How the Modi government is dismantling India’s federalism, politically and fiscally

States’ access to resources is seemingly conditional on having a “double-engine sarkar”, even as governments’ space for economic policy is shrinking.

Members of the All India Confederation of Commercial Taxes Association protesting in New Delhi against the Central government taking away a major share of revenue from States under the GST Act.  | Photo Credit: SHIV KUMAR PUSHPAKAR

Indian federalism is under severe strain. Announcements of measures which parties outside the BJP-led National Democratic Alliance see as attacks on federalism have increased in frequency. A recent example is the “One Nation, One Election” call for simultaneous elections to different levels of government, which has been identified as a “blatant attempt to undermine” the country’s federal structure.

Centralisation is, of course, not just political. Parallel to political challenges to federalism has been the much more consistent tendency to erode the fiscal and, therefore, economic policy space of State governments. Given the responsibilities that States have been allocated, which require expenditures in excess of their revenue generating capabilities, the Constitution mandates the appointment of Finance Commissions once every five years to decide on and devolve to States a share of the resources mobilised by the Centre.

Yet, the actual devolution of resources has been controversial right from the start. The widespread perception is that the Centre retains for itself a disproportionate share of resources, and it has over time made even the devolved share subject to regressive conditions, contrary to the original conception. The fallout has been the view of States that their share in the divisible pool has fallen short of what is rightfully theirs in the surplus resources mobilised by the Centre.

Available evidence backs that view on a number of counts. To start with, Finance Commissions have not always been independent of the Centre as mandated because the Centre has constituted them and decided their terms of reference, without any consultation with States. This has influenced their recommendations.

Second, a large chunk of the resources transferred were kept out of the Finance Commission’s ambit, giving space for discrimination as well central control over their use. More so after the Planning Commission and the National Development Council were abolished.

Third, there has been a growing reliance on cesses and surcharges that do not fall within the remit of the revenue-sharing decisions of the Finance Commissions. By 2020-21, the share of such imposts in total tax collections stood at more than 15 per cent, a massive increase from the pre-Modi years.

Fourth, indications are that the autonomous resource mobilisation capacities of States have been eroded because of the implementation of the GST regime. That regime has effectively denied State governments any ability to raise their own revenues other than through sales taxes on alcohol and excise duties on fuel, which are exempted from GST. States are now dependent on the Centre for nearly half of all of their resources, and have no control over more than two-thirds of their revenues.

Eroding States’ resources

It would be wrong to see these processes as being one of mere competition for resources between the Centre and the States. Rather, it is linked to the evolution of political democracy in post-Independence India. A much-analysed feature of that evolution was the end of one-party dominance starting at the State level in the late 1960s and at the centre from the late 1980s. The tendency for the same party, the Congress, to have governments at the Centre and in States gave way to a more complex political mosaic. This could affect the composition of the Rajya Sabha as well and consequently the legislative power of the ruling party at the Centre.

This triggered a tendency to try and influence from above, through Central intervention, the political environment in States. There have been concerted efforts to restrain the ability of opposition-ruled States to adopt economic policy measures and initiatives that win parties ruling in those States a degree of political legitimacy. Capital expenditures that build State infrastructure and social expenditures, especially subsidised food provision, a modicum of social protection, and employment guarantee schemes, do contribute to the party in power in a State winning a degree of political legitimacy.

So, in time, eroding States’ access to resources became an instrument to strike at their ability to initiate such economic policy measures. Whatever infrastructural investments and social sector expenditures occur at the State level are branded as “Central” initiatives or attributed to the patronage of the highest authority, the Prime Minister, even though a large and rising share of the expenditure Is met by the State treasury.

These tendencies have intensified during the years of neoliberal reform. In the name of “fiscal reform”, conditions began to be imposed on State governments that eroded their fiscal autonomy. Nothing reflects the success of this project more than the adoption of the Fiscal Responsibility and Budget Management Act by most State governments. As if this voluntary ceiling on their expenditure financed with borrowing was not enough, the Central government and the Reserve Bank of India have adopted direct measures to limit debt-financed spending.

Highlights

• Parallel to political challenges to federalism has been the much more consistent tendency to erode the fiscal and, therefore, economic policy space of State governments.
• A large chunk of the resources transferred were kept out of the Finance Commission’s ambit, giving space for discrimination as well central control over their use.
• There has been a growing reliance on cesses and surcharges that do not fall within the remit of the revenue-sharing decisions of the Finance Commissions.

Extra-budgetary borrowing

In addition, attempts to raise extra-budgetary resources through borrowing by State-sponsored corporate entities have been blocked. Even during the COVID-19 pandemic, when States had to shoulder a whole host of expenditures relating to health and overall well-being of their populations, extra borrowing was allowed subject to the implementation of reforms, such as hikes in tariffs on power distributed by State government-run distribution companies, that were hugely unpopular and regressive.

In response, opposition-led State governments have been forced to curtail all manner of expenses in order to raise money for welfare measures. The party ruling at the Centre, in turn, has responded by attacking these as “populist” measures that would push States into levels of indebtedness that could precipitate crisis of the Sri Lankan kind! Meanwhile, the Centre continues to allocate money for similar schemes seen as needed to win voter support. So do State governments controlled by the BJP, because of the special assistance they receive from the Centre.

If such discrimination was not enough, more recently matters have taken a turn for the worse, and centralisation has come to be openly weaponised. Nothing reflects this more than the conscious call to voters to elect BJP-led governments in States so as to get themselves a “double-engine sarkar”, or a State-level government that would serve as a locomotive that receives an additional push from the Centre. This amounts to an open declaration that access to benefits of developmental spending depends not on a constitutionally structured transfer of resources from the Centre to the States but on the election of governments led by the BJP that rules in the Centre. Seen in that context, the call for simultaneous elections does appear to be another means of erasing India’s federal mosaic.

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.