Centre-state relations: A wake-up call

Each of the panels threw up new ideas and innovative approaches on these complex issues. Let me, however, focus on the session entitled 8216;Politics: The Centre-State Divide8217;, which had Vasundhara Raje and Nitish Kumar as the two panelists. Vasundhara Raje made a forceful presentation on Rajasthan8217;s achievements and plans in the offing to improve higher education, tourism and electricity availability. Nitish Kumar outlined his 8216;Vision for Bihar8217; and while his first priority was improving overall confidence and security, he said the neglected developmental agenda would get a new push. He seemed resolute and sincere to do multiple things simultaneously to make up Bihar8217;s development deficit. This included roads, power, infrastructure, harnessing agriculture, effective water utilisation and even linking Bihar rivers to improve inter-basin optimisation!

The state of the Centre-state relations, however, raises at least three distinct issues. While everyone recognises that our federal model has served the country well, changing development compulsions, heterogeneity of governance, rise of regional parties and growing income divides need new approaches.

First and foremost, the structure of financial devolution. While the recommendations of the constitutionally mandated Finance Commission have lent stability, while giving emphasis to equity and efficiency, the same cannot be said of other devolutions. The additional plan flows from the Centre, while largely formulaic, are not statutorily defined and bilateral consultations between states and the Planning Commission are not devoid of quasi-political considerations. Besides, devolutions through the ministries in respect of central sector schemes are even less transparent. There is no way to check the overall allocation of funds across states to consider the allocation for capital and current expenditure and to look at the conditions under which these funds are allocated.

Expert studies like Indira Rajaraman8217;s8212;8216;Is the Indian fiscal federation under threat?8217;8212;raise serious policy concerns. Stuti Khemani in her paper entitled 8216;Partisan Politics and Intergovernmental Transfers in India8217; argues that 8216;8216;a recent surge of empirical studies shows that variations in inter-governmental transfers to sub-national jurisdictions within countries cannot be explained by traditional concerns of equity and efficiency alone, and that political variables representing electoral incentives of public agents are additional and significant determinants8217;8217;.

Looking at the somewhat opaque manner in which various ministries allocate funds to states, it is difficult in one place to collate all the funds which any state has received in a fiscal year and relate them to principles based on either equity or efficiency. The access to externally aided funds is a further complication, and notwithstanding differences in absorptive capacity or efficiency of utilisation, political preference or directional encouragement to lending agencies adds to the distortion.

Looking at the transfer system, it seems possible to achieve several improvements8212;not only governance and fairness but also efficiency in integrating the myriad forms of transfers that exist today. Increasing transparency and coordination would protect these funds from the winds of politics but also improve efficiency and utilisation.

Second, an absence of a well-functioning institutional mechanism for Centre-state dialogue. The National Development Council NDC was designed to facilitate such a dialogue, but over the years has become a largely ceremonial body which meets occasionally to approve the Five Year Plan, its Mid-term Review or on special subjects. The Inter-State Council which was to play a central role in dispute resolution has not served this purpose either. Except for river disputes, independently provided for under the Constitution, the Inter-State Council has not been active in other areas of differences and disputes which can make it a permanent adjudication body.

States continue to complain that unilateral decisions by the Central Government, say on fiscal issues like cess, whose realisation are not shared, or compelling states to bear 1/4th of the variable cost under the National Rural Employment Guarantee Act or setting up a new Pay Commission when they have barely emerged from the impact of the 5th Pay Commission underscores the need for an active consultative mechanism.

The NDC needs redefinition of its mandate and the Inter-State Council must be rehoused as part of the Prime Minister8217;s Office the Prime Minister is the Chairman of the Council for making the dialogue with the states an ongoing process. This is particularly so when both coalition politics and regional parties are here to stay in the foreseeable future.

Third, given the pace of change, on how to deal with recalcitrant states on issues which are in the domain of states but have national implications? If education or health system in a state continues to suffer, with thousands of posts of teachers and doctors remaining unfilled, what recourse does the Central Government have? This raises the larger issue of how to balance devolutions from being performance-driven rather than entitlement outcomes and the need to harmonise considerations of equity with efficiency when the two may lead in the opposite direction.

The Centre-state divide needs a revisit. Both procedures and institutions need restructuring to meet the new developmental challenges. Everyone knows there is lack of adequate reforms in power, education, health and agriculture, which lie in the purview of the states. We do not have the luxury of time; archaic approach and institutions are inconsistent with ambitious growth targets. Some things are obvious. These need not await the recommendations of the yet to be constituted commission on Centre-state relations. A wake-up call is overdue.

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