Strong Centre, Weak States?
There is a reason India has a federal structure. We’re too big and too diverse. While one ought to be wary of those who want to centralize authority, in India’s case we need to be doubly concerned now that there’s a fascist government at the Centre. In the extract below, taken from Challenges to Indian Fiscal Federalism (also available as an eBook), the authors outline how the structure of decentralized autonomy has been undermined, especially since liberalization.
Quasi Federalism?
Surprisingly, when the Constitution was framed, several unitary features found a pride of place in it. It is for this reason that many have chosen to describe India as quasi-federal. The broad colonial legal structure of the Montague–Chelmsford Reforms (1919) and Government of India Act (1935), was carried over into the Indian Constitution.
As E.M.S. Namboodiripad commented [in 1968], the Constitution was drawn up in the emotional context of India’s Partition. As a consequence, the emphasis was more on the unity of the country rather than the autonomy of the States. Initially, the Constitution did not even accept the principle of language-based States. It was only after the mass agitations in Andhra and Maharashtra that the principle of linguistic States was adopted.
In the legislative sphere, though there are distinct Union and State Lists (Seventh Schedule of the Constitution), there is also a Concurrent List, where the central government has overriding powers. Besides, the Residuary powers are also vested with the Centre. The Centre has the discretion to legislate on subjects in the State List (Article 249) and give directions to the States (Articles 256, 257 and 355). The Centre does not have the need to consult States in entering into international treaties, even when they have a key bearing on the subjects falling in the State List.[1]
On the whole, reviewing the trends during the last seven decades, there is evidence of a steady encroachment into the legislative spheres of the States mainly through enlarging the Concurrent List and also through entering into international treaties as part of the globalization process, in the recent years.
In the sphere of administration, the right of the central government to intervene in the States is nearly unconditional and open. Articles 256 and 257 give wide powers to the central government to issue directions to the State administration. The much-abused Article 356 gives power to the central government to dismiss elected State governments, if it perceives a ‘constitutional breakdown’ in the State. The Governor, the formal head of the State administration, is appointed by the central government and in a substantial number of instances, without consulting the State governments and on purely partisan considerations.[2] The most recent case has been the blatant misuse of the office of the Lt Governor in Delhi,[3] where the formal head claimed to have overriding powers over elected ministry, finally compelling the Supreme Court to intervene. In fact, the only silver lining in an ever darkening horizon has been the 1993 Supreme Court judgement in the S.R. Bommai case, where certain restrictions were placed on imposition and continuance of President’s rule in the States. Despite, the recommendations of the Sarkaria and M.M. Punchi Commissions on Centre–State relations (which submitted reports in 1987 and 2010 respectively) and Supreme Court judgements, even in recent times, we are not short of instances of dismissal of State governments and the manipulative use of the Governor’s office for manufacturing a legislative majority.
In the financial sphere, as in most federations, in India also there is a serious mismatch between the functions and finances of the Union and that of the federating States. In India, the States spend around 60 per cent of the combined government expenditure, but collect only around 40 per cent of the combined revenues. Therefore, there is need for a constitutional mechanism to transfer resources to the States. The constitutional provision for the quinquennial appointment of an independent Finance Commission (hereafter FC), with a quasi-judicial character has this aim. There is also the objective of limiting the discretion of the Centre in the matter of resource flows to the States. The FCs determine the proportion of the taxes to be devolved to the States and also the principles of its distribution among the States. Tax devolution constitutes around 90 per cent of the total award of the FCs. The rest consists of special grants to the States facing revenue deficits even after tax devolution, minor specific-purpose grants, disaster management and grants for local governments since the 10th FC.
Besides, the FC channel, the Planning Commission[4] formed through an Executive Order in 1951, became an important source of fund flow to the States, partly through formula-based grants[5] and the balance through discretionary grants. This led to constraining the role of the FCs since the 1960s, to examine and make recommendations only on the non-plan revenue component of the State budgets, resulting in unwarranted segmentation in the disbursement of grants. Soon, a third channel of resource transfer, namely, Centrally Sponsored Schemes (CSS), which are included in the central plan, also became an important source of grants to the States, especially, since the 1970s. But these were tied flows for schemes whose criteria were rigidly fixed by the Centre, with the States being forced to share (an increasing) part of the cost of their implementation. This implied substantial central incursion into the subjects in the State List.
In addition to the above three, the Centre also gave discretionary grants to the States, after considering special needs. These grants, like the non-FC grants mentioned above were disbursed invoking provisions of Article 282 of the Constitution, which is classified under ‘Miscellaneous Financial Provisions’ meant to be used sparingly under special circumstances. But this constitutional provision has become the basis for routine disbursal of grants by the Centre to the States.
The multiplicity of sources of funds flow from the Centre to the States, not only distorted the constitutional intention of nondiscretionary transfers but also stymied the expenditure priorities of the States, thus effectively undermining the fundamental principles of fiscal federalism sought to be constitutionally protected through the FCs. As a consequence, the contribution of FC awards in the total resource transfer to the States has tended to come down to less than 60 per cent until the 14th FC increased the share of taxes. In the aftermath of economic liberalization, the role of the FCs itself underwent substantial changes. They became vehicles for enforcing and incentivizing fiscal reforms aimed at realizing deficit targets at the State level. This tendency has been visible since the 11th FC, with efforts to link disbursement of statutory grants and debt relief packages to the passing and implementation of Fiscal Responsibility and Budget Management (FRBM) Acts by the States. As a consequence States have been subjected to double jeopardy in recent years. Not only has the share of grants disbursed by the FCs fallen relative to other grants, but also the FCs have themselves started adopting roles not mandated by the Constitution, thereby adversely affecting the States.
The trends discussed above have had serious implications for State finances. The constraints imposed by the FCs since the 11th among them, have compelled the States to adhere to deficit targets lest they should lose the benefits made conditional on the realization of those targets. Though many States began recording revenue surpluses, there has been inefficiency in the management of borrowed funds. This problem worsened as the States chose not to spend for fear of breaching deficit targets set by the FCs as conditions for debt relief and rescheduling.
Further, in the globalization era, central taxes have not been very buoyant due to the many tax concessions given and rate reductions implemented to incentivize the private sector. The divisible pool of taxes also shrank as a consequence. The increasing reliance on surcharges and cesses, revenues from which are not shareable with the States, and their rising share in gross tax revenue, is another reason for this. These along with an inherent bias in setting rates of Goods and Services Taxes (GST) and apportioning revenues from them between the Centre and the States, have worsened the vertical fiscal imbalances between the Centre and the States. This has happened despite increased devolution of shareable taxes from the Centre to the States by the 14th FC.
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[1] The ASEAN Treaty which provides for lowering import duty on commodities like natural rubber has been entered into without consulting the States concerned which will have to address the issue of affected farmers whose welfare is a State subject.↩
[2] These issues were raised by the Rajamannar Committee Report (1971) and Memorandum submitted by the Left Front government of West Bengal in 1977. These two suggested substantial political and fiscal devolution of power to the States.↩
[3] See judgement of the Supreme Court in Government of NCT of Delhi vs Union of India & Another, Civil Appeal No. 2357 of 2017, in which the Chief Justice of India observed, ‘If a well deliberated legitimate decision of the Council of Ministers is not given effect to due to an attitude to differ on the part of the Lieutenant Governor, then the concept of collective responsibility would stand negated.’↩
[4] Now no longer in existence since the formation of NITI Aayog.↩
[5] A part of the plan grants was transferred through the Gadgil formula.↩
Featured image: Cartoon by Kutty, The Indian Express, 10 April 1967. Relevant today as it was topical then.