Mention the word federalism and depending upon who one is talking to thoughts and views are coloured by images of either trying to correct a Centre’s creeping centralisation or supporting the strengthening of states. But think of it in the Indian context and it gets a bit more nuanced with an emphasis on cooperative federalism and an apparent need to add more depth. “Historical evolution of federal nation states has broadly seen two types of federal arrangements. These have been ‘coming together’ and ‘holding together’. Our constitutional founding fathers advisedly chose a union of States with centripetal bias as the arrangement,” says Dr Vijay Kelkar, chairman 13th Finance Commission. Delivering his address digitally at the 2nd BPR Vithal Memorial Lecture on Friday, December 1st, , organised by the Centre for Economic and Social Studies, Hyderabad, he opted to speak about a move “Towards Strengthening India’s Cooperative Federalism: Initiatives for Multi-level Governance Reforms”. This, in the hope that some of it would resonate with BPR Vithal, whom Dr Kelkar looked up to not just as the member of the 10th Finance commission or a veteran on state finances but also as the author of some of the foundational books on India’s model of fiscal federalism.
To Dr Kelkar, “our current approach towards cooperative federalism does not go deep enough in this age of rapid urbanisation and democratic decentralisation.” This, he says, “means our cooperative federalism model needs to be further strengthened by recognizing the multi-level governance structure that is envisaged in the 73rd and 74th Constitutional Amendments establishing self-governance in rural and urban areas.” He therefore puts forth an argument for “a tri-cameral approach via democratic decentralisation and roping in the third tier. Such Decentralisation, read with the subsidiarity principle, will truly allow a multi-level play of consequence and help tackle the complex problems facing India.”
Explaining, he says, “decentralisation comprises delegation, decongestion and devolution. The first two mentioned are akin to agency transfers and mainly dictated by considerations of pragmatism and efficient management but the third aspect namely, that of devolution is rather more substantial. It is the very soul of the tenet of decentralisation and zeroes in on and completes the characterization of decentralisation as was thought of in letter and spirit when the 74th Constitutional Amendment.”
The third tier
“Unfortunately,” to him, “the expectations have been belied with most states suffering from and allowing the legacy overhang to dominate. The local bodies are still considered as the creatures of the states as they once were, prior to the constitution amendment. Their validity as the legitimate, third tier of the government, is still not a reality and indeed is not recognized as such. Bringing in the third tier of government within the fold of the overall architecture of fiscal federalism may actually help secure a more solid relation between the three levels of government and allow for the prospect of cooperation between all three with all of them willing to accommodate others.”
Explaining this in the context of the theme of his address, he says, such a structure “will allow a multi-level perspective and play for thinking about India’s federal structure.” Quick to point out the reason why he prefers to use the word play rather than planning, he says, “is because the connotation and concept of planning has undergone much change. The planning in its various forms had started looking more like a wish list with little regard to realism. It was seen as a response to the statutory requirement, frozen in time, without a rolling character and hence without a possibility of mid-course correction or tweaks. The conformity of ex-ante plan and ex-post outcomes was hardly a matter of concern. Indeed, it had started becoming more and more mechanical allocation exercise and sometimes mere physical land use planning without trying to operationalise the aspirations of the people which,” he says, “is so essential for an effectively functioning participatory democracy.”
Also, minimalism, Strategic stance and realism (given the available) resource envelope along with autonomy of expenditure and other decisions would form the hallmark of the newfound meaning of multi-level planning.
He also points out that “while NITI Aayog is doing a fine job of creating discussion and perspective papers, the fact of the matter is that it has no teeth to influence the state. Hence, providing it with a small percent of GDP (say 1-2%) as resources to dispense to the States and below and a sharply defined operational role (hinted above) will get the stakeholders to take serious note of NITI guidelines and pronouncements.”
Sharing the GST
Sharing his insights on GST (Goods and Services Tax), he says, “let us put in place a way by which we are able to share the GST with the third tier. As we know, the local governments are weak and disempowered and so unable to fulfil the mandates. We will require a constitutional amendment firstly to create a consolidated fund at the local bodies level and secondly for in the makeup of GST which could be shared between the three parties involved. This is only fair since the GST is a consumption tax and the taxpayer must see direct benefits accruing for their payment. This will also boost the supply of governance and make available higher quality of local public goods and amenities.” He also makes other suggestions, including around simpler GST rates and structures and for a Centre of Excellence for solving issues, Dr Kelkar spends some time on what he calls “the third tier of government.” He says: “It is a matter of pity that despite the passage of nearly three decades after the passage of the 74th Constitutional Amendment (CAA), the actual and effective implementation is not forthcoming. The 74th CAA actually provided State Finance Commission (SFC) as an instrumentality to formulaically devolve funds to local bodies much as in the case of FCs. Most States have ignored the awards and incentives to make the States fall in line have come to a nought.”
The inequality challenge
While Dr Kelkar covers a lot more areas with implications for the cooperative federalism and on the strengthening of it, one compelling argument for the model itself as against the competitive federalism that some suggest, he says, “the ratio of per capita incomes between the best and the worst performing states is anywhere between 6:1 and 10:1; further that only 15 districts in the country account for 50 per cent of India’s GDP. Such harsh levels of inequality do not provide appropriate initial conditions for competitive forces to be unleashed. The Centre must provide some succour to the lagging States with a cooperation of the better off ones at least for some time to come. Thus, for me, the overarching frame has to be provided by Cooperative Federalism with some bespoken competitive federal elements being allowed in for some specific purpose and arenas.”