Harmonising fiscal federalism need of the hour

I was at the launch of Y.V. Reddy and G.R. Reddy’s Indian Fiscal Federalism, arguably the most important publication of the year. Y. Venugopal Reddy served in finance, both at Central and state levels, for much of his career as a civil servant, before climaxing his achievements as deputy governor and governor of the Reserve Bank of India. With his trademark impish humour, he said of G.R., his statistician co-author: “I provide the opinions and he provides the data to back up my opinions.”

The presentation focused on the fundamental asymmetry that underlies our constitutional order. While the Seventh Schedule sets out the state’s ambit of governance, it leaves the lion’s share of tax revenues to the Centre, to be subsequently shared with the states on the basis of recommendations made by a quinquennial finance commission. Moreover, there is no provision for the sharing of financial resources generated by the Centre via cesses, huge dividends secured from public sector enterprises or from the RBI’s profits. This has rendered states hopelessly dependent on the Centre’s largesse.

Illustration: Bhaskaran Illustration: Bhaskaran

To compensate for this constitutional asymmetry, an extra-constitutional device, Centrally Sponsored Schemes (CSS), has been devised which has progressively encroached upon the states’ domain, virtually to the exclusion or, at any rate, the marginalisation of their responsibility for constitutionally ordained functions.

Parts IX and IXA of the Constitution are devoted respectively to the panchayats and the municipalities, that along with Schedules XI and XII illustratively lay out the responsibilities of these democratically elected local bodies to bring participatory democracy to the grass roots. But, with the abolition of octroi by GST, these vitally important instruments are now virtually bereft of any instrument of resource mobilisation. Hitherto, octroi had been the most important source of revenue for the metropolitan and municipal bodies.

For the first two decades of independence, and sporadically since then, the mismatch between the division of constitutional responsibilities and the finances to undertake them was masked by a single party ruling at both the Centre and in almost all states. But, this diminution in practice of the identity and role of the states contributed over time to the emergence of regional parties that now run virtually all states on the geographical periphery of the country, leaving the so-called national parties perilously seeking to retain their dominance in the heartland. Thus, the “union of states”—a cooperative relationship between equals that B.R. Ambedkar and his fellow founding fathers had envisaged—has, over time, deteriorated to a Centre vs states confrontation that does not bode well for the unity and integrity of India.

What is needed is a clear political recognition of the need to align the sourcing and availability of financial resources to the responsibilities set out in the Constitution, for the Union, the states, the municipalities and the panchayats respectively. Perhaps the single most important task before us is to work out a consensus to harmonise the developmental responsibilities of the three tiers of government with their rights to the finances.

Most importantly, the Fifteenth Finance Commission, headed by N.K. Singh, must rise at the present juncture to its fundamental task of definitively proposing a model that makes it financially feasible for each tier of government to perform its distinctive constitutional role, so that we restore the earlier spirit of a cooperative, and not confrontational, union of states.

Aiyar is a former Union minister and social commentator.