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Money for Nothing

Special packages to states fly in the face of cooperative federalism

Written by P Vaidyanathan Iyer |
Updated: July 17, 2015 5:03:57 pm
Narendra Modi, Jammu & Kashmir, BJP-led government, assembly elections, Mohammad Sayeed, PDP chief, BJP PDP, Mamata Banerjee, iecolumnist, Indian Express PDP chief Mufti Mohammad Sayeed admitted that the BJP and the PDP were like the North and South Poles — but more a compulsion forced on the two parties by a polarised verdict.

A string of development packages for Jammu and Kashmir, Bihar and West Bengal being discussed by the BJP-led government at the Centre flies in the face of cooperative federalism, a cause so passionately espoused by Prime Minister Narendra Modi. There is little or no doubt these additional funds or concessions are driven by political considerations — compulsions of coalition in J&K, given the state’s unique character, and assembly elections in the other two, due to take place in the next 12 months.

So be it, but such out-of-turn packages only point to the abuse of discretionary powers by a ruling party. The J&K alliance was not really one based on ideology — PDP chief Mufti Mohammad Sayeed admitted that the BJP and the PDP were like the North and South Poles — but more a compulsion forced on the two parties by a polarised verdict. It has been over four months, and the PDP is at a loss back home in the Valley, unable to justify its tie-up with the BJP. A massive package will be the price the BJP pays for this. Fighting a crucial battle in Bihar in October, the party hopes that a Central government package will place it on an even keel with Chief Minister Nitish Kumar. In West Bengal, the BJP is trying to make inroads, and funding support to Mamata Banerjee’s government is seen as a return gift for her support to the Bangladesh Land Boundary Agreement and also as a talking point in the run-up to the state elections next May.

Such political packages have a significant component of additional funding, which only serves to distort further the existing mechanism of distributing resources. It has not even been a year since the new government implemented the 14th Finance Commission report that had recommended a higher, 42 per cent, devolution of Central tax receipts to states. And it chose to do this in one-go instead of phasing it out over a couple of years, which would have perhaps given states some breathing time to upgrade their capacity to spend, that is, plan and execute projects. States were overjoyed because higher devolution means higher untied funds. But soon after they spent some money on full-page advertisements lauding Modi, they realised the extra funds given with one hand were taken away with the other.

To retain some fiscal space for the Centre, Finance Minister Arun Jaitley slashed the size of Centrally sponsored schemes (CSS) in Budget 2015-16, leaving states to fend for themselves in continuing with these schemes. While a Niti Aayog sub-committee of state chief ministers is addressing this issue, Modi sought to project his government’s decision to hike devolution to 42 per cent as a proactive and bold decision that tied in with his theme of cooperative federalism, wherein states are at the centrestage. Of course, along with a significantly larger pie of the divisible pool, Modi also understood that states needed policy space and, hence, allowed them to go ahead and amend critical laws like labour, and now, education and land. These represent a remarkable change in the outlook of India’s federal structure, where increased flexibility does not, any more, make the Centre nervous about states’ tendencies to break away.

I deliberately said that such packages “further” distort the existing mechanism of fund transfers because, besides the Finance Commission, which is constitutionally mandated to recommend how much money states should get from the Centre’s divisible pool, allocations have been made to states till last year by the Planning Commission as well. This, too, had a huge element of discretion. Many “special packages” in the past, including to Bundelkhand, the Northeast, Odisha’s Koraput-Bolangir-Kalahandi (KBK) region, West Bengal, Bihar and J&K, were suddenly announced to suit politics, and then additional funds were sought from Parliament through supplementary demands for grants. For instance, the Rs 8,750 crore special plan for West Bengal was announced on December 7, 2011, to placate Banerjee, who had just a week ago forced the UPA government to withdraw its decision allowing 51 per cent FDI in multi-brand retail.

A similar Rs 12,000 crore plan for Bihar was approved by the Congress-led UPA in April 2013 to cosy up to the JD(U) and Nitish Kumar, who had increasingly begun to target Modi. The percentage of Plan expenditure — largely discretionary — in transfers to states has only increased over the years. With the abolition of the Planning Commission, its powers are now vested with the Union finance ministry for all practical purposes. In fact, the 14th Finance Commission has specifically taken care of the needs of 11 states that have low per capita expenditure by giving them grants. J&K takes the lion’s share, or 30 per cent, of the total revenue deficit grants of Rs 1,94,821 crore recommended by the commission over five years ending 2019-20.

There are legitimate demands too. For instance, a special financial package for Punjab post-insurgency. Or for a plague that can potentially debilitate the nation. But over a period of time, demands for special packages without a strong basis have become commonplace. Succumbing to these demands without proper assessment weakens the resource base and results in competitive federalism of a different kind, where every state uses this tool at a politically opportune time to extract extra money.

While some money may be used for development purposes, the lack of strong monitoring of the implementation often results in poor delivery and diversion of funds. Unfortunately, the Central government has also not seriously thought of an institutional mechanism for a national discussion on the need for special plans — and of their post-award review. The Constitution did envisage this need and provided for the setting up of an inter-state council. But ironically, although established in 1990 and mandated to meet thrice a year, it has met only twice in the last 10 years, and only 10 times since it was set up. It can be resuscitated so that the government and any particular state can justify the need for a development package based on urgency and principles of equity.

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