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Federalism Under Liberalisation


The new Prime Minister Mr.Deve Gowda personified best two contemporary trends of Indian polity. He did what no other chief minister ever dared to do. Throwing frontal challenge to the present federal framework of the constitution, he as the chief minister of Karnataka declared that he would not wait for the Presidential assent for his Karnataka Land Reforms (Amendment) Act and would go ahead to implement it. He was also the man who was handpicked by Rao to head the Indian delegation to Davos for a display of the so-called political consensus on economic reforms. Yet, he was bitterly critical of Rao government for not speedily clearing his pet MNC projects. Thus the great liberaliser was also an ardent champion of the federal cause. It would be interesting to see whether he would also be carrying his federal baggage from Bangalore to Delhi. Liberalisation did not leave the federal equations untouched though it was not clear whether it would strengthen federal or unitary tendencies in the long run. Now, the changing balance of political forces - with the regional parties acquiring greater clout in Delhi - is bound to have its significant bearing on federal ties.

In the light of the this new context it is necessary to review the question of federalism in India. The principal areas of dispute relate to distribution of legislative powers between the Centre and the State, the role of governors, the answerability of senior bureaucrats in the State administration, Central control over industrial, monetary, commerce and energy polices, the planning system, location of public sector project and sharing of financial powers and resources between the Centre and States. There is also the question of Central clearance for the MoUs entered into by the State governments with MNCs and private business houses. As this involves major kickbacks and cuts, the sharing of the political spoils is also one area of serious contention outside of the institutional framework. However, at the heart of the Centre-State dispute is the financial relationship.

Fiscal Federalism

Currently, as much as 70% of total resources raised in the public domain is retained by the Union government and only 30% is available to the 22 State governments. This kind of lopsided distribution of financial resources is without parallel for a federal polity. The more elastic sources of revenue are reserved for the Centre. The States are not allowed any share of the proceeds of corporate tax which these days exceed those from income tax. The Centre also refuses to share with the States the yield from surcharge on income tax. It is also necessary to mention the recently adopted practice by Union government to collect additional revenue by raising the prices of administered prices of commodities such as petroleum products, coal, iron, steel, cement, aluminium, etc., instead of adjusting the rates of excise duties. By this practice, the States have been deprived of thousands of crores of rupees. Another example concerns railways. A tax on railway fare was levied in '50s but soon merged with railway fares. The result is that railway fares are increased from time to time, but the States have no share in it.

Transfers to States, as proposed in the central budget for 1993-94, declined for that year to 6.3% of GDP from 6.9% in 1992-93. In absolute terms, the difference is equal to Rs. 4710 crores. The major cause for the decline is that substantially smaller provision has been made for grants and loans to the States, the decline being of the order of 0.39% of GDP (Rs. 3060 crores) with the decline in grants somewhat larger than that in loans. So when the earlier Finance Minister spoke of larger allocations for anti-poverty programmes he was doing so tongue-in-cheek, because the States will actually be receiving substantially less year after year.

For the 8th year in succession, the States are facing huge financial imbalances, particularly on the revenue account. The Gross Fiscal Deficit (GFD) of States, according to RBI, was Rs. 23,706 crores in 1993-94, up by 18.6% against 5.6% in 1992-93, highlighting the deterioration in the revenue account. According to the study, the composition of GFD shows a fall in the share of net loans from the Centre to the extent of 12,207 crores (43%) and States' own net capital receipts to the tune of Rs. 10,806 crores (48.5%) and increase in the overall deficit to Rs. 2639.7 crores (11.1%). Resource mobilisation efforts of the States, in general, have a linkage with Centre's financial assistance to Plans, in addition to the grants and share in taxes. With Centre's assistance to Plans shrinking and Centre's share in the total taxes rising by 15%, the revenue sources of the States are gradually drying up. Amal Ray says, 'the States have practically little or no autonomy to plan in their constitutionally delimited spheres. ... to evolve autonomous development impulses, programmes and strategies in their legitimate spheres of activities' (EPW, 25.1.92). Even the Ninth Finance Commission, in spite of its pronounced pro-Centre bias, had to say 'it is worth noting that the proportion of shared taxes in States' revenue is lower now than before'. The decline however, as government claims, has been compensated by a rise in the share of grants, especially discretionary grants. But the makers of the constitution relied more on the shared taxes and other statutory devolution than on discretionary transfers for reducing fiscal imbalances between the Centre and the States. With the decline in stable and assured sources of revenue, that is sharable taxes, the fiscal dependence of the States upon Centre has grown over the years.

