cooperative and fiscal federalism

India’s journey toward cooperative and fiscal federalism over the past decade has resulted in significant changes in the relationship between the Centre and state governments. The shift towards federalism has involved a more collaborative approach, with both sides working together to achieve common goals.

Understanding Federalism in India

• Reinterpreting Federalism:

  • Federalism isn’t explicitly mentioned in the Indian Constitution. However, B.R. Ambedkar’s vision for a system that is “both unitary and federal according to the requirements of time and circumstances” has guided India’s constitutional framework.

  • Historically, India’s system leaned more towards a unitary state; however, recent developments in the past decade have seen a shift towards a more federal approach.

• Types of Federalism:

  • Cooperative Federalism: The Centre and states work in close partnership in decision-making and implementation. States are no longer simply recipients of directives from the Centre but are active partners in governance.

    • Example: NITI Aayog’s Governing Council where Chief Ministers and the Prime Minister sit together, signaling equal importance in discussions.

  • Competitive Federalism: States are encouraged to compete with each other to improve performance, attract investments, and improve governance.

    • Example: The Aspirational Districts Programme, where states compete to improve social indicators like health and education.

  • Fiscal Federalism: The financial relationship between the Centre and states, focusing on the sharing of resources, especially taxes.

    • Example: The GST Council, which involves both the Centre and states in the decision-making process around tax policy.

Role of NITI Aayog in Promoting Federalism

NITI Aayog, created in 2015 to replace the Planning Commission, has played a significant role in promoting cooperative and competitive federalism:

• Bridge between Centre and States: NITI Aayog fosters greater cooperation between the Centre and states, ensuring that states have a say in decision-making.

• Guidance and Facilitation: Unlike the old Planning Commission, NITI Aayog is not just a fund disbursary body. It guides, facilitates, and coordinates developmental policies and programs, making it an important partner in governance.

• Competitiveness: By introducing Aspirational Districts Programme and creating indices like Health Index and SDG Index, NITI Aayog encourages states to compete to improve governance and development.

Other Key Initiatives Boosting Federalism

1. GST Council:

   • The GST Council is a symbol of fiscal federalism, ensuring consensus-based tax governance. States have an important voice in shaping tax policies, and they receive 71% of GST revenues, while the Centre retains 29%.

   • GST compensation: The Centre has provided over ₹6.52 lakh crore in GST compensation to states (2017-2025) to ensure that states aren’t adversely impacted by the implementation of GST.

2. Tax Devolution:

   • The 14th Finance Commission increased the states' share in the divisible tax pool from 32% to 42%. This change gave states greater financial autonomy.

   • Increased Transfers: Transfers to economically weaker states such as Uttar Pradesh, Rajasthan, and Chhattisgarh have been significantly increased, empowering them to address local development challenges.

3. Centrally Sponsored Schemes (CSS):

   • Funding for Centrally Sponsored Schemes (CSS) has increased significantly over the past decade, with allocations growing by 197% between 2015-16 and 2023-24. This has led to improved socioeconomic transformations across states.

   • However, CSS schemes often face the challenge of being over-centralized, where the Centre dictates the design and execution, leaving little room for states to tailor solutions according to local needs.

Challenges in Indian Federalism

1. Fiscal Centralization:

   • Despite the progress in fiscal federalism, states rely heavily on the Centre for financial resources. Over 40% of state revenues come from Centre transfers.

   • The sunset of GST compensation in 2022 has left many states, like Punjab and Kerala, fiscally strained, as they no longer receive the compensations for potential GST revenue shortfalls.

2. Unequal Bargaining Power:

   • While states are meant to have an equal voice in the federal structure, the Centre’s power still overshadows that of smaller or politically-opposing states.

   • These states often struggle to get a fair share of resources or favorable terms for policy implementation.

3. Over-centralization of Centrally Sponsored Schemes (CSS):

   • Many centrally sponsored schemes are designed in a one-size-fits-all manner, without considering local realities and needs.

   • States often have to bear a partial cost burden but have limited authority to shape the design or execution of these schemes.

   • For example, PMGSY (Pradhan Mantri Gram Sadak Yojana) and PMAY (Pradhan Mantri Awas Yojana) are centrally-set schemes that may not always align with the local needs of states.

4. Political Polarization:

   • Allegations of political bias in fund allocation have been raised by states like West Bengal, Kerala, and Delhi, which accuse the Centre of favoring states governed by the ruling party.

   • This political polarization often hinders the smooth functioning of cooperative federalism.

5. Weak Institutional Mechanisms:

   • Bodies like the Inter-State Council and Zonal Councils are often underutilized, limiting their potential to resolve inter-state disputes and foster collaboration.

   • NITI Aayog, though playing an advisory role, lacks statutory status, limiting its authority and accountability in guiding federal policies.

6. Encroachment on State Subjects:

   • There is a growing concern about the Centre’s encroachment on areas listed under the State List in the Constitution.

   • For instance, the Farm Laws (now repealed) were perceived as an overreach into agriculture, which is a subject under the State List.

Step for Strengthening Indian Federalism

1. Federalism as a Guiding Principle:

   • Federalism remains a central governance philosophy in India, even though it’s not explicitly mentioned in the Constitution.

   • As Ambedkar noted, India’s Constitution would remain “both unitary and federal according to the requirements of time and circumstances.”

2. Suggestions for Strengthening NITI Aayog’s Functioning:

   • Grant statutory status to NITI Aayog to enhance its authority, ensuring that it can effectively guide policy and governance at both the Centre and state levels.

   • Strengthen state consultations in the policy formulation process to ensure that policies are equitable and cater to regional needs.

   • Improve funding and staffing within NITI Aayog to enhance operational efficiency and coordination with states.

   • Strike a balance between cooperative and competitive federalism, ensuring that the competition between states does not lead to unintended consequences like inequality in development.

Conclusion:

India’s federal structure has evolved significantly over the past decade, with a shift towards more cooperative and fiscal federalism. Initiatives like NITI Aayog, the GST Council, and increased tax devolution have fostered a more collaborative approach between the Centre and states. However, challenges such as fiscal centralization, unequal bargaining power, and over-centralization of CSS remain.