People's Democracy

Centre-State Relations: After 60 Years Of Independence

Asim K Dasgupta

WHILE the usual celebrations are being held on the Independence Day, it has also to be regarded as a day for introspection – for assessment of the important pledges made in the initial years after independence and the actual achievements. On the basis of this assessment, there may be a different kind of pledge that the vast majority of working people would like to make to themselves on this occasion of Independence Day.

FAILED PLEDGES

It is well known that the constitution of India was framed within about three years of independence, and it made some pledges through the Directive Principles of State Policy --- to secure, among other things, for the people of India the right to an adequate means of livelihood, the right to employment, education and health. These pledges, however, have been grossly under-achieved. The number of the unemployed, according to the latest National Sample Survey data, has soared from 2.65 crore in 1999-2000 by 87 lakh to reach a staggered figure of 3.52 crore in 2004-05. About 30 percent of the population is still below or around the poverty line, one-third of population is illiterate and under-five mortality rate is unfortunately at 85 per 1,000 live births.

There was another related, important pledge made in terms of the constitutional provisions. It is known that in the constitution, major responsibilities in the spheres of development expenditure (for instance, on education, health, irrigation, roads, power etc) as well as administrative expenditure (on general administration, law and order etc) were given to the states. But in the distribution of powers of revenue-raising in the same constitution, major sources of revenue (such as income and corporate tax, production excise, customs duties etc) were all given to the centre. It is in view of this imbalance --- the major revenue-raising powers being heavily tilted in favour of the central government and major responsibilities in the sphere of developmental and administrative expenditure given to the states --- that the constitution made an important pledge in its article 280: of setting up a Finance Commission with a periodicity of five years, to recommend a just share of receipts of central taxes as well as a compensating flow of deficit grants to the states. Article 275, then, made the provision of further augmentation of the states’ revenue through grants for promotion of welfare of the scheduled tribes.

However, regarding these pledges about the much-needed decentralisation of financial resources to the states, there has unfortunately been a gross failure over the years at the national level. This failure is not an isolated event. It is connected with the adoption at the national level of a capitalist path of development which required India to be a unified homogeneous market. This path reflected the needs of the big capitalists, allied with landlords, who have always considered democracy and more powers for the states and the people as obstacles to their view of economic growth and political power.

PREVAILING IMBALANCE

The basic problem of imbalance in the financial aspect of centre-state relations, as mentioned above, is actually seen from the following fact. In 2004-05, according to the estimates of expenditure compiled by the Reserve Bank of India, the burden of annual developmental expenditure borne by the states (taken together, Rs 3.62 lakh crore) was more than one and a half times higher than what was borne by the centre (Rs 2.33 lakh crore). These figures relate to the expenditure that the states could made under financial constraints. The really needed developmental expenditure of the states would have been much higher, at least twice this figure. On the other hand, in the sphere of revenue-raising, of the total revenue collected in the country in 2005-06, nearly 62 percent went to the hands of the central government and only 38 percent to all the states taken together.

Given this greater burden of the states’ responsibilities of developmental expenditure on the one hand, and more powers of revenue mobilisation at the centre on the other, the pledge has been, as mentioned earlier, for a matching transfer of resources from the centre to the states in terms of devolution of central taxes and grants in terms of article 280 and article 275 of the constitution. In fact, however, the share of net central transfer in terms of devolution of central taxes and grants (net of interest payment by the states on central loans), as a proportion of the centre’s total revenue receipts, has unfortunately fallen from 32.7 percent in 1990-91 to a very low figure of 29.5 percent in 2004-05, showing a gross failure of the pledge in terms of constitutional provisions to help the states for carrying out the needed developmental activities. Confronted with this situation, it has been worked out by the Left-led state governments (and supported by other states as well) that, given the available data on the need of development expenditure, the state's share of central tax revenue should be at least 50 percent.

Moreover, the states have also correctly demanded transfer of at least residuary powers in the constitution, particularly the residuary powers of taxation of services, to the states. But, of late, through a constitutional amendment, the centre has unjustly acquired for itself the entire power of levy of service taxation. Fairness requires that the states may now at least be given the concurrent powers of taxation of all services, albeit at a lower rate than that levied by the centre.

