2017 The year ahead

Federal faultlines

One of the defining features of Prime Minister Narendra Modi‘s discourse around governance reform has been the goal of building a more cooperative form of Centre-state relations. A former chief minister himself, Modi promised a new approach. Chief ministers would work together with the Centre as a ‘Team India’ to resolve differences and achieve a jointly defined national interest.

There have been real changes in the practice and institutional architecture of federalism in the last two years. The implementation of the Fourteenth Finance Commission recommendations increased the states’ share of central taxation from 32 per cent to 42 per cent. Along with the rationalisation of centrally sponsored schemes, this move recognised the demand of state governments to have more autonomy over their spending decisions. It constituted a substantial increase in the untied funds they received from New Delhi.

Even more significant was the passage of the Goods and Services Tax Act this year. The alignment of indirect taxation by Central and state governments and the removal of inter-state tariff barriers are major steps towards achieving a common market in India. The move has required the Centre and states to pool their sovereignty to pursue shared national economic goals. The states will not have veto rights on the GST Council that governs the operations of the new tax-they will have to form alliances with the Central government to get amendments passed.

The other major institutional innovation related to federalism was the abolition of the Planning Commission. The government argued that the Niti Aayog would oversee a transition from a top-down, Centre-to-state policy flow towards a genuinely cooperative partnership between the two. At the first meeting of the Niti Aayog in February 2015, Modi urged the states to embrace a spirit of ‘competitive, cooperative federalism’ in which they would compete with each other to improve governance, working in tandem for the goal of sabka saath, sabka vikaas.

However, there are signs that in a number of respects Centre-state relations are becoming increasingly politicised in ways that threaten to undermine the promised goal of a more cooperative form of federalism. This also raises questions about how far the Niti Aayog is able to function as a neutral platform for Centre-state dialogue and policy discussion. For instance, in its first meeting, the Niti Aayog governing council, which includes all CMs and state governors, established groups to explore and report on three priority areas for Centre-state cooperation: skills development, Swachh Bharat and the rationalisation of centrally sponsored schemes. Chief ministers of all 29 states, the NCT of Delhi plus the Union territories of Puducherry and the Andaman and Nicobar islands were represented on one of the three sub-groups.

Initially, two of the three sub-groups were due to be convened by CMs belonging to Opposition parties (the Congress’s Siddaramaiah from Karnataka and the CPI(M)’s Manik Sarkar from Tripura). Unceremoniously, two weeks after their formation, news came that these committees were instead to be convened by regional allies of the Central government (Punjab’s Parkash Singh Badal and Andhra Pradesh’s N. Chandrababu Naidu), along with the third committee chaired by the BJP’s own CM Shivraj Singh Chouhan from Madhya Pradesh.

Since the three groups reported in late 2015, there have been no other comprehensive consultative platforms. Those which have been established, such as the small committee on digital payments launched in the wake of demonetisation and convened by Naidu, look even more partisan. The CMs of Bihar and Tripura pulled out of the committee soon after it was established.

Naidu is the non-BJP chief minister most vigorously committed to the platform of cooperation with the Centre. This is a reprise of a role he played in the earlier NDA regime of 1999-2004. Andhra is fast becoming the poster-child of competitive federalism too. The state came first-with Telangana-in the government’s 2016 index of implementation of ‘business reforms action’ plans (the index mirrors the World Bank’s ‘ease of doing business’ index). Of the top 12 reforming states-the ‘leaders’-all but Uttarakhand and Telangana are ruled by the BJP or its allies.

A growing number of states-especially those ruled by non-NDA parties-are becoming less willing to play along. Some of the more vocal ones, like West Bengal, have long proved a thorn in the side of Central governments. But it is becoming apparent that partisan divides between the NDA and non-NDA ruled states are starting to overshadow the vision of cooperative federalism promoted in the first half of Modi’s term in office.

The current difficulties in holding GST Council meetings and reaching agreement on the architecture of the GST regime are indications of the challenges ahead in realising a vision of cooperative federalism. These challenges have become much greater following demonetisation. Not only have many states complained about the expected hit to their revenues caused by it (Kerala’s finance minister recently estimated the state’s revenues would decline by 40 per cent), but the political fallout of demonetisation has made Centre-state relations a much testier issue.

Many states complained that the means by which demonetisation was carried out violated the spirit of cooperative federalism. Enacted by the prime minister over the heads of state governments, this was a policy that was intended to nationalise the political debate. It is in line with the projection of Modi’s presence and authority across areas of government activity. This centralising drift threatens to make the clarion call for cooperative federalism ring increasingly hollow. It has already put the April 2017 deadline for rolling out GST in doubt.

Centre-state relations could, therefore, become a key theme around which the non-NDA opposition coalesces. Yet there are many imponderables. How will the vacuum left by Jayalalithaa’s passing be filled and with what consequences for Tamil Nadu’s ties with the Centre? The Punjab and Uttar Pradesh election outcomes will be crucial in determining the weight of NDA-affiliated states within the federation. The Congress party’s approach too remains unclear. While the party CMs in Karnataka and Uttarakhand have begun to speak out against the ‘anti-federal’ attitude of the Centre, the party leadership has not articulated a clear vision of, or for, federalism in India yet.

The growing lines of partisan tension between the Central government and the states look rather different to the recent past when Opposition-ruled states were frequently some of the strongest in implementing flagship central programmes. This was because state governments were able to claim credit for them in a period during which there was not such a centralising momentum and during which state politics maintained a good degree of autonomy from the national level. In this context, there were few regional takers for the idea of a ‘federal front’, floated periodically by Mamata Banerjee. The current drift towards political centralisation provides Opposition-ruled states stronger incentives-along with greater fiscal autonomy-to undermine, or drag their heels over the implementation of central policy priorities. Whether it also drives them closer together politically will become clearer over the coming year.

This government has given new impetus to discussions of cooperative federalism. That said, the need to maintain a balance between regional autonomy to design and implement policies in ways that respond to local priorities, alongside the space for authoritative action by the Central government, are critical issues for India going into the new year.

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