FROM THE RINGSIDE
Centre, states must strike new friendship
N K Singh
Posted online: Sunday, April 15, 2007 at 0000 hrs Print Email
Last week, I wrote a column on the recently concluded Stanford Mirror Conference in Patna. One of the papers presented was on ‘Challenges Facing the Indian Economy’, by T.N. Srinivasan, and it deserves closer attention.
The paper considers the important achievements of reforms, as well as steps needed to revive and complete the reform agenda. Much of it is familiar terrain — further tariff reduction, fiscal rectitude, addressing vulnerability arising from contingent liabilities. It also cautions about our urge to imitate China in its SEZ policies. And I agree that cocooning limited areas and providing them fiscal concessions instead of improving overall investment climate through better governance and efficient infrastructure may not be the best way to go.
An equally interesting part of his paper concerns institutional reform, particularly Centre-State relations. Srinivasan argues that the centralised quasi-federal system adopted by the framers of the Indian Constitution in 1950 worked well when there were homogenous single-party governments in almost all the states and the Centre, but the subsequent emergence of heterogeneity, the decline of institutions, and changes in the economy have eroded the rationale for unitary and quasi-federal features of the Constitution.
Srinivasan made four important proposals:
• First, alter the mandate of the Finance Commissions to let them consider the workings of public sector entities which can impact finances at the Centre and the state.
• Second, unify all devolutions by doing away with discretionary transfers and multiple centrally sponsored schemes.
• Third, set up a fiscal policy review council, comprising the prime minister, finance minister, chief ministers, and some experts to examine and enable participative engagement of the Centre and the states, take a macro viewpoint, and allow states to question Central policies.
• Fourth, since planning in the conventional sense has outlived its utility while public investment hasn’t, reconstitute the Planning Commission as a fund for public investment with both the Centre and the state as stakeholders. They may borrow funds to provide resources for long-term finance.
There is no doubt that at present Centre-state consultations have ceased to be meaningful. The Inter-State Council hasn’t served its original objectives; the National Development Council has become a ceremonial body.
To create functional institutional entities is now a contextual necessity.
Important decisions by the Centre that impact the states fiscally rarely follow consultations with them. For instance fiscal concessions in tax policies, both direct and indirect, or various exemptions, take away a large corpus (as much as half of the collected revenues according to the 2007-08 budget) of funds that would otherwise form part of the common divisible pool to be shared with the states. The states have legitimate reasons to ask questions and worry about this.
The consultations suggested are not meant to take away the budget-making powers of the Centre, but to ensure meaningful consultation between the Centre and states, which are common stakeholders.
If states are expected to behave in a fiscally responsible way, is it fair that the Centre’s own policies should remain above discussion or reproach? Why can’t the states discuss the Centre’s fiscal policies?
The present structure of inherent biases, political predilection and differential criteria make the present structure of Centre-state relations an unequal one. The political appetite in coalition governments for constitutional changes may be low. A lot of things can be done within the existing framework and through administrative action to create a new and a more meaningful mechanism for Centre-state dialogue. But who will take the lead?
The present Central leadership, given other distractions, may not show much urgency. It is, therefore, for the states to consider, consult, and act in concert to seek fair and rational redress. Centre-state relations need an innovative approach.