Centre-State Relations Need Holistic Review

Strengthening Federalism
Team INCLUSION
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Centre-State relations in India are a complex one and are guided by several constitutional and non-constitutional bodies. While social welfare falls largely in the domain of states, the role of the central government in designing and dictating the financial terms have grown wider over the years. This often results in a conflicting situation and calls for a holistic review.

  1. There is need to holistically re-visit the Centre-State relations. It is desirable to constitute a High Powered Commission consisting of eminent lawyers, jurists and policymakers with administrative experience to examine the entries of List I and List II and List III of the 7th Schedule of the Constitution.
  2. Consultative mechanism between the Centre and states need to be made more transparent and robust.
  3. The Inter-State Council should not be treated as a central government body and its federal character should be maintained. The Council should be suitably empowered, through a constitutional amendment.
  4. There is need to bring symmetry in the functioning of the GST Council and the Finance Commission.
  5. Successive attempts to rationalise the Centrally Sponsored Schemes have met with limited success. There is need to have a holistic re-visit of all Centrally Sponsored Schemes.
  6. State Finance Commissions need to be strengthened. Their terms of reference should be decided in joint consultations between the central government and states.
  7. The 15th Finance Commission should allocate some fund to incentivise the formation of State Finance Commissions.
  8. NITI Aayog should be given constitutional legitimacy and suitably empowered to allocate non-FC transfers to the states.
  9. Empower local governments – Panchayati Raj Institutions and Municipalities – by giving them more financial powers.

Roles and responsibilities of the Centre and the states have been listed in the seventh schedule of the Indian Constitution. It has three lists: List I - Union List, List II – State List and List III – Concurrent List. While the List I and List II have roles and responsibilities defined for the Centre and states, respectively, the List III include the areas that overlap between the Centre and the states and thus, fall in the purview of both.

The 15th Finance Commission could allocate some amount by which States should be incentivised to constitute State Finance Commissions following the process and standard of Union Finance Commission in terms of timeliness of its constitution and eminence of its membership.

V N Alok, IIPA

Social welfare like public health and sanitation, education, water and agriculture fall largely in the purview of state governments. However, over the years the central government has been playing a greater role in these areas.

Experts argue that while the 7th Schedule list was exhaustive and served the purpose of ensuring smooth functioning between the Centre and the states, it needs to be holistically revisited taking into account the changed socio-economic dynamics and new technologies.

According to N K Singh, Chairman, 15th Finance Commission, the 7th schedule of the Constitution, as originally defined, has ceased to serve its purpose, which was intended. Unless we re-draw the contours of the schedule, some of the incongruity between the 7th Schedule and Article 282 of the Constitution and the standalone legislation of the subjects primarily will remain cluttered and opaque. “It is time we understood the contemporary reality and revisit the 7th schedule,” he said.

He pointed out that under Article 282 of the Constitution, Centrally Sponsored Schemes (CSS) are implemented. Such schemes are designed by the Centre and the cost is divided between the Centre and states. These schemes cover subjects which should be in the domain of states. This practice of Central schemes was made part of the First Five Year Plan itself and with passing time, it only got more and more accentuated.

Like the Finance Commission, the Constitution has also provided for the establishment of a federal body called the Inter-State Council to resolve disputes and deal with subjects in which some or all states and the central government, have a shared interest.

Sudipto Mundle, 14th Finance Commission

Successive governments have promised greater autonomy for states and argued that the centre should not get involved in the state subjects. But the ground reality shows that the Centre is playing an increasing role in the areas, which were supposed to be the state subjects. In fact, the Central government has pushed forward several legislations on the subjects, which are purely in the domain of states. It includes the Right to Food, Right to Employment and Right to Work. All these are purely state subjects under the 7th Schedule of the Constitution.

“There have been 115 standalone Centrally Sponsored Schemes notwithstanding many rationalisation attempts that were made, the last one by a committee headed by Shivraj Singh Chouhan,” said Singh.

Nearly Rs 6.50 lakh crore is being spent annually on the Centrally Sponsored Schemes. Out of this Rs 3.53 lakh crore is spent by the Centre, the rest comes from the states. Despite successive attempts to rationalise and reduce the centre's role in welfare schemes the number of CSS and the amount spent on such schemes have increased continuously over the years. This indicates that there is a need for a more credible policy for rationalisation of CSS.