It may also be noted that the share of total market borrowing to which the states may be entitled is also dictated by the centre. In the 1950s, shares of market borrowing of the states and the centre in the total governmental market borrowings were in the proportion of 50:50. But this share of market borrowing of the states has now fallen sharply to around 15 percent, with more than 85 percent of the market borrowing being cornered by the centre. Now, consistent with development responsibilities of the states, the share of market borrowing of the states should be steadily increased to 50 percent within a period of five years.

NEW PROBLEMS

While none of the problems behind the prevailing imbalance – the grossly unfair centralisation of resources – has been resolved even after 60 years of independence, new forms of assaults on the financial and decision-making powers of the states have been additionally made after the central government started compromising with the IMF-WTO-World Bank guided neo-liberal policies, particularly since 1991-92.

In consequence of this policy, there has been an indiscriminate liberalisation of imports reflected in terms of sharp reduction in import duties, reluctance in enhancing the rate of direct taxes for the richer groups and an indifference to unearthing the tax-evaded black money. As a result, the actual collection of central taxes fell significantly short of the amount recommended by the Eleventh Finance Commission (2000-05). Therefore, not only has the share of central taxes remained low at 29.5 percent, the actual amount received by the states has also been substantially less, by nearly 19 percent, than what was recommended by the commission over the reference period (2000-05).

Neo-liberal policy also forced the states to compete with one another in attracting industrial investment in terms of granting of tax exemptions, resulting in shortfall in the collection of the states' own tax revenues as well. Moreover, the central policy is of charging unfairly high rates of interest on the central loans to the states, particularly for the loans related to small savings (with interest rate exceeding at times even 16 percent). This also has increased the states’ debt burden in this period, with the ratio of interest payment to the revenue receipts of the states moving up sharply from 13.0 percent in 1990-91 to 25.8 percent in 2003-04.

This was also the period when the full impact of pay revision following the centre's decision on the Fifth Central Pay Commission recommendations had fallen severely on the states’ finances. As a collective consequence of all these factors, the states had to face a serious financial crisis. Confronted with this situation, the states tried to enhance their own tax collection efforts, particularly through adoption of state-level value added tax in recent years. But despite these efforts, the inherent limitation on the revenue-raising power of all the states persisted. Therefore, all the states also demanded in one voice from the government of India, at the meeting of National Development Council (February 19, 1999), then from the Eleventh Finance Commission and also from the Twelfth Finance Commission that, among other things, (a) the states' share of central taxes must be increased to 50 percent and the states be given concurrent power of levy of service taxes, (b) debt relief on central loans must be provided to the states and (c) at least 50 percent of the states’ additional financial burden due to pay revision must be borne by the centre. It is a matter of regret that none of these justified demands of the states have been met. On the contrary, the central government used this financial crisis of the states, for which the central policy itself was largely responsible, to introduce through backdoor the IMF-WTO-World Bank conditionalities of neo-liberal reforms. It linked up, on the basis of the Eleventh Finance Commission recommendation, even the constitutionally mandated revenue-deficit grants to the states with the condition that 15 percent of a state’s entitlement of revenue deficit grant would be withheld unless that state had effected a reduction of 5 percent of revenue deficit as a proportion of revenue receipt every year over the period (2000-05). This neo-liberal conditionality forced the states to impose a virtual ban on recruitment and that created genuine problems in the delivery of welfare services and development activities in the states.

