Federal wrestling

Debate on the relevance of federalism and the possibilities of evolving a viable federal model is currently ongoing in several countries around the region, perhaps most notably in Nepal. Prior to making any final decision during these processes, it will be important for lawmakers in these countries to evaluate the Indian model, to take into account both its successes and ongoing failures. Past experience shows decisively that there is no generic model of federalism, and that each country will need to evolve its own system, one that is relevant to individual domestic conditions. In India, too, this debate is far from finished.

A major element of India's experience with federalism has been that the functioning of federal units with adequate powers at the state level is essential to address the people's socio-economic aspirations. The commonly made argument that lower governmental units are inefficient and corrupt is untenable, since such problems exist at all levels of governance. Likewise, the anxiety that states might opt for secessionism if given autonomous powers has been proven false. For example, during the early 1940s, the Dravida Munnetra Kazhagam (DMK), now a ruling party in Tamil Nadu, was actively pushing for secession, citing Brahminical domination in the Indian state administration. When India adopted a federal Constitution, however, the DMK felt that it needed to advocate for the linguistic wishes of Tamils within the framework of Indian national unity. The party subsequently gave up the call for secession, entered mainstream politics and, on many occasions, has been elected to power. The fundamental issue is thus not the viability of federalism, but rather the distribution and sharing of responsibilities and power between the Centre and the states. On the other hand, imbalanced power-sharing between these two entities creates a chronic state of conflict in the long term.

Given India's broad socio-cultural diversity, Article I of the Indian Constitution declares that the country "shall be a Union of states". Though the Constitution is largely guided by the federal principle, there has actually been a marked drive towards centralisation since Independence itself. There are three main reasons for this: the resistance of some princely states to integrate with the Indian Union; the existence of secessionist political groups; and the interest of the Indian economic elite in an extensive domestic market, which was more feasible under a centralised state. The Constitution also offers a firm delineation of responsibilities vested in the Centre and the states, defining three lists of subjects. The Union is awarded an exclusive right to legislate on 97 issues; the states have the right to legislate on 66; and the concurrent list gives rights to both the Centre and the states to legislate on 47. In this power-sharing pattern, the states have long felt an imbalance – for instance, regularly complaining about the proliferation of so-called centrally sponsored schemes, which operate essentially on state matters. One example of this is the Rural Development Ministry's implementing of the Pradhan Mantri Gram Sadak Yojana, a project of connecting rural habitations, even though it is the states that have constitutionally assigned decision-making powers on this issue.

In India, executive powers, such as those to levy duties or to raise revenue by taxes, are distributed between the Centre and the states. Meanwhile, the Constitution directs the states to carry out developmental and administrative expenditures in which the states oversee such issues as law and order, infrastructure development, health, education, agriculture, etc. However, every one of the most important revenue-raising powers remains or has been centralised. Over the years, a major demand on the part of the states has been to increase the percentage of taxes provided to them by the Centre, from the current 30.5 percent to a full 50 percent. This demand has been consistently pushed aside by the Centre, despite the fact that state-government tax receipts have significantly increased in recent years, to more than 55 percent of total fiscal resources in 2006-07. Perhaps more startling, the combined annual development expenditure of the states is currently one and half times greater than that of the Centre. In dire need of resources, most state governments have had to negotiate with multilateral institutions, including the World Bank and the International Monetary Fund.

State governments are not permitted to levy income tax, corporate tax, wealth tax, or import and export duties. They also cannot determine the rates or any procedure related to excise duties on goods and services. Nor can they impose taxes on the service industry – a notable shortcoming given that today this is the fastest-growing sector of the Indian economy. To mobilise funds from the market, the states are thus constantly forced to seek permission from the Centre. Instead, the states collect revenue from minor duties, such as sales, purchase, amusement and road taxes, or from excise duties on liquor. Partly as a result of this, state governments in India face constant financial hardship, and an alarmingly increasing debt burden. For example, Kerala's total debt has increased from around INR 114.3 billion in 1996-97 to nearly INR 571.4 billion in 2007-08.

According to the Constitution, central tax revenue is to be shared between the Union and the states, as per the recommendations of the Finance Commission. This body gives recommendations on distribution of tax revenue between the Union and the states, and amongst the states themselves. While this may seem straightforward, the Commission's recommendations have come up for significant criticism. The most common complaint on the part of the states has been that the Commission does not ensure an equitable distribution of fiscal resources from the Centre. Goa, for instance, contributes 0.7 percent of all taxes collected by the Centre, but receives only 0.2 percent of the total largesse.

