The Price of Persistent Federal Frictions

What’s in Today’s Article?

• What is Federalism?
• Features of Centralised Federalism in India
• Federal Frictions between Centre & States
• Economic Consequences of the Federal Frictions
• Interdependence between Centre & States

Why in the News?

• Disputes between the Centre and States regarding economic policies have a long history in India.
• However, in recent years the frequency and intensity of such disputes have increased and assumed the character of ‘persistent frictions’ in the federal system.

What is Federalism?

• Federalism is a system of government in which the power is divided between a central authority (Central governments) and various constituent units (State governments) of the country.
• The Constitution makers adopted a unique model of a federal structure for independent India which is often called ‘centralised federalism’.
• This is because unlike classical federalism like the United States (US) or Canada, the Constitution is mandatory for a structurally more powerful Union government in many key areas.
• The decision of the founding fathers to create a stronger Centre is attributed to their fear of growing secessionist tendencies in a country which had suffered from the legacy of partition during independence.

Features of Centralised Federalism in India

• The Union government enjoys superior powers vis-à-vis the states in crucial matters such as the discretion to reconstruct the boundaries of the states.
• The Union list contains more subjects than the State list and its law prevails over states even on the subjects in the Concurrent list.
• Also, the Parliament can legislate on any state subject under extraordinary circumstances, importantly, the Centre enjoys massive control over economic resources.
• Also, the Centre has the power to appoint governors in the states and can dissolve state governments by proclaiming the president’s rule if the Centre deems fit.

Federal Frictions between Centre & States

• The current context of economic relations between the Centre and States is very different from the 1980s and 1990s.
• Continuing economic reforms since 1991 has led to the relaxation of many controls on investments, giving some room to States.
• However, the autonomy regarding public expenditure policies is not absolute as State governments depend on the Centre for their revenue receipts.
• Several States have recently pushed back as a result of which the ‘give and take’ equation between the Centre and the States has given way to a more hardened stand by both, leaving little room to negotiate.
• The increasingly fractious Centre-State ties have chipped away at the edifice of cooperative federalism.
  • Cooperative federalism means a combination of cooperation and interdependence between the Centre and the States to ensure smooth governance of the country.

Economic Consequences of the Federal Frictions

• Centre starts crowding out the States in terms of investments:
  • An interesting case is that of infrastructure development in recent years.
  • The Centre launched the PM Gati Shakti, a digital platform, to incorporate schemes of various Ministries and State governments to achieve integrated planning and coordinated implementation of infrastructure connectivity projects.
  • All States and UTs had to prepare and operationalise a State master plan in line with the national master plan for seamless implementation.
  • However, the flexibility of States in formulating their master plan is curtailed by the centralisation of planning and implementation of the national master plan.
• Fiscal competition between the Centre and States:
  • In a federal system, fiscal competition manifests between different regions/States.
  • However, in a scenario of frictions with the Centre, State governments will engage in competition with other States and with the Centre. Welfare provisioning is one such area.
  • The Centre with enhanced fiscal space has more spending power, while States’ revenues, especially non-tax revenues, remain flat as possibilities of raising non-taxes are confined to a smaller sphere due to the direct provisioning of many utilities and services by the Centre.
• Inefficiencies associated with ‘parallel policies’:
  • Federal abrasions lead to either the Centre or the States duplicating the other’s policies.
  • The case of pension reforms is one such example of parallel policies developed by the States.
  • The National Pension System (NPS) changed the architecture of the pension system in India from a defined benefit scheme to a defined contribution scheme.
  • The scheme, mandatory for all central government employees, enlarged its scope and coverage with most of the States joining at different points of time.
  • Though States joined the NPS initially, some States have started to roll back to the old pension scheme as the fiscal cost of reverting would be visible only after 2034 when most of the newly joined employees retire.
  • The emergence of such parallel schemes is mainly due to the trust deficit prevailing in the federal system, the fiscal costs of which have long run consequences on the economy.

Interdependence between Centre & States

• For securing the implementation of many of its laws and policies, the Centre depends on the States, particularly in the concurrent spheres.
• The States also entrust their executive functions, with the consent of the Centre, to the government or agencies of the Centre (Article 258A).
  • Article 258A provides for the power of the States to entrust functions to the Union. It was inserted by the Constitution (Seventh Amendment) Act, 1956.
• Such interdependence is inevitable, especially in a large, diverse, developing society and needs to be preserved.

Q1) What is Competitive Federalism?

It encourages healthy competition among states through transparent rankings, in various sectors, along with a hand-holding approach.

Q2) What is the Parliamentary form of Government? 

Parliamentary system, democratic form of government in which the party (or a coalition of parties) with the greatest representation in the parliament (legislature) forms the government, its leader becoming prime minister or chancellor.

Source: The price of persistent federal frictions | ORF

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