The Revolution Begins – Arvind Panagariya
With Finance Commission recommendations, Centre-state relations set to undergo dramatic change
Any big change requires big ideas, decisive leadership and happy coincidence of circumstances. Nothing illustrates this better than the unfolding story of cooperative federalism in India.
As chief minister of Gujarat, Narendra Modi had often argued that the central government implemented schemes were at odds with the state’s needs and priorities. For example, schemes that provided funds for electrification were at best of limited value to Gujarat since it had already achieved near 100% electrification. This state could have spent the money provided for such a scheme more productively if allowed to use it for other purposes.
In advancing this view, Modi was joined by other chief ministers such as Vasundhara Raje of Rajasthan who argued that the vast numbers of central schemes further restricted their fiscal space because many of them required matching contributions by them from their otherwise untied funds. Once these matching funds were committed to access central schemes, states were left with very limited funds for even the most important expenditure items such as enforcement of law and order.
Nevertheless, this system has remained entrenched in one form or another in the last several decades on account of coincidence of three factors. First, outside of state leaders and a few economists and policy analysts, advocates of the view that true federalism means giving greater fiscal space to states and trusting them in setting their own priorities have been few and far between.
Second, the Finance Commission appointed once every five years plays a key role in the division of tax revenues between Centre and states. Consistent with the first point, successive Finance Commissions held untied funds to the states at or below 30% of the divisible tax pool. Only the 13th Finance Commission exceeded this mark, setting states’ share at 32%.
Finally , successive central governments have chosen to transfer the bulk of the remaining funds to the states via central and centrally sponsored schemes. With nearly 8% growth over an entire decade, tax revenues have significantly expanded. Alongside, central and centrally sponsored schemes and the revenue resources they absorb have expanded dramatically as well.
Two key factors have come together to dramatically alter this equilibrium.One, India now has a prime minister who was once a chief minister and strongly feels that cooperative federalism means greater fiscal and legislative space for states. And two, by a happy coincidence, the chairman and members of the 14th Finance Commission believe in genuine federalism themselves.
Moreover, they have recognised the opportunity offered by a prime minister at the helmwho truly believes in the power of states and their leaders. Accordingly , they have recommended that starting 2015-16, states be awarded 42% of the divisible pool of tax revenues.This is a gigantic and unprecedented 10% jump in devolution.
Predictably , the prime minister and his Cabinet have accepted this bold recommendation of the 14th Finance Commission.
What implications does this change have? For starters, with larger transfers coming as untied funds, states also have greater responsibility in discharging their duties. It is likely that they will now have to take greater responsibility in areas that have been hithertocovered by the Centre, especially those falling on the state list. States will also have to do this in ways that are more consistent with their priorities and not according to “one size fits all“ schemes. By the same token, with a lower share in the divisible pool the Centre’s fiscal space will shrink, requiring a rethink of central and centrally sponsored schemes.
One might ask where does Niti Aayog fit into this story? I am tempted to say that in replacing the Planning Commission by Niti Aayog, Prime Minister Modi may have anticipated the 14th Finance Commission. Under the previous regime, the Centre was often seen as “giver“ and states as “recipients“ thereby making the latter feel that they were less than equal partners. In replacing the Planning Commission by Niti Aayog, the prime minister sought to change that equation and forge an equal relationship between the two sides. As such this change represents a step towards cooperative federalism.
We will have a more complete picture of the emerging Centre-state relations this Saturday when the finance minister presents the budget. But even with what we now know, one thing is clear: in the years to come, Niti Aayog will have to play a much greater role in the knowledge space. Greater fiscal freedom combined with greater legislative freedom in areas covered by the concurrent list of the Constitution means that states will need to play a more active role in designing their own programmes and policies.
As they do so, they will need to reach out to data, analysis and expert advice.The design of Niti Aayog as per the Cabinet Note of 1 January 2015 positions it well to provide these services. By the same token, those of us at Niti Aayog have to work hard in the months to come to build new strengths so that we do not disappoint the states that reach out to us for advice and assistance. We shall see.
The writer is Vice Chairperson of Niti Aayog.
Sources – The Times of India
Directions: (1-6): Read the following passage carefully and answers the questions given below it. Certain words are given in bold to help you locate them while answering some of the questions.
Ques. 1 As the Chief Minister of Gujarat, Narendra Modi why argued that the Central Government implemented schemes are at odds for the state government?
a) Because the Central Government was not paying the equal amount of funds for all the states.
b) Because, he being from the opposition, want to criticize the steps taken by the Central Govenrment and leave an impression on the general public mind that what a crook central government is.
c) Because Central Government doesn’t take in the picture all the perspective while allocating the funds.
d) Because he wanted more funds for filling his and his cabinet minister’s pocket.
e) None of these
Ques. 2 Why Vasundhara Raje decided to join the views of Narendra Modi?
a) Being from the same party, she had no choice but to join hand in hand with her party leader.
b) Vasundhra Raje and Narendra Modi had a hidden plan of going against any of the good initiatives taken by the Central Government.
c) Vasundhra Raje was also facing the atrocities of Central Government and want to raise her voice with Narendra Modi.
d) Vasundhra Raje, being a Chief Minister of a state of India, where central schemes are restricted the fiscal space of the state government, feels that it is injustice on the part of Central Government.
Ques. 3 The writer referred the PM’s view of cooperative federalism, what do you understand by cooperative federalism?
a) It means a more prominent role for the Centre, than states.
b) It means the competitiveness between the Centre and the state.
c) It means more competitiveness among states
d) It means a sync in relation among the states and the centre.
e) It means a sync in relation among the states
Ques 4. What does writer meant by “one size fits all” schemes?
a) NITI Ayog will makes schemes that would be equally beneficial for all.
b) Previously, the schemes were more transparent and object oriented.
c) Planning Commission were making schemes without considering the crucial scenario in the sates.
d) Planning Commission was making more precise schemes, so as to address the actual needs of the states.
e) None of these
Ques. 5 Why the Government did a 10% increase in devolution?
a) To transfer the funds in the hands of state.
b) Shed of the extra responsibility of the state sponsored schemes.
c) To make state more self dependent.
d) To increase the extent of authority on states.
e) To appease the non BJP states in India.
Ques 6. What is the drastic change of the policy in NITI Ayog from that was in Planning Commission?
a) Now states will have equal equation with the centre.
b) States will have more financial freedom
c) Centre has given the responsibility to states to draft every scheme.
d) Both a and b
e) Both b and c
Directions (7-10): Which of the following words is the same in meaning as the word printed in bold as used in the passage:
Ques 7. Entrenched
Ques 8. Helm
Ques 9. Hitherto
b) until now
d) As far as
Ques 10. Devolution
a) dispersal of power
b) control of power
c) bound by power
d) easing of power
e) deprived of power