India’s fiscal federalism is still evolving… by B. Chandrasekaran

 India’s fiscal federalism is still evolving… by B. Chandrasekaran

The article titled "The poor state of India's fiscal federalism by Kalaiyarasan. A" published in The Hindu on July 28, 2022, makes several sweeping statements without substantial data to prove on larger policy perspective and beyond taking the ideological position. The author’s statements cannot be taken as academic interest because it has public policy ramifications in many respects, mostly misleading.

At the outset, the article paints abjectly the state of India's fiscal federalism with allegations like the “centralisation of fiscal power”, “political centralisation” and "cultural nationalism", etc., especially since 2014. The pitch is set out very well before any data to substantiate for inferences to be drawn to conclude meaningfully.

One of the greatest economists of twentieth-century India was Dr. B.R.Ambedkar who never advocated for centralised planning or power centre except to protect the country's sovereignty by integrating the regional administrations as one country. Indeed, he always strived for decentralised planning for socio-economic development, and that dream is yet to be fulfilled in Independent India even after 75 years.

While the basic structure of India’s tryst with destiny was always found to be lubricated around conflict of visions with which the democracy unfolds and still drives for bettering. Alas, across the country, the autonomy of administrative power and devolution of financial power are yet to be transferred from State capitals to village panchayats and local bodies which rarely need now to make real growth centres across the country.

Interestingly, most seem to be forgotten now conveniently that unlike before 2014, no Chief Minister is visiting New Delhi now for approval of State’s Annual Plan budgetary provisions finalisation, including sectoral allocations, grants, etc. The Planning Commission structure was reformed with financial devolution power has been decentralised more now than in the past since independence.

The author’s statement “States lost their capacity to generate revenue by surrendering their rights in the wake of the Goods and Services Tax (GST) regime, their expenditure pattern too was distorted by the Union’s intrusion, particularly through its centrally sponsored schemes” is deeply flawed on many grounds.

A dynamic democracy like India had debated for a decade on a comprehensive indirect tax system and had powerfully exercised the tools of consensus building through political dialogs to align the states on their own will with facts and figures on the table at a common goal of the Goods and Services Tax system which may not be the perfect one but it was a fair beginning. The structure is still in evolving state with pros and cons to argue, but not to deny the fact that it can be done away with it completely.

For years, many states did not clean up their own awfully managed already fiscally stressed financial health and wasteful expenditures especially soon after the elections and just before the next elections on the lofty promises made to the electorate. When the states were having provisions of their own tax revenues even then they would not able to fulfill the promises made to the electorate and then invariably asked the union government to provide grants or special funds were underestimated by the author's article under review.

According to the report, titled “Central Transfers to States in India Rewarding Performance While Ensuring Equality” authored by economist M Govinda Rao “in 2012, there were 147 such schemes initiated by various Central ministries and many of them were directly implemented by numerous implementing agencies specifically created for the purpose and the grants were given to them directly bypassing the States.”

Whereas, at present, the union government provides funds to states through Centrally Sponsored Schemes (CSS) which has been effectively reduced to 28 schemes from 66 schemes including flagship schemes. The CSS has been rationalised based on the recommendations of the Sub-Group Report Submitted by the Chief Ministers in 2015. The implementation of CSS was mainly on key sectors of national importance because the state governments were strategically not giving due importance for the past many years.

Unlike in the past, States have more flexibility now to implement certain schemes as per the state-specific requirements with the check and balance systems. As many as 45 Central Sector schemes are implemented by States for specified purposes.

The article talks about the case of Tamil Nadu which took steps “to look at Centre-State fiscal relations and recommend more transfers and taxation powers for regional governments.” The point is well taken. One is tempted to ask why Tamil Nadu’s discom has been ranked as the top worst in the country for many years. Moreover, several state-owned public-sector enterprises continue to make a loss but are buried under the carpet from any reform steps. The author fails to heed some of these deeply poor governance structures.

Also, why the decentralisation of financial and administrative power is still not accorded to local bodies in Tamil Nadu? While its neighbours like Kerala and Karnataka have the best decentralised process of governance in the country despite the challenges of welfare politics and administrative misgovernance. Because the depth of the democratisation process has stopped in Tamil Nadu with power welded at the state capital even now by deep-rooted vested interests in anything and everything.

The fact that regional disparity emanates partly from the fact that the state capital power centre still refuses to transfer the democratic power to local bodies which are duly elected by the people for direct democracy with trusts. Moreover, what is the status of major state's State Finance Commissions are upto? Are they performing the requisite role of the state development and bridging the gaps of disparity like inequalities of rural-urban divide, disparities among intra regions, etc? It seems that not much attention is given either academically or in public policy discourse even in states like Tamil Nadu which is being branded as a developed state.

To sum up, it has been several months since Tamil Nadu’s 6^th State Finance Commission report for the period of 2022-2029 was submitted to the state government, acceptance of its recommendations and timeline for implementations are yet to be known to the people. Strangely, the report is not even made public. This is the Dravidian model of governance. None of the academic or policy institutions will raise their voice against such poor governance because they will lose funding from the state government or be humiliated for their right to express in the interest of the public cause.

(The author is an economist and public policy expert)