Ever since the Narendra Modi government came to power last year, there has been much talk about cooperative federalism and an organic Team India where the Centre would play an enabling role to help the states progress rapidly. The move now underway to free up more funds for the states and allow them a greater say in spending, and in choosing schemes suited to their development models and local needs, is a welcome step in that direction. Over the last few years, some states have been vocal about what they perceive as Delhi’s patronage and the Centre’s one-size-fits-all approach in implementing national schemes. The government appears to be convinced that this stance needs to be reversed and that the states are better equipped to identify their development goals than Central ministries or the now-defunct Planning Commission.
A higher share of 42 per cent for the states in the Central gross tax revenue kitty, which the 14th Finance Commission is said to have proposed, will improve state finances. This would offset deterioration due to the slowdown over the last couple of years. While almost all the states are sure to welcome this, sceptics may argue that granting unbridled freedom to the states to utilise resources without imposing conditions or monitoring end-use may fuel spending on populist schemes or programmes that would not promote the creation of durable assets. There could also be concerns about the inherent disadvantages that some of the troubled and hilly states face, and whether they should have unconditional access to resources.
The counter-argument: progressive states may grab this opportunity to build on their strengths and forge ahead, fostering greater competition. Eight to 10 states led by Maharashtra, Gujarat, Tamil Nadu, Karnataka and undivided Andhra Pradesh contribute over 70 per cent of the total gross state domestic product. If they — and a couple of emerging states — step up the pace of public investment or capital spending bolstered by higher transfer of funds without strings attached, it would boost overall growth. Laggard states would be forced to act then. That is a happier scenario than the Centre sitting in judgement on the plans and priorities of the states. But equally, there are challenges. While it may be an opportune time to let go, the absorptive capacity of many states to utilise a bigger pool of funds remains a worry. And barring the success of the National Highways Authority of India, the state’s capacity to execute large-scale public infrastructure projects remains weak. Finally, many Central ministries and departments that mediate Central schemes and programmes will be rendered redundant. That’s a political call that the Modi government will have to take.