A robust co-operative endeavour from both the Union and states is necessary to accelerate India’s development.
Alexis de Tocqueville, in his celebrated work ‘Democracy in America,’ extolled: “The federal system was created with the intention of combining the different advantages which result from the magnitude and the littleness of nations.”
In economic terms, this implies reaping the economies of scale while providing public services according to the varying preferences of people. In political terms, this means building a healthy national polity by combining the sub-national entities. In emotional terms, this provides a domestic bond while retaining multiple local identities.
The relationship between the Centre and the states can be both competitive and cooperative. The starting point in ensuring cooperation is to provide clarity in role-play. This philosophy is akin to assigning property rights and is essential to provide account-
ability and incentives. According to the Coase theorem, clear marking of property rights is critical for investment decisions. The overlapping assignments must be settled through bargaining and this could lead to efficient outcomes if the transaction cost is lower than the gains to the parties. However, in an interdependent system, overlapping assignments are unavoidable and in such cases, there should be checks and balances to make the gains and losses from the cooperation transparent and to conduct Coasean bargains.
Limits to cooperation
In the Musgravian troika of governmental functions, the Central government has a dominant role in the design and implementation of macroeconomic stabilisation functions while the state governments have a dominant role in undertaking the allocation function. It is also essential that counter-cyclical fiscal policy is calibrated harmoniously. Experience has shown that individual efforts are necessary to enable subnational governments to follow counter-cyclical fiscal policy along with the Centre.
What are the limits to cooperation? An essential element in cooperative federalism is clarity in the assignment of functions among different levels of government, limits of encroachments and mechanisms to deal with overlapping. In this environment, bargains can work and cooperation is possible when both the parties are gainers or when one of the parties gains and the other does not lose. This no-loss theory is also possible when there is a precise mechanism to compensate the losers adequately.
In India, the Seventh Schedule to the Constitution assigns the legislative domains of the Union and states in the Union, State, and Concurrent Lists. The subjects in the Concurrent List have to be undertaken by both levels of government, and therefore, considerable efforts are needed to ensure complementarity. Over the years, the emergence of coalition governments at the Centre has given rise to differences in the governing parties at the Centre and states and have brought to the fore the need for a strong institution for fostering cooperation.
Pressures in Fostering Cooperation
Several factors have contributed to pressures in fostering cooperation. Some of them are:
One, the Union and state governments are unequal partners. The overwhelming power of the Union governments enables it to take a dominant stand. This dominance creates trust deficits and puts a strain on cooperative behaviour.
Two, changing political environment arising from the end of one-party rule at the Central and state levels, the emergence of coalition governments at the Union level and asymmetric relationships when the ruling party at the state is different from that of the Union government.
Three, a transition from Plan to market economy and abolition of the Planning Commission. Change to market implies increased competition at the state level to attract investments which tends to reduce areas of cooperation. The removal of the Planning Commission has reduced interactions between the Union and states on developmental issues. Although NITI Aayog is supposed to foster collaboration, it is yet to prove its mettle.
Four, the changing landscape of the transfer system. The 14th Finance Commission has shown that between 2002-05 and 2005-11, the revenue expenditure of the Union government on items listed under the state subject increased from 14 to 20 per cent and on items under Concurrent List increased from 13 to 17 per cent. This increase was done by introducing Centrally sponsored schemes. In fact, the Union government implemented many of the projects through independent agencies bypassing the state governments to claim political ownership. However, in 2014, the practice was reversed.
Five, the FFC increased the tax devolution to the states in the divisible pool to 42 per cent which on the face of it looks streets ahead of the 32 per cent recommended by the previous Commission. However, this comparison is flawed as the FFC had to take into account Plan requirements of the states and desisted from recommending discretionary grants which amounted to 1.5 per cent. The increase was justified by the Commission because it is preferable for the states to have the fiscal space to incur expenditures.
Policy and institutional reforms
The first significant issue is to look at rebalancing the relationships between the Union and states. The second issue that we need to do is to fill the institutional vacuum that exists today. There are no institutions for inter-governmental bargaining and conflict resolution in Indian federation. The Inter-State Council should have a more significant role to play in this context. Another area that requires a detailed examination is the mechanism of intergovernmental transfers. There needs to be limits on specific purpose transfers regarding both the number of schemes and the volume of assistance given. It is essential to have a consultative mechanism for designing and implementing specific-purpose transfers with the participation of all stakeholders and domain experts as recommended by the FFC.
Trust and understanding
Fostering cooperative spirit is essential to reap the gains from scale economies. There are several areas of coordination which must be exploited and areas of disharmony to be resolved as listed out below.
There is considerable overlap in carrying out legislative and executive functions in Concurrent subjects. The recent years have shown the need for co-operation in areas such as energy and environment, education and poverty alleviation where the need for coordinated action and quick decisions are critical.
The Union government must intervene in the national interest even if they are in the State or in Concurrent List, but these have to be done in a coordinated manner. The examples include education, healthcare, urban development and poverty alleviation.
In areas that are contentious, it is vital to minimise frictions by having an independent institution set up for inter-governmental bargaining and conflict resolution. Such an institution must be grounded in the Constitution and should operate independently.
The most prominent takeaway from this
ideology is that fostering cooperation is not just an option but an imperative to strengthen the country as a federation in both political and economic spheres.