Policy | Cooperative federalism is the need to the hour, but it’s missing

Subir Roy

Centre-state relations are likely to suffer a setback with the Union Cabinet mandating the 15th finance commission to create a fund for defense and internal security. Likely to be called the Rashtriya Suraksha Nidhi, it will come out of the Centre’s gross tax receipts and remain outside of the consolidated fund of India.

The overt justification for the move is the Centre wanting the states to share the cost of defending the country form external and internal threats. However, the underlying reason is to pass onto the states some of the financial burden for defense and security.

This will result in more fiscal elbow room for the Centre and a decline in the states’ finances, souring of Centre-state ties which are grounded in financial matters. More fundamentally, it will set back cooperative federalism seen as a pathway along which the country can progress by remaining focused and develop.

The Centre has so far funded the budget for defense and internal security out of its resources as not only is defense a central subject, it is an area which needs singular focus and no confusion over who is in charge and with whom the buck stops. The states do not have, and neither do they want to have, a finger on the defence trigger.

After the current 15th finance commission’s recommendations are finalised, expenditure on defense and national security will be taken out of central resources first and then the amount left will constitute the divisible pool from which, according to the last finance commission’s award, the states are to get 42 per cent. If effect, what is to be divided will be less than what it would have been otherwise.

Cooperative federalism is seen to be the desirable attitude to adopt going by the success of the GST council. It has the finance ministers of the Centre the states as members and all its decisions are taken unanimously.

It is argued that reform in agricultural marketing has been elusive because agriculture is a state subject and the states and the Centre can’t agree on a single policy. Similarly, if new fines for road rules violations had been thrashed out in a spirit of cooperative federalism, then the current chaos of states fixing different new fine rates would have been avoided. Cooperative federalism over these two key issues would have taken India forward faster.

The Centre’s move to alter the terms of reference occurs in a historical context. The 14th finance commission sharply raised the states’ share of the divisible pool of resources from 32 per cent to 42 per cent. The latest move on defense expenditure is seen as an attempt by the Centre to give notice that it seeks to claw back some of what it had lost. This rise is not considered to be as big as it looks because it contains 5.5 per cent plan grants which were given by the erstwhile planning commission under the Gadgil formula.

In fact, this latest change and the controversy that it has generated is not the first to surround the commission. A key one was sparked earlier when the initial terms of reference proposed that the commission devise performance-based incentives for the states on matters such as implementation of flagship central government schemes and norms to  control ‘populist measures’. Importantly, populism on the part of the Centre (Mudra scheme ?) is not under examination by the commission.

There was also controversy over the directive to the commission to examine if revenue deficit grants should be continued. As these are an integral part of the way the commission works, asking the commission to examine the grants for the states and not the Centre is clearly one-sided and goes against the spirit of the commission’s functioning through a quasi-judicial process which flows from the Constitution. Devolution of resources does not take place out of resources owned by the Centre but collected by the Centre and shared between the Centre and the states as the finance commission sees fit.

The issue of fiscal federalism has to be seen in the contest of the direction in which independent India has been moving. Over the decades more and more functions have come to be performed by the states and local bodies and this is considered to be a good thing as development imperatives need to be determined by tiers of government which are closer to the ground.

The problem, however, is that the Centre has come to commandeer too much of resources through centrally-sponsored schemes over the formulation of which the states have no say. These schemes are implemented by the states but the Centre takes credit for them. One instrument through which the Centre had commandeered more and more resources was through the planning commission. The present government has replaced it with Niti Aayog but the new body does not have the power or stature to deal even-handedly with the Centre and the states.

What is significant is that the terms of reference of the 15th finance commission seek to turn the clock backward. Not only is there a signal to stall the process of devolution of more and more resources to the states, there even seems to be an attempt to undo some of the work that was done by the previous finance commission. If the original terms of reference of the 15th finance commission created this impression, the revised terms involving defense expenditure makes the intention more explicit.

Sage advice from someone like YV Reddy, who has seen and handled a lot in his long period of public service, is that India is too big and diverse to be governed mostly according to the perception of those in power at the Centre at any given time. If India has to develop in a balanced manner so that all its parts have emotional commitment to the national development effort, then it can happen through a spirit of co-operation and listening to each other – through cooperative federalism.

Subir Roy is a senior journalist and author. The views expressed are personal.