismiss the governments in Arunachal Pradesh and more recently, in Uttarakhand which was negated by the Supreme Court judgement shows that this government is not different from the previous ones and will not shy away from dismissing state governments ruled by unfriendly opposition parties. Having elected to rule the country with massive majority, the government should have focussed on the economy. Instead, it has been waging continuous wars with the opposition. The electoral reverse in Bihar seems to have only strengthened this and with the Congress party battered in the recent state elections, there is a fear that we will see more of it.

The most important reform involving the Union and states is the implementation of GST. Unfortunately, the reform is stuck, like a bullock cart stuck in the mud. The fault lies as much in the intransigence of Congress led opposition as in the reluctance of the ruling party to take a conciliatory approach. The consequence of this is that the country continues to suffer the tyranny of status quo in tax reform. The approach seems to be to reduce the Congress party to a helpless situation and carry on the constitutional amendment. In this gamesmanship, the people have to wait until a “Congress mukt” Bharat is achieved!

The most important claim made by the government in fostering cooperative federalism was the acceptance of the recommendations of the 14th Finance Commission (FFC) to increase the states’ share in the divisible pool of taxes from 32 to 42%. The finance minister in his budget speech claimed, “…In keeping with the true spirit of cooperative federalism, we have devolved 42% share of the divisible pool of taxes to states … The devolution to the states would be of the order of R5.24 lakh crore in FY16 as against the devolution of Rs 3.38 lakh crore as per the revised estimates of FY15. Another R3.04 lakh crore would be transferred by way of grants and plan transfers. The total transfer to the states will be about 62% of the total tax receipts of the country.”

The government must be given credit for accepting this recommendation of the FFC. However, it must be noted that the FFC increased the states’ share to cover total, not just non-plan revenue expenditure requirements of the states and therefore, subsumes the block grants given by the planning commission. Further, it desisted from recommending the discretionary grants and when this is taken into account, the increase in tax devolution works out to be only about three percentage points. Curiously, the minister’s claim that, with higher tax devolution and plan grants the transfer to the States would amount to 62% of the total tax receipts is clearly an exaggerated claim.  In reality, there was only a marginal increase in the ratio of transfers to gross tax revenue collected by the Union government from 54.5% in FY15 to 57.1% in FY16 according to the budget estimates and even lower, 56.2% according to revised estimates. As a ratio of central government’s gross revenues (tax and non-tax), the increase was from 47.2% in FY15 to 47.9% in FY16 (RE)  Thus, FFC’s recommendation has not led to any significant increase in the transfers. The higher tax devolution was substantially offset by lower plan grants.

Surely, the intent of increasing tax devolution by the FFC was to enhance greater flexibility to the states in the use of funds—not increase in total transfers. The commission’s recommendations, however, required restructuring centrally sponsored schemes. Based on the recommendations of the NITI Aayog committee with the chief minister of Madhya Pradesh as the convenor, the number of schemes were consolidated from the 66 to 28 and classified into “core of the core”, “core” and “optional”, categories with the general category states requiring to contribute 30%, 40% and 50% respectively. To the extent that this has required the states to make larger contributions from their own resources, the intent of the FFC to increase the flexibility has been diluted.

A major violation of the spirit of cooperative federalism by the government is seen in levying cesses and surcharges to deny the states the share in additional tax revenues mobilised. Thus, in 2015-16, the revised estimate of the gross tax revenue of the government in 2015-16 was higher than the budget estimate by Rs 10,121 crore.  Of this, while the central government gained by R27,666 crore, the states had to endure loss of Rs 17,765 crore. Denying the states the share of additional tax revenues mobilised is surely not in the interest of cooperative federalism.

The history of the last two years of NDA shows that there has been very little change, despite the FFC providing a different framework. So far, “cooperative federalism” has remained more a slogan than a reality. Perhaps, the rulers consider feasibility of cooperative federalism only when the states are ruled by their own party or their allies!

The author is emeritus professor, NIPFP and chief economic adviser, Brickwork Ratings
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First published on: 26-05-2016 at 07:53 IST