Cooperative Federalism

A look at the larger picture of the Indian federation drives home the need and significance of reinforcing and strengthening the “cooperative” element in our federal structure, which is crucial in formulating the fiscal relationship in the Indian economy. Experts believe that moving forward, “cooperative” federalism would be best served by four constituents: the Finance commission, NITI Aayog, Goods and Services Tax (GST), and de facto Decentralisation. All these four constituents can play a vital role in strengthening the bond between the center and state governments and among state governments. Nearly three decades ago, the passage of the 73rd and 74th constitutional amendments paved the way for possible uniformity of decentralised governance, as far as ULBs and Panchayati Raj Institutions (PRIs) were concerned. The facile manner in which the implementation has proceeded in almost all the states is common knowledge, wherein both the letter and the spirit of the amendments appear to have been sacrificed at the altar of political practice. It was partly because of state behavior and the importance of empowering local governments that the last five finance commissions have successfully provided more and more funds. 

Covid has also brought about changes in the federal structure and governance: it has necessitated the need for governments to work together; local governments are expected to provide solutions and respond to challenges, and greater digitalisation is providing sub-national governments better opportunities to execute and collect revenue. Perhaps, there is a need to relook into the subjects under central, state and concurrent lists; what can be added or moved. The esteemed panelists of the SKOCH group’s panel discussion attempted to discuss the new issues connected to the decentralization question.

Understanding Cooperative Federalism 

The classical definition of federalism is the method of dealing with or dividing power, so that general and regional governments are each within a sphere and are independent. The classical definition of Federalism is not the one that we see. Overlaps are bound to happen. The assignment according to comparative advantage necessarily results in overlapping systems, and cooperation becomes necessary. But vertical and horizontal competition is essential for the smooth functioning of any multi-level fiscal system. Mr. Govinda Rao (Economist & Member, 14th Finance Commission) said, “In actual practice, there are limits to cooperation. If you have complete cooperation, then there is no federalism because it’s all you need to reach a sort of arrangement. So, attempts should be made to expand the scope of cooperation, and, as I mentioned, comparative advantage results in overlapping systems, and then we need to deal with them. Analytically, you see cooperation is possible only when the parties have something to gain from it. If some parties gain and some lose, the parties that gain should be able to compensate the party that loses and gets them, you know, calls them into the system. And even then, when some of the parties gain more, bargaining is necessary to get them together and expand the scope of cooperation. To gain this interaction between the parties from cooperation, one needs to have an institutional mechanism to reduce the transactional costs of this bargaining. The third point that I want to make it in the Indian context. You have the seventh schedule, which divides the remits of a Union state and in terms of Union state in the concurrent list. The moment you have a concurrent list, cooperation becomes necessary. And, even in the state list, what happens is that the Union government may think that certain services must be provided in minimum standards and that certain services must be provided across the country. So, it may have to get into the union list and work on that. The question is whether the intended minimum level of service and the design are done through centrally sponsored schemes. But then what they have worked is a scope for improving them and several other things that will come through.”

The primary relationship between the governments is one of competition. There is a competitive relationship between the states. The competition is vertical and horizontal, competing for the shared pool of funds, regional policies, etc. Everybody wants the major project to be located in their state. Hence regional policies compete for investments; there is a tax competition passing out the tax burden to the non-residents. These are some of the examples that one can see. So, a fundamental relationship is one of competition, but there can be predatory competition too.

Understanding the changes required for empowering State Governments and achieving Self Governing cities 

 Dr. Amar Patnaik (MP, Rajya Sabha) feels that federalism is conceptually rooted in cooperation. The way the constitutional framers framed the constitution explains that it was not designed for competition. He further said, “I think it is federalism which is conceptually rooted in cooperation, number one, and that is why India is called the union of states. It is not a monolithic central government, which will treat the state’s subordinate agencies because competition gives the essence as if the states are subordinate to the Centre. The Centre is the monitor, who is engaging people in the competition. The second point is competitive federalism doesn’t take care of regional imbalances when there is no level playing field. The second aspect I would talk about is Professor Rao talked about the central list, state list, and the concurrent and the residuals, but the point is that the new way of encroaching into the state’s powers to legislate has been by changing some words. For instance, Dams are on the state list. Still, Dam safety legislation has been brought by the central government because they say that they got an opinion from the Attorney General saying that dams may be in the state, but dam safety is not. Now I give you another example; with regards to the RTI or the Right to Information Act, the states legislated their own RTI laws. But now, when we are talking about the privacy law or the data protection law of which I was a member, it is the Centre which is legislating on which I gave a descent note because I think the states should have the power to appoint their data protection authorities and have that structure.”

Mr. Patnaik feels that the third point is the most crucial, i.e., fiscal federalism. He said, “If you take the last and the current budget, the amount of resources dwindling has decreased as a percentage of the gross tax revenue divisible. It is reduced from 30.02% to 29.61% in the 2023 budget, and that is happening because the cess and surcharge have increased by a phenomenal 17% compared to the last year. And I do not know if you follow the reply to the budget of the finance minister, I had made this point in my budget speech, and she replied quite extensively by saying that this cess and surcharge we’re collecting is ultimately spent for the States. Still, it is like the paterfamilias deciding that you know which state will get what. I think that is not the spirit of cooperative federalism.”