The Twelfth Finance Commission (2005-10) has gone one step further. While recommending a very partial debt relief on central loan to the states, the commission has excluded from its purview all the small savings related central loans from 1999-2000 onwards. (This is the most substantial part of central loan burden on several states.) Not only that; even for the residual category of central loans, this partial debt package has been tied up with the IMF-WTO-World Bank conditionality that the states compulsorily enact a Fiscal Responsibility and Budget Management (FRBM) Act, which requires that they annually reduce revenue deficit and fiscal deficit and totally eliminate the revenue deficit by 2008-09. This is a very restrictive condition and has been recommended without any understanding of the states’ plight and the components of revenue expenditure. In terms of the accounting principles laid down by the Comptroller and Auditor General of India, all grants to local bodies (i.e. the panchayats and municipalities), to the aided schools and colleges, expenditure on account of salaries of doctors, medicines etc are classified as revenue expenditure. If the states are to make an effort to achieve the FRBM Act’s targets, there may not by any fiscal space left for them for development expenditure. This would amount to withdrawal of their welfare and developmental role. This may be in tune with the neo-liberal policy, but goes against the constitutional pledge mentioned in the beginning and is totally unacceptable to the vast majority of people. The states therefore need to unanimously demand that on a state subject the central government must not impose any external loan/aid conditionality on any state government without its concurrence. Also, the debt problems of the states, including those related to small savings loans, must be solved without linking it with any conditionality and without further delay.

The centrally sponsored schemes are yet another modality for imposition of the neo-liberal conditionalities. These schemes are formulated without adequate consultation with the state governments and without regard to the latter’s priorities. Since the state governments have to bear a substantial part of expenditure, they find it difficult to make proper allocation of their resources in accordance with their own priorities. Moreover, these conditionalities often impinge upon the states’ autonomy. For example, when the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was launched, the centre unilaterally asked the states to bring down stamp duty rates within five years to a level not exceeding 5 percent. This was a direct intrusion into the states’ autonomy because, with respect to taxes in the state list, the legislative assembly has full power to prescribe rates. Of late the government of India has accepted the Vaidyanathan committee recommendation on revival of cooperative credit structure; this too curtails the states’ autonomy in regard to the cooperative structure and links up the flow of fund with the state governments’ acceptance of the conditionalities attached. In some of the centrally sponsored schemes, the states' share of the financial burden is also being unilaterally increased. For instance, despite repeated objections by all the chief ministers, the states’ share in the Sarva Shiksha Abhiyan programme has recently been increased from 25 to 50 percent.
It may be noted that in recent years, in the sphere of state subjects, the centre has been imposing on the states distinct neo-liberal conditionalities, tying them up with more and more centrally sponsored schemes. This is reflected in the fact that while central transfer to the states as a proportion of the centre's revenue receipt has, as already shown, steadily fallen over the years, within that total transfer the proportion of transfer of funds with neo-liberal conditionalities has increased. The time has therefore come when the states must once again strongly demand, as they had done earlier, the transfer of all centrally sponsored schemes in state subjects to the states --- with funds and without any conditionality.

ADMINISTRATIVE & LEGISLATIVE ISSUES

Along with these critical issues of the needed reordering of centre-state relations in the financial sphere, there are important and long-pending demands for changes in the centre-state relations in the administrative and legislative spheres as well. The most vital issue in administrative matters is related to the blatant and repeated political abuse of article 356 of the constitution by the central government to dislodge the democratically elected state governments. It is therefore urged, as per discussions in the Inter-State Council, that there must be strong safeguards against the abuse of article 356, keeping in view the judicial pronouncements by the Supreme Court in the S R Bommai case. This must be done through constitution amendments, without further delay, so that article 356 is not used except in the case of a serious threat to the secular fabric of the country. Similarly, a constitutional amendment is needed against abuse of article 355, so that central government can send central forces only after the concerned state government requests for it. In the legislative sphere, again with appropriate constitutional amendments, definite time limits need to be fixed for receiving the governor’s sanction or the president’s assent for the bills passed by a state assembly.

To sum up, the reordering of centre-state relations for more justified devolution of powers to the states is an important pledge intrinsically connected to the fulfilment of other pledges regarding the common people’s greater access to employment, livelihood, education, health care and other amenities. Such decentralisation of powers from the centre to the states, moreover, must not stop at the state headquarters, but go down to the level of village panchayats and urban municipalities in the districts, and through them to the vast majority of people. It is only through the people’s involvement of people, through their struggles, that these two kinds of pledges – pledge of employment, livelihood, education and health for the people and pledge for decentralisation of powers – can be combined into a unified pledge for realisation. The Independence Day is an occasion for the common working people to take up this unified pledge as a part of their class struggle.