Singh suggested to have a holistic re-visit of all the CSS, to see the symmetry between central outlays and centrally sponsored schemes to improve the multiplier effects and optimise multiplier gains.

He further suggested that there was a need to constitute an Empowered Group of domain experts to submit to the Finance Minister and Prime Minister on modalities of further and deeper rationalisation of these CSS.

On institutional vacuum he said post-abolition of Planning Commission many institutions are in place but we need to see how they become more robust to impart greater dynamism in a consultative mechanism between the Centre and states. We have an institutional entity called Inter-State Council (ISC) on how to rejuvenate and rekindle Inter-State Council deserves serious consideration.

There are cases of flight of capital from northern states to the southern. This is due to the pattern of economic development and reliance on agriculture and small scale industries in northern states. Banks are not very favourable in giving loans to these sectors.

Charan Singh, Punjab & Sind Bank

He further stated that the symmetry in the workings of the GST Council and the Finance Commission deserves serious consideration. The difficulty lies in the areas of the ways to monitor, scrutinise and optimise revenue outcomes. Since both the Finance Commission and the GST Council are constitutional bodies, the coordination mechanism between the two is now an inescapable necessity.

Sudipto Mundle, Member, 14th Finance Commission, emphasised on the need for strengthening the Inter-State Council. It is a federal body and could act as an effective institution in resolving conflicts among states. But it has lost its federal character by being made a part of the Union Home Ministry. Another problem is that it hardly meets. Like the Finance Commission, the Constitution has also provided for the establishment of a federal body called the Inter-State Council to resolve disputes and deal with subjects in which some or all states and the central government, have a shared interest. Mundle said the Inter-State Council should not be treated as a central government body and its federal character should be maintained.

The Inter-State Council could be suitably empowered, through a constitutional amendment if necessary, and reinvented as another effective platform for cooperative federalism like the GSTC. Through this platform the stronger states could help the weaker ones with their best practices in design and implementation of important development schemes. The central government could also channel grants through it to support such schemes in the case of merit goods of national interest, including those on the State list.

73rd and 74th Constitutional Amendments were made for empowerment of local bodies, Panchayati Raj Institutions and municipalities. However, in each case it was left to the discretion of the states to enact the necessary legislation for establishing independent local governments, suitably empowered and resourced to deliver local public services.
Such independent local governments with their own functions, functionaries and funds would have to be carved out of the domain of state governments, curtailing their powers and the influence of state legislators. It is a zero-sum power game between the states and local governments, with the states appointed as arbiters. Not surprisingly, state governments have made little progress in establishing independent local governments in the seventy years post the adoption of the Constitution, and the twenty-five years since the adoption of the 73rd and 74th Amendments.

There are a few exceptions where some progress has been made in assigning tax revenues to local bodies. The 13th and 14th Finance Commissions also earmarked substantial funds for local governments in different ways. The creation of an independent Consolidated Funds of Panchayats and Municipalities has been proposed through a constitutional amendment, to be funded by resources recommended by the FC, state FCs and earmarked shares of the GST, which could be a gamechanger, said Mundle.

But funds, important as they are, will not by themselves create independent local governments unless they are empowered through the transfer of functions and functionaries, as stipulated in the 73rd and 74th Constitutional Amendments. That can only happen if the interests of state legislators are aligned with those of elected local government leaders. But that would require a radically different federal structure where citizens directly elect only the legislators of local governments, who then elect the legislators to the state assemblies, who in turn elect the legislators to the national Parliament. Of course, that is just a utopian idea which will never be realised. So, India is unlikely to have a third tier of government in the foreseeable future. But, it is tempting to just plant the seeds of that radical thought.

Charan Singh, Non-Executive Chairman, Punjab & Sind Bank said, "The credit deposit ratio of schedule commercial banks is high in southern and western states and low in northern and eastern states. There are cases of capital flight from northern states to southern states. This is due to the pattern of economic development and reliance on agriculture and small scale industries in northern states. Banks are not very favourable in giving loans to these sectors."

"The 15th Finance Commission could allocate some amount by which States should be incentivised to constitute State Finance Commissions following the process and standard of Union Finance Commission in terms of timeliness of its constitution, eminence of its membership and quality of reports," added V N Alok, IIPA.

The constitution of the future Finance Commissions and their terms of reference could be decided in the meeting jointly held along with State Finance Ministers. The Commonwealth Grant Commission of Australia and a similar body in South Africa could be a good benchmark to follow.

(Comments are welcome at info@skoch.in)

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