India is a union and not a federation of states. The states did not come together voluntarily and sign a pact to become one nation, as in the case of, say, the United States of America. The states of India are creatures of the union and can be merged, bifurcated or modified by the union. They do not have a different constitution, nor can they secede at will. Much of their fiscal powers are constrained too. For instance, unlike provinces of Brazil, Mexico and other Latin American economies, states in India cannot issue dollar debt, nor can they unilaterally binge on rupee debt. With the goods and services tax (GST), many of their taxation powers have gone too, having now been subsumed in a national states’ council. And yet, despite this unitary structure of India’s union, there is an inherent federal nature and structure to the union. This is most unsurprising, given the diversity of the country in every conceivable dimension.
The Constitution of India explicitly lists and describes the distribution of powers between Central and state governments, and there is also a concurrent list. It preserves and respects regional aspirations. It has been carefully thought out, and was hammered and chiselled over three long years of debate and discussion. It is one of the finest in modern history, having built upon and benefited from the insight of earlier exemplary ones. And yet it has undergone more than a hundred amendments in just seven decades. By contrast, the US constitution has been amended about 30 times over two-and-a-half centuries.
You might say India’s lawmakers are more responsive to changes in society. Or you can criticize the founding fathers for not having been farsighted enough. Whatever the conclusion, the federal and unitary nature of India is forever in flux, and we are constantly seeking that elusive balance between centrifugal and centripetal forces. Last year this column (From Delicensing To GST, 10 August 2016) discussed how the reform journey had seen the pendulum swing from the decentralizing (centrifugal) reforms of 1991, to the more centralizing (centripetal) reform of GST in 2017. Delicensing and deregulation implicitly meant diffusion of powers to lower tiers of government, whereas “one nation, one tax” is a centralizing phenomenon.
The decentralization agenda is, however, largely incomplete. To this day, despite the 72nd and 73rd amendments to the Constitution, true and effective empowerment of local governments is still a distant dream. In the late 1990s, a small village in Maharashtra, cheered by the prospect of a $2 billion project coming up in its vicinity, thought it could build a small local hospital by imposing a tiny property tax. This village of Dabhol woke up to the rude reality that its powers were null in its ability to tax industrial plants within its jurisdiction. At present, the richest municipality of Mumbai is staring at the prospect of losing almost one-third of its revenue, as octroi is abolished under the juggernaut of GST. Of course, there’s assurance of compensation from the state government, but that leaves the city at the mercy of higher-ups, not to mention unpredictable and inordinate delays in fund transfers.
There are many states that routinely flout the recommendations of state finance commissions of funds transfer from state to local governments. Some states have not even bothered about setting up such commissions. In some spheres, complete decentralization is an imperative. For instance, we continue to drag our feet and deny control and autonomy to local parents’ councils in determining teacher salaries and assessment, even though these very locals are key stakeholders. Shouldn’t they be in charge of their children’s schools?
What is the optimum balance between centripetal and centrifugal forces? This is topical again in the context of the GST Council. It has been heralded as an entity that captures the true spirit of cooperative federalism. Together the council members, representatives of states, decided on tax rates of more than 1,200 items, as also the modalities of collecting and sharing the tax. Decisions are by consensus, not forced by brute majorities. But the outcome is very unsatisfactory. The present proposal defeats the very spirit of “one nation, one tax”.
Multiple rates, arbitrary classifications, many exemptions, and rates that depend on thresholds of spending, are all a recipe for disputes, discretion and possibly corruption. Besides, as in the case of Mumbai’s municipality, many states are still anxious about losing revenue. How will they face their constituencies if forced to cut back on social services due to loss of revenue beyond their control? So centrifugal forces are already at play, being spooked by this “one nation, one tax” which it is not quite yet. Another example is from the cultural, not economic domain. The imposition of a nationwide ban on slaughter of cattle is bringing a backlash, as states feel it undermines their power to determine regulations appropriate to their local culture and economy. Such action also weakens the spirit of federalism.
India is a unique and admirable mix of both a unitary and federal entity. It has survived as a rambunctious but robust democracy in one piece, in a world where countries broke up (Soviet Union, Yugoslavia), or seceded from a union (Brexit), or where rebellion is brewing against the centre (Donald Trump supporters versus Washington). India’s genius is the ability of its people to hold multiple identities with ease. But the sustainability of the union requires a careful balance between centripetal forces (such as GST) and respect for local and regional aspirations and their need for autonomy.
Ajit Ranade is chief economist at Aditya Birla Group.