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14 August 2014, Gateway House

A renewed federalism of consonance

The government in New Delhi can address roadblocks in centre-state relations in various ways: by allowing fiscal federalism through such measures as a reallocation of resources; customising central schemes to state-specific needs; and by formulating policies through consultation, not confrontation

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The relationship between the centre and the states has been a popular topic of study, often discussed, not just as a subject doctoral theses and op-eds but also by important national commissions. The framers of our Constitution, envisaged our country to have a federal polity with a strong centre – and its centrist orientation was apparent from the structure of the Constitution, which was largely based on the Government of India Act, 1935. While immediately after Independence, this did not pose a problem politically, given that most states were governed by the same political party, Congress, in subsequent years, with the rise of regional parties and coalition governments at the centre, the essentially federal nature of our country has forced its way out of constitutional captivity.

The past two decades have seen the emergence of coalitions with constituent parties from around the country. This has led to regional assertiveness that has redefined governance at both the state and central level. However, the ‘high command’ culture of many governments at the centre has had a damaging impact on our federal polity. With the centre attempting to strong arm its way and bring in legislative changes without the states’ consonance on some issues, mistrust has developed between the centre and the states which eventually led to policy paralysis.

With a new government at the helm, there is a fresh opportunity for the centre to reset the relationship with the states. During his election campaign and after coming to power, Prime Minister Modi has repeatedly asserted that the centre and states must work together for our country to progress. Despite a single party government coming to power after more than two decades, the fact is that many regional parties continue to have a formidable strength in Parliament, therefore signifying their increasing relevance in the national arena. Therefore, it is essential that the roadblocks that have pervaded centre-state relations in our country are identified and streamlined. I believe that three areas need urgent attention in this regard.

Firstly, the centre must ensure that adequate resources are allocated to states to perform their duties effectively. This can be done by ensuring proper redistribution of resources as well as fast tracking executive decisions that can potentially benefit states.

It is well known that the most lucrative taxes in our country are levied by the centre and states, especially the backward ones, are dependent on central funds for carrying out developmental programmes. In an attempt to streamline the multifarious tax system in the country, the centre has been mulling over a single Goods and Services Tax. While the benefits of such a simplified tax regime can never be over-estimated, the state governments’ reluctance to accept this proposal is rooted in their apprehensions over further revenue loss in the short term. If the central government is serious about this proposal, it must show large heartedness and compensate states as a measure to boost their confidence.

Historically backward states, like Odisha which are striving to make leaps towards development have been left short-changed in the past due to the centre’s discriminatory policy. Take for instance the case of allocations made to the Railways in Odisha. According to an estimate, the gross earnings from Odisha were projected to be approximately Rs 14,000 crore(2013-14) with expected growth in rail traffic likely to be in excess of 300 MMTPA in the next 5 years. Despite the obvious advantages of investment in Odisha, the Union Government has made paltry allocations to Railways in Odisha, leaving its rail density significantly below the national average. With a commitment to fiscal prudence, the current government in its budget prioritised projects which have either been incomplete for a long time, or have the potential of generating profits for the beleaguered Railways. Despite the fact that there are several projects that squarely meet both these criteria, Odisha has received less than its fair share in allocations.

In other cases, the centre has often dragged its feet over executive decisions that have the potential to benefit state governments and augment the resources available to them for developmental purposes. For instance; royalty rates have a significant impact on mineral bearing states of the country and the law specifies that they should be revised every three years. The royalty rates were last revised in 2009 and the next revision was due in 2012.  However, the revision is yet to be undertaken. It is estimated that for Odisha, non-revision of royalty rates of major minerals by the centre has resulted in a loss of over Rs. 2600 crore in 2012-13. The centre’s laggard response has compromised an important source of revenue realisation for states and reeks of the influence of the mining lobby. While it is commendable that the new government has announced in its Budget that it will revise royalties, there is no clarity on the time frame for this revision and whether the revision will be effected from 2012 onwards, so that the states can realise the revenue forgone. In any event, future royalties must be ad-valerom, market price linked and thus automatically revised.

I believe that fiscal federalism is the lynchpin of centre-state relations and if the central government takes steps to fiscally empower the states, it will go a long way in building the states confidence towards it.

Secondly, in the last two decades, there has been a mushrooming of centrally sponsored schemes in the country. A large component of the centre’s aid to the state governments is often given for spending on specific purposes and funds are directly transferred to implementing agencies, bypassing the state government. Not only this, states are often required to make matching contributions for availing funds to implement schemes like the Sarva Shiksha Abhiyaan. As a result, the economically backward states, which are constrained by their fiscal capacity, are only able to commit a small share of resources to their implementation as opposed to the better-off states.  The current system is an impractical “one size fits all” and prevents state governments from customizing schemes to their needs. Therefore, there is an urgent need to provide the state governments with room for flexible spending to encourage experimentation innovation and relevance to localised needs.

Thirdly, the government must communicate with state governments and make policy formulation consultative rather than confrontational as had been done earlier. There is an urgent need for creating platforms for ideas based exchanges between the centre and the state. While the National Development Council was formed for this very purpose, it has not been used optimally and has often been reduced as a platform for triumphalism by some state governments of their achievements. If a platform for meaningful deliberations is created, the centre and state governments can share lessons, best practices and can make governance more transparent and accountable to the people of this country.

In order to uphold the true essence of our federal structure as envisaged in our Constitution, the centre and states must work together. Having been at the helm of a state government for over a decade, the new prime minister has a first-hand understanding of the constraints that state governments face and the states will be hopeful that he takes steps to address them.

Baijayant ‘Jay’ Panda is a Member of Parliament since 2009; he represents the Kendrapara constituency, Odisha and the Biju Janata Dal (BJD) party. Earlier, he was twice elected to the Rajya Sabha (in 2000 and 2006). He was given an award for best parliamentary practices by the Chief Justice of India in 2008. He is chairman of the India-U.S. Forum of Parliamentarians. Since its inception in 2007, he has been associated with the Citizens’ Alliance Against Malnutrition, an advocacy group. Panda graduated from the Michigan Technological University, U.S., and worked in the corporate sector before joining politics.

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