Home Truths of Economic Federalism

Now that we a have a ruling coalition including many regional parties, we hear much talk of economic federalism. Critics claim the Centre has over the years usurped power belonging to the states. Maybe so. But if the Centre has committed a hundred sins, the states have committed a thousand.

The Centre has flagrantly misused President’s Rule to dismiss inconvenient state governments. But the states have usurped the powers of municipalities and panchayati raj institutions on an infinitely larger scale. President’s Rule has been occasional, but the supersession of municipalities and local governments by, state governments has long been the norm. The Constitution was amended some years ago to give local governments constitutional protection.

Yet several states have failed to hold panchayat elections within the stipulated time. The states are supposed to devolve fiscal and administrative powers to local Governments after receiving rec-ammendalions of newly-created Finance Commissions. Not a single state had done this job.

Many critics object to Centrally-sponsored schemes. These relate to topics under the jurisdiction of the states, but the Centre designs those schemes and conditions for pibursement. The Centre can and iocs use such schemes to favour states of its choice. So critics say Centrally-sponsored schemes should be transferred to the states. But why ? These schemes do not take away any entitlements of States, but simply add to them. No central discretion or patronage is involved in the distribution of Plan funds (which are governed by he Gadgil formula) or tax revenue which is governed by the Finance commission formula). The money for Centrally-sponsored schemes comes out of the Centre’s kitty, and is at the expense of the Centre’s own schemes.

If you want to end Central patronagc, abolish centrally-sponsored schemes, and let the Centre keep the cash for its own projects. But there is no case for handing over cash to the states.

The states say they do not have enough sources of revenue to meet their responsibilities. This argument would be tenable only if they were already tapping all resources of revenue. This is simply not the case. The states have wilfully neglected potential gold mines of revenue.

Consider land revenue. This levy sustained both the Mughal and British empires. It does not sustain the states today because they have have let it wither away. They have not substituted it with agricultural income tax, another levy over which they have jurisdiction. They have the constitutional authority to tax larger farmers, but lack the guts.

The law lays down that state electricity boards (SEBs) should earn a net return of three per cent. In fact they lose around Rs 10,000 crore per year. If the states did no more than fulfil their legal obligation, they would have revenue pouring out of their ears.

In earlier decades, the SEBs were supposed to generate enough power for the nation. However, they bungled that job so badly that by the 1970s there was a power crisis. The Centre then formed the National Thermal Power Corporation and National Hydro Power Corporation to supplement state efforts. The reaction of the state was to gradually withdraw from investing in power, so the two central undertakings now account for the lion’s share of fresh capacity. This was not Central encroachment on the states’ turf. It was a Central rescue of the Indian people massive states’ bungling. A similar logic underlies many other centrally sponsored schemes.

Rural development is a state subject. Maharashtra started its Employment Guarantee Scheme in the mid-1970s, raising money mainly through a tax on professionals. Nothing prevented other states from following suit, save their indolence. So the Centre decided to start rural employment schemes with its own money. These have now become the mainstay of poverty alleviation. Here again, the Centre has been obliged to rescue people from the states’ neglect.

The states are responsible for canal water for farmers. They have set water rates so low that these do not even cover maintenance costs, and entire irrigations systems are deteriorating. The Irrigation Commission suggested water charges at 5 per cent of gross crop value for food grains and 12 per cent for cash crops. In fact charges nowhere exceed 2.9 per cent, and in West Bengal and Tamil Nadu are a laughable 0.1 per cent. In recent budgets, including the latest, the Centre has given additional money to the states to complete irrigation projects. Why? Surely the states should produce the money themselves by raising canal rates.

The Centre is no angel. It too has been guilty of populism, corruption and inefficiency on a grand scale. But at least Central public sector units make a combined profit of Rs 7,000 crore. State government units not only lose money, most have not even finalised their accounts for many years (this is an offence for which the culprits should be prosecuted).

Apart from the misuse of President’s Rule, in which area has the Centre been most guilty of poaching on states’ turf ? The answer is industry. This was originally a state subject. But Nehru wanted planning, and viewed industrial licensing as necessary to have sensible planning. So he changed the law to usurp power over industry from the states. After that, the Centre decided who could invest how much and where. The states had no say at all.

Nothing has empowered the states more than the abolition of most industrial licensing by Mr Narasimha Rao in 1991. Today, the states have come into their own, can attract industry through their own efforts. The reform process has not gone far enough, and too many Central clearances are still needed, especially in infrastructure, coal and oil. We need automatic licensing in accordance with transparent guidelines in many more areas. That will do far more to empower states than transferring some centrally sponsored schemes.

What do you think?