We blame the Centre for low GDP, but India is run by states

November 03, 2020 6:00 AM

Unless states reform, the Centre can only do so much—growth is as much a reflection of the states’ performance as of the Centre’s. Time to review State and concurrent Lists?

In the absence of pinning down responsibility between the Centre and the states, what the learned gave was general gyaan.

By Sanjeev Nayyar
Some years ago, the German CEO of an Indian MNC asked me which government was he to keep happy? Modi (the Centre) or the states? I told him that India is run by the states, unlike what he heard in Germany; so, he had to keep the Centre and the CM of every state where his company had a factory, happy.

Recently, a leading weekly magazine had an excellent write-up on how to revive the Indian economy. But none of the distinguished writers said which government is responsible for what. In the absence of pinning down responsibility between the Centre and the states, what the learned gave was general gyaan.

India is lacking not in knowing what to do, but in implementation (akin to a company that builds broadband infrastructure, but lacks last-mile connectivity) and accountability. Thus, the focus should be on who is responsible for what.

When one talks of India’s GDP growth, we invariably hold the Centre responsible. And the states, which directly or indirectly greatly influence the macro parameters, hardly get reflected upon in the right perspective. Note that the key factors affecting growth are essentially state subjects, namely agriculture, land, labour, industry, employment, health and education.

Under the 7th Schedule of the Constitution, agriculture, health and water (includes irrigation and canals) come under the State List, whilst employment, education, land, labour, industry and power come under the Concurrent List. (Education moved from the State to the Concurrent List in 1976.) “Under the Constitution, ‘land’ falls under the State List, while ‘acquisition and requisitioning of property’ comes under the Concurrent List, empowering the Centre as well as states to legislate on the matter.”

Note that like many aspects of the Indian Constitution are borrowed from the West, the concept of the Concurrent List is taken from Australia.

Every politician swears by farmer welfare, yet when the Centre introduced three farm Bills, considered as the 1991 moment for agriculture, there were howls of protest. Note that these laws can have an impact only when states change their laws in line with the Centre’s.

Overdependence on rains is one of the banes of Indian farming. Irrigation is the solution. Yet, are governments and the nation focused on increasing the land area covered by irrigation? No. Many prefer the easy way to keep farmers happy, viz. loan write-offs (according to State Finances: A Study of State Budgets 2019-20 RBI report, since 2014-15, 10 states have announced loan waiver programmes of an aggregate amount of Rs 2.3 lakh crore) or free power (Punjab Budget FY20, at Rs 8,275 crore).

The point being made is that farmer welfare is largely dependent on the actions of the state government. The Centre has stepped in because states have not delivered. For example, the Centre intervened with the Atal Bhujal Yojana as states are not competent for water management, according to Prof Adarsh Vig of Guru Nanak Dev University.

Because of the importance and modern-day complexities of agriculture, shouldn’t agriculture be moved to the

Concurrent List?
Another example is of the labour Codes recently introduced by the Centre. Similarly, maximum compliances are governed by state governments, Gautam C and Rishi A wrote in the ORF, “India’s businesses function in a regulatory universe of 1,536 Acts that demand 69,233 compliances and 6,618 filings across the Union and state governments. Of these, almost a third (30%, or 463) of the laws and almost half (47%, or 32,542) compliances come under the labour category. Statistically, almost all the compliances (97.1%) are governed by state governments and 937 by the Union government.”

The Centre has done its bit by assimilating 44 Union labour laws into four Codes. Unless states frame enabling rules and regulations, it will adversely affect employment, investment and growth. Third example of how important states are is the power sector.

Among the reasons for discoms not meeting UDAY targets is because of “inadequate hikes in power tariffs, inadequate rise in ‘open access’ transactions and outstanding dues accumulating from state government departments. Discom dues to all power producers across India stood at a staggering Rs 90,577 crore at the end of March 2020, up 41% from a year earlier.”

The above adversely affects discom cash flows. When payment funding mechanism was recently implemented, discoms had to reduce power offtake since they did not have the cash to pay. This forced power generating companies to curtail production, which contributed to a fall in GDP (Q3FY19).

Indirectly, the state of discoms decides power production. If states do not run discoms efficiently, it adversely affects power production and consequently India’s GDP. After all, there is only that much the Centre can do! Bringing down AT&C losses and increasing billing and collection efficiencies is the job of states.

Non-availability of uninterrupted power supply requires a company to buy a generator, adding to project costs.
The above, and when states default on power purchase agreements, adversely affect investment, employment and growth.

Let us now come to health infrastructure, under focus because of Covid-19. Public health and allied subjects, such as sanitation, hospitals and dispensaries, are the exclusive responsibilities of state governments under the 7th Schedule of the Constitution, whereas the prevention of the extension of infectious or contagious diseases from one state to another (Covid-19) falls under the Concurrent List, making it the shared responsibility of the Centre and states.

States’ responsibilities are also shared with municipal bodies and panchayats to a certain extent. But health infrastructure is the primary responsibility of state governments.

State governments spend budgets through public health and medical education departments. They also give funds to rural local bodies and municipal bodies for certain types of infrastructure. Big corporations like Mumbai have their own resources to spend on health infrastructure, and hence do not get money from the state government. But smaller and not so rich corporations may need some support from state governments, even though they have their own budget for health infrastructure.

What is the importance of building health infrastructure for a state government? Is it a parameter by which the public evaluates a government’s performance? How many hospitals have municipal corporations of metro cities built in the last 15 years? State governments spend substantial resources on salaries, interests, loan write-offs and subsidies, leaving less for health.

To cater to a growing population and aspirations, the Centre set up AIIMS-type hospitals and introduced schemes like the Ayushman Bharat (expenditure shared 40% by states) type of schemes.

The items under State and Concurrent Lists need review based on population and future needs. It was decided based on the conditions in India around 1947. India has survived the millennia because it changed with the times.

So, is it time to revisit the entire Constitutional listing of functions and responsibilities of the Centre and states—in the spirit of cooperative federalism? Since growth is linked to employment, investment and revenues shall increase when states also reform and create an environment that is conducive to growth. The quality of spending by states is crucial.


The author is a chartered accountant, corporate trainer and the founder www.esamskriti.com
Twitter @NayyarSanjeev

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