In this ongoing tussle within the bourgeoisie, articulating the point of view of pro-reforms section of the establishment who favour greater sharing of powers with the States, the leading centrist politician Ramakrishna Hegde says that the Planning Commission has changed from an advisory body to an extra-constitutional authority wielding enormous power over the States without any representation on it from States. Since the Planning Commission consists of appointees by the Centre, States' feeling of dependence has been heightened. Hedge proposes constitutional status be given to Planning Commission and making it serve as an executive arm of National Development Council. Hegde further wants the authority and prestige of Finance Commission be fully restored and its independence guaranteed by ensuring that its chairman shall be a serving judge of Supreme Court. Hegde further advocates removal of constraints on the States' power to raise loans and greater fiscal autonomy for the States.

Red Carpet to MNCs

While liberalisation has impinged upon the resources of the States, it has brought about an undesirable enhancement of their powers in certain other areas: now States are relatively more free to deal directly with the multinationals. And the race is now on, between different chief ministers. While the slogan of 'more powers to the States' - the key slogan of liberal and regionalist bourgeoisie and their politicians - does have some democratic content, it is clear that decentralisation per se need not be always pro-people.

West Bengal CPI(M) government is one of the States which articulated the federal aspirations of the States on Centre-State relations. Later it turned out that Jyoti Basu became a frontrunner in directly luring the MNCs into West Bengal even going to the extent of heaping sly praise on liberalisation policies of the Centre without giving a serious thought to the implications of the prospects of different state governments led by different bourgeois-landlord parties establishing direct close relations with various imperialist quarters. The CPI(M) took great pains to clarify the New Industrial Policy of WB government in their political-organisational report of 15th Congress of their party: "CC Statement explains the background of discrimination against WB by the Centre because of the existence of the LF government and the earlier policies which militated against the industrial development in the State such as the freight equalisation and the partisan use of licensing policy. As a result of this discrimination, WB which was a premier industrial State at the time of independence fell back and was only producing 8% of total industrial output by 1985. Now with liberalisation both the freight equalisation policy and the licensing system have been abolished .... The party programme had envisaged our participation in State governments which cannot bring about major policy changes in the economic and industrial spheres as these powers vest with the Centre". CPI(M)'s 15th Congress report further states that Left Front government presented the Industrial Policy Statement without any discussion in the State Committee or Central Committee. The CPI(M) however cannot offer the theory of `discrimination of the States' as a fig leaf to explain why Jyoti Basu personally heads a team of industrialists visiting West to woo MNCs. Over 60 MoUs have already been reportedly signed with foreign investors by the LF regime and this was one area where the diehard unitarist Congress was only too willing to delegate all powers to the State of West Bengal .

In Tamil Nadu which articulated federal tendencies to the extent of advocating separation at one point, the mood of the bureaucrats dealing with industrial promotion is upbeat. Their optimism stems from the fact that an increasing number of foreign companies with plans to set up manufacturing base in the country make it a point to visit the State. This growing interest, the officials feel, is mainly because of easy availability of land, a relatively comfortable power position and responsive bureaucracy and political leadership. Once the standard cut of 5% of the project cost is set aside as bribe to the politicians things start moving fast for the investors. More powers under liberalisation means more kickbacks and the demand for institutional decentralisation has taken a backseat. If Centre's policy facilitates zero-tax companies which ultimately cuts into federal resource transfers, the States do not make much fuss. The States go on a scramble among themselves offering zero-sales-tax offers to lure MNCs. Ford-Mahindras was one such beneficiary and on the strength of such offers 3 other foreign automobile projects are expected to come up in TN. Even the projects chased out by the people of other States are finding a free entry into TN: Sterlite project which faced stiff opposition in Maharashtra easily came into TN in 94; the Thapar Dupont Nylon project which was driven out of Goa on environmental considerations was welcomed in TN in 95.

