Debate on revdi culture highlights bitterness between Centre and states

Source: The post is based on the article “Debate on revdi culture highlights bitterness between Centre and states” published in the Indian Express on 26^th August 2022.

Syllabus: GS 2 – Issues and challenges pertaining to the federal structure.

Relevance: About the increasing centralisation in fiscal space.

News: Recently, the Prime Minister has called for an end to free “revdi” (freebies) culture. This shows curbing freebies may now be the Centre’s policy priority. The Centre’s stranglehold over states on almost all fronts, is leading to a breakdown of trust between the two “partners”.

What are the opinions of the Constituent Assembly on the Unitary and Federal nature of the Constitution?

The framers of the Constitution were aware of the uncertainties raised when India embraced a federal structure with strong unitary features. The present issue of increasing unilateralism as a good governance model is not even expected.

Jawaharlal Nehru defended the unitary features as a weak central authority “would be incapable of ensuring peace, of coordinating vital matters of common concern and of speaking effectively for the whole country in the international sphere.”

But B R Ambedkar assured that “The Constitution is a federal Constitution…Both the Union and the states are created by the Constitution, both derive their respective authority from the Constitution.”

What is the present state of Fiscal federalism in India?

How did increasing centralisation in fiscal space happened?

For a long time, Planning Commission and Finance Commission were the cardinal pillars of Centre-state relations on the fiscal front.

Over the years, the very nature of fiscal transfer has become thoroughly centralised. For instance,

Non-adherence to Finance Commission recommendations: The last two successive Finance Commissions pegged the share of states in gross taxes to over 40%. But the actual transfer never reached this prescribed level. The peak was 36.6% in FY19 and it fell to a meagre 29% subsequently.

Implementing Goods and Services Tax (GST): The GST was once hailed as a milestone for cooperative federalism. But in reality, it increased the dependence of the states on the Centre for revenue.

Abolition of Planning commission: The Commission was disbanded to make way for the Niti Aayog. The powers of allocation of resources to states were passed on to the Ministry of Finance.

Under the Planning Commission, the Gadgil formula was used to allocate funds to states. However, after 2015, transfers to states are determined based not on any formula but purely on political exigencies.

The issue with Niti Aayog: In National Development Council (NDC) meetings, the prime minister used to regularly meet the chief ministers. But this has long been abolished.

Instead, CMs were made members of the governing council of the Niti Aayog. This was neither a substitute for the discussions between the planning bodies of state governments and the Planning Commission nor the discussions in the NDC.

States as agents of implementing Central schemes: The Constitution empowers the states to conceive schemes to provide sustenance and relief to people. Many study highlights that state government schemes are more innovative and appropriate to the targeted groups.

However, the Centre justifies the collection of Cess and surcharges as the Centre distributes these to states via central schemes.

What should be done to correct the increasing centralisation in fiscal space?

The Centre’s record is still worse on the fiscal deficit front and off-budget borrowing. This should be corrected first.  Also at present, India need unity and not uniformity, assimilation not extinction.