Violating the basic principle of federal fiscal devolution, the Commission has often proposed conditional transfers, while the Centre imposes conditions to central assistance and centrally sponsored schemes – all without arriving first at consensus with the states. For example, the 11th Finance Commission asked the state governments to pass the Fiscal Responsibly Act for debt relief to the states. The current Finance Commission, the 13th, is now asking the states to introduce the Fiscal Responsibility and Budget Management Act, which requires the reduction of the Centre's fiscal deficit and elimination of its revenue deficit within a specified period. But achieving higher revenue is possible only by widening the tax base, imposing more taxes on the rich. With the absence of political will to take such measures, the necessary adjustments have to be made by cutting expenditures; inevitably, states are compelled to cut back expenditure on social-welfare services. In order to undertake investment in social and economic infrastructure, they have had to depend on private capital, and to enter into public-private partnerships.

Needful federalism
Apart from the need to restructure fiscal federalism, India's legislative and administrative branches also require radical restructuring in order to achieve a truly democratic federal set-up. There has been some stuttering progress in this regard. Due to pressure mainly from the left parties, in 1983 the central government constituted the Sarkaria Commission, tasked with examining the relationship and balance of power between the state and central governments. Many of its recommendations are vital even today. For example, with respect of subjects in the Concurrent List, the Commission insisted that the Centre hold consultations with the state governments. Likewise, on the issue of the appointment of the governor, the Commission recommended that the state chief minister should be consulted, and that the procedure of consultation should be prescribed in the Constitution. Two decades on, however, not a single of the Commission's recommendations has been implemented.

All the while, outstanding issues have been left by the wayside, including the increase in the share of central taxes for the states, and the debt burden on the states. One basic demand, still unaddressed, has been the setting of a time limit for receiving the sanction of governors or assent of the president for bills passed by the state assemblies. This is important in light of past criticism regarding the partisan conduct of state governors, many of whom have been accused of acting in the interests of the ruling party at the Centre.

Finances are not the only point of contention in this power struggle between the Centre and the states. In a weakening law-and-order situation, the Centre retains the right to dismiss the state government and impose president's rule, on the basis of Article 356 of the Indian Constitution. This infamous article has served as a weapon with which to intimidate elected state governments. The worst victims of such abuse have been the left governments in West Bengal and Kerala, while the governments headed by the DMK in Tamil Nadu were also dismissed on similar premises. Seen as a serious threat to evolving a meaningful federalism, the Sarkaria Commission made a plethora of suggestions on this issue, echoed by the Supreme Court. To date, however, no safeguards against the abuse of Article 356 have been institutionalised by the Centre.

In recent years, India's local-level parties have emerged as just as powerful as the two major national parties, in terms of electoral performance. As such, they also reflect the intensified localised aspirations of the people, and highlight the fact that the legitimate aspirations of India's 'backward' areas can only be properly addressed through democratic decentralisation. In the long term, localised underdevelopment can only pose a danger to the integrity of the polity as a whole. While the nature of coalition politics in India has increased the bargaining capacity of some states, those aligned with the ruling party at the Centre try to receive more discretionary grants than do the others.

Given this tussle between the Centre and the states, managing political decentralisation alongside economic centralisation is going to emerge as a pre-eminent challenge in this era of globalisation. Globalisation poses special challenges for federal systems of government, as the role of India's states become increasingly unclear, with overlapping areas of sub-national governance. This challenge is compounded with controversies over environmental regulation, inter-state quarantines, relegating the policies for the indigenous developmental needs and related issues. State governments also have a tendency at times to react protectively when facing dislocation and threats from global forces. In such a situation, the new challenge of Indian federalism – and, by extension, that of all of the other countries currently experimenting with various types of federalism – will be to devise political processes that foster positive state and territorial participation in the country's response to globalisation. The increasing power of multilateral institutions and regional development banks alike is able to penetrate and bypass state governments, by superimposing their jurisdiction over nation states and sub-national areas. The countries of Southasia are rightly concerned about the kind of impact that this could have on their local traditions, trade, economy and autonomy.

Given that countries such as Nepal are already members of multilateral institutions, devising a federal model of governance that meets the needs of their federal constituencies, while in line with their regional and international commitments, is going to be an uphill task. One way to go about this would be to borrow the concept of a federal model most suitable to domestic conditions, while being cautious to ensure that multilateral commitments are able to work in harmony with federal needs.

~ N Gunasekaran is a writer and political analyst based in Madras.