If Deve Gowda, the unlikeliest of the candidates for primeministership, was suddenly pitchforked into that post, it was not without reason. He even excelled the erstwhile Congress chief ministers of Gujarat and Maharashtra in extolling the reforms. Of course, he did raise some noise over Centre-State relations but that was because he wanted a faster pace of reforms. When the local Congress opposition came out against the land reforms bill, Gowda even wrote to Narasimha Rao asking him whether his party is really serious about the reforms! In and around Bangalore, land prices soared and real estate costs went through the roof as MNCs went about acquiring land for their units and for housing their executives. Land reforms act was amended so as to make acquisition of land easier for foreign investors. Naturally, within months after assuming power, at Davos symposium, the star attraction turned out to be Mr. Deve Gowda. At Davos, Gowda was emphatic that his government would be market-friendly and outward-looking. The JD government went about wooing private investors, especially the MNCs. Apart from the mega projects like Cogentrix coming up in environmentally vulnerable South Canara, SunMicro Systems, Apple Computers, AST Research, Lee and Levi's are among the big names to set up shop in Bangalore. People of South Canara are waging valiant struggle against the mega projects and in Bangalore Prof. Nanjundaswamy is spearheading the struggle against KFC. Deve Gowda dealt with these militant struggles 'with iron hand to instill confidence in the minds of the investors'.

The story of Bihar is no different. Fighting the Centre's discrimination against the State by falling in line with the Centre's economic policies is not only Laloo's brand federalism. In Andhra Pradesh, the present CM Chandrababu Naidu was the man instrumental behind the 'midnight MoUs' on 23 projects entered into by NTR, which of course figured as a major Centre-State issue. Chandrababu Naidu proclaims that his government is aiming at an investment of Rs. 1,00,000 crores by 2000 AD. Some of the leading names in the hospitality industry-the Oberoi group, Sterling, Escorts are understood to have been eyeing the State for substantial investment. Also, fresh investment proposal worth Rs. 20,000 crores have been received by the State in the areas of petroleum products, cement and food processing.

With the States presently preoccupied in attracting more investment and concentrating on making the most out of the liberalised regime and ruling parties at the state level aiming more at non-institutional powers for greater political spoils, has the demand for institutional restructuring of Centre-State relations taken the backseat for good? Clearly not so. The political compulsions for industrialisation and job creation may appear to be the overriding concern at present. But more industrial projects in a particular State does not automatically translate into more revenues. With excise, customs and corporate tax flowing directly into the Centre's kitty, it only aggravates the lopsidedness. As seen earlier the finances of the states are already in doldrums. With the growing unrest among the voters, even the most populist of the regimes is able to have a stable stint at power. But the expectations among the masses for all-round development is at an unprecedented high. The demand for more powers to the states is bound to gain in stridency, if only to deflect the popular anger. Moreover, with national parties either declining or facing stagnation, the regional parties have come to wield greater influence. For the first time they are in a position to directly influence policy and decision-making at the Centre. And they are demanding, and are in a position to command, their pound of flesh. To begin with, it may be just wrangling over portfolios. But before the present circus at the Centre comes to a denouement, it is only to be expected that they would try to push for some permanent measures.

True, the manifestoes of all the major regional parties talk only in vague and general terms. Any power shift along federal lines will be limited by the actual balance of power between Congress and the NF,LF and regional parties. Regionalisation at the level of party politics need not necessarily translate into greater federalisation of the power structure. Any major constitutional change or even legislative measure is ruled out under the present arrangement because of the Congress which may thwart it. In all probability, the issue might well be frozen in a new commission on Centre-State relations. Even the earlier Sarkaria Commission's recommendations have not been implemented in full. Even if the earlier proposals of the Commission set aside by the previous Congress regimes are implemented it would be a significant step.

Sarkaria Commission

The Sarkaria Commission had recommended that consultations with the States should precede any central legislation on subjects in the concurrent lists. Moreover in 1988 an expert group set up by the Centre recommended that before any new centrally sponsored scheme is introduced detailed discussions should be held with the State governments and their views should be given due weightage in the guidelines framed for the implementation of the schemes. The Sarkaria Commission also recommended that the central schemes should be kept minimum and decentralisation in the plan process should be maximised. Sarkaria Commission observed that Planning Commission functioned more as a limb of the Union government rather than as truly federal institution. However neither in terms of value of centrally planned and sponsored schemes nor in terms of guidelines framed for their implementation, has New Delhi shown any respect for Sarkaria Commission recommendations or that of similar bodies. It however remains to be seen whether the socalled assertion of the regional parties on the national scene would achieve anything substantial even where it is possible to do so merely by passing executive orders. All these parties including the DMK and Akali Dal had considerably toned down their regionalist clamour much before the elections. Surprisingly, the left has also fallen silent over this issue. And it would be interesting to see if Deve Gowda, as puppet prime minister bound by the Congress strings, would have enough time to recall his days as a hamstrung chief minister devoid of powers. Any thing more than mere cosmetic changes would be a pleasant surprise.

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