While explaining the last point, he said that “in this scheme for competitive federalism, the concept of aspirational districts is being brought in by NITI Aayog. No extra financial or human resources are given to these aspirational districts. It is just a group of monitors from the central government to the state government and informs and uses the collectors of the same state functionaries. They have an electronic dashboard to tell them that you are doing better than the other. Now, I have demanded many times that if you’re thinking of improving the aspirational districts, let’s say Malkangiri comes down to the level of the Purda district in Orissa. At least make the resources transfer from 60-40 ratio to 90-10 ratio. But what is happening is that the center, through the Niti Aayog, is coming over to the States to enforce the way the programs will be executed in the state. So, I think the concept of competitive federalism will not deliver or improve the backward states to a level in which they can compete with the more advanced states.”

Are there lessons to be learned from European Union or elsewhere like Germany?

On being asked about how Georg Milbradt (Chairman, Forum of Federations, Ottawa) sees Cooperative Capitalism as a concept, he said, “we don’t have a competitive system like those federations such as the United States where the political areas are distributed between federation and States and the States and the Federation have the possibility to legislate, to execute laws, to fund their programs, etc. In our system, we have, first of all, a division of powers concerning legislation. The Federation has a short list of federal, exclusive federal legislation in the states, which is normally in all other constitutions. Then we have a very comprehensive list of concurrent legislation. The peculiarity is that the states can only use the concurrent list if the Federation has not used its powers. In the end, there is a preponderance of federal legislation or items not in two lists are exclusive state competencies concerning legislation.”

He further said that “cooperation is positive, good and necessary, but too much is harmful, and I have the impression that in Germany, the balance trade-off between competition on one hand and cooperation, on the other hand, is too much shifted to cooperation.  I was the Chief Minister in Saxony and wanted less Interference from the central government and more autonomy because of strengthening democracy, responsibility, and accountability. So, our system of institutionalized cooperation has advantages and disadvantages. I was asked to say some words about the European Union. This is still a supernational organization with some federal elements. Europe is still on the way to becoming a real Federation, with a responsible European executive, reducing the importance of the Member States. The EU is still no Union but a community of states; therefore, it cannot be a model for India. On the contrary, Europe can learn more from India on creating a functioning Union even if you still want to improve your Union”.

KM Chandrasekhar (Former Cabinet Secretary) strongly feels that decentralisation is essential. Because China focused on Decentralisation, it resulted in actual tangible development there. He also agreed with Dr. Patnaik that this concept of competitive federalism makes no sense.

How has the pandemic generated fresh insights into decentralisation?

Dr. Ashok Kumar Lahiri (Member, West Bengal Legislative Assembly & Member 15th Finance Commission) hopes we’ll focus more on the local governments in India because, during the pandemic, we have realized its importance. They are the closest to the grassroots level and are very important in delivering public services. Mr. Ruapk Chattopadhyay (President and CEO, Forum of Federations, Ottawa) thinks that the most significant contribution intellectually one could make or think about is having a political dialogue to see if India’s current institutions are fit for purpose. No one has had that dialogue at the political level. There have been judges who were part of technocratic committees, but this is insufficient and certainly out of step with what many other countries have done. He feels that this is an excellent opportunity to start that would open up the space for a political dialogue to examine whether India’s institutions continue to fit the purpose.

Yamini Aiyar (President and Chief Executive, Centre for Policy Research) feels that the federal challenge will become much more complex than it is today. After all, it’s not just about haggling over how much devolution or centrally sponsored schemes vs. untied funds. It is about a fundamental challenge that the Indian economy confronts growth without convergence. We are seeing income divergence across states, which is only growing recently. What does it mean to forge a contract of compromise where more prosperous states give a lot more to poorer states? And in that context, the demand for cooperation is going to increase significantly, and these demands for cooperation are coming at a time when we do not have an institutional structure for negotiating these bargains. This institutional structure is not just about politics; it’s also about administration. Ultimately, for all its flaws, the Planning Commission had an administrative system that allowed constant conversation between central and state administrators. To obtain the bureaucracy is today a player in the game of centralizing our politics, which gives a significant cause of concern for what the future holds for creating effective sites for mediation, negotiation, bargaining, and debugging.

KM Chandrasekhar strongly feels that decentralisation is essential for us. Because China focused on Decentralisation, it resulted in actual tangible development there. He also agreed with Dr. Patnaik that this concept of competitive federalism makes no sense.

Mr. Ajay Shah (Author & Independent Scholar) agreed with Yamini Aiyar and said, “we are stuck, and the process of conversation and give and take has broken down.”

Mr. Vijay Kelkar (Chairman, 13th Finance Commission) discussed two critical proposals. He mentioned the point made by Dr. Govind Rao about Institutions. He asked everyone to see whether we could think about institutions to take care of this change which is coming up as a seismic change in Indian federalism. Second, at the earliest, we must ensure that the state government gets more significant flows. He recommended that future surcharges and cesses should be shareable with the States. That’s one way of ensuring how we probably can increase the resource flow to the States, which he feels is a concrete proposal.

Recommendations

• States should have the power to appoint their data protection authorities.
• Focus should be given to decentralisation as it is essential for a country like India.
• Focus should be given to local governments as they are crucial in delivering public services at the grassroots level.
• Efforts should be made to have a political dialogue to see if India’s current institutions are fit for purpose.
• There is a need to relook the subjects under central, state and concurrent lists.
• In the future, surcharges and cesses should be shareable with the States. 
• There is a need for reinforcing and strengthening the “cooperative” element in India’s federal structure.