Vishal Sharma
With the BJP getting the absolute majority in the elections, its prime ministerial candidate, Narendra Modi’s focus now shifts to all important job of putting together a government that is clean and efficient at once. During the election campaign, he has raised the peoples’ aspirations to himalayan heights in sofar as his ability to deliver more and better than the outgoing dispensation is concerned. It is, therefore, certain that he will be watched every step of the way, surely, like no one before, and, perhaps, like no one after him. In some strange way, Modi’s evaluation will begin even before he has put in his performance.
Modi comes in with a welcome baggage of a reformist. He is not seen as an expedient politician even by his adversaries. This impression of him is grounded in his performance in Gujarat where his work has been seen as both substantive and long ranging. Instead of improving work processes within the existing development paradigms in Gujarat, it is said that he has moved towards rejigging the paradigms themselves. This has stood him well in not only increasing economic opportunities in Gujarat despite the fact that the latter is already an overexplored state in many ways, but also enhancing and deepening economic freedoms there.
Nowhere his skills as new paradigm creator shall be more needed than in restructuring the institutions that frame the ever so tenuous centre-state fiscal relations; and that have over time outlived their utility even by the conservative reckoning. One such institution that represents tenuous fiscal federalism is planning commission. Planning commission (PC) is a product of Nehruvian idea of heavy handed fiscal oversight and oppressive centralisation. An anachronism in the present times, PC has ensured that a strong and redistributive centre gives moneys to the states for schemes and works identified by it, and not by the states. No wonder, this has led to the formulation of plans and schemes, which have no organic relation with the demands on the ground.
As if it was not enough, these schemes come with uniform cost norms for all states without any built in provisions for flexibility for difficult areas. No saner element can imagine that per unit cost of an activity in plains of Punjab is comparable, let’s say, with that of hilly and tortuous terrains of Kashmir and HP. But those who have conceived such schemes would have us believe otherwise. Unfortunately, and entirely predictably, the wholly erroneous premise behind these schemes has led to the states showing no sense of ownership of these plans. Consequently, the states have developed only in haphazard manner even as the centre continues with its inexplicable tied plan funding.
Modi will be well advised to do away with this tied funding regime, which is more guided by the need to arm twist the states ruled by the opposition than anything else. As the chairperson of the PC, he should ask the commission to sit with the CMs of the state to ascertain their annual requirements. After which the entire plan, sans the loan component, as mutually assessed, can flow untied to the states, with states being held to their complete utilization and tangible physical outcomes after the lapse of the relevant fiscal.
Even the borrowing requirements under plan or otherwise of the states should neither be capped by the centre nor mediated by it. It should be left to the respective state assemblies subject of course to the caveat that any potential or express default may be necessarily avoided. Similarly, international loan financing/assistance to the states should also be allowed to flow directly to the states except when it is seen as an assault on sovereignty of the state or centre.
Another institution- the finance commission (FC), which is a much stronger institution having constitutional status, needs to be relooked at to factor in the long standing concerns of the states. States have been crying for inclusion of cesses, levies, royalties from coal mines, spectrum fees etc., in the divisible pool so that the states receive higher resultant shares. But for some reasons, the above accruals have not been shared with the states. FCs have traditionally taken a conservative view in this regard; and rather chosen to go along with the centre’s view in the matter. If an FC truly wants a fiscally empowering architecture for both the states and the centre (as the spirit of its mandate is), then it will have to think the better of this selective revenue sharing. Also, the whole FC award regime is based on the determinants/ variables, as worked out by the FC itself. Some of these variables like fiscal capacity, tax compliance, revenue generation, population, geographical discomfort, cost disabilities etc. can’t be universally applied to all the states to work out the award for each state. Unfortunately, FC has followed one size fit all approach in devising its awards for each state. Even grant of special packages and dispensations or loan write offs have been executed independent of the genuine fiscal capacity issues of the beneficiary states.
If Modi has to really transform the existing structure of fiscal federalism in the country, he will have to first look at the very composition of the FC itself. As things stand today, FC is constituted by the centre without any consultations with the states. It’s a top down fiat from the centre. This is arguably where lies its biggest problem. If the FC could have states’ representative(s) on it (states could get together and decide a common representative), its approach could perhaps change, guided as it would be by the concerns of the states. It is not that FC does not consider the views of the states before finalizing its award. But it is more a formality driven by the symbolism that otherwise is inherent in so much of what gets transacted between the states and the centre.
The other problem is that an FC is immediately wound up after it gives its awards. This is fraught with its own problems. For instance, if an award given by the FC is disputed by a state after of course the former is wound up, its arbitration is left to the centre. This has traditionally been resented by the states, as they feel that the centre has appropriated too much power for itself-one of giving award; and later as arbiter of disputes. Some of these issues may appear innocuous, but they are doing long term damage to the fragile fiscal federalism of the country, and therefore, their solutions can’t wait forever.
Modi’s first real test doubtless would be attending to the stuttering economy; and taking immediate corrective steps to check inflation (more importantly food inflation), improve investment climate and accelerate industrial and agricultural growth. But he would be failing glaringly, if he does not reset the centre state relations in a ‘Modi-fied’ framework, extricating it forever from the Nehruvian foundational ideals.
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