On the impact of declining center-state relations – The price of persistent federal frictions

Source: This post on the impact of declining center-state relations has been created based on the article “The price of persistent federal frictions” published in The Hindu on 16^th November 2023.

UPSC Syllabus Topic: GS Paper 2 Indian Polity – Issues and challenges pertaining to the federal structure.

News: This article discusses the impact of declining Centre-State relations on the economy of India.

A detailed article on Federal Structure of Indian Polity can be read here.

A detailed article on the Challenges of Centre-State relations can be read here.

In recent years, the frequency and intensity of disputes between the Union government and the States have increased. The economic costs of this development are long-lasting.

What are the emerging challenges in center-state relations?

1. Lack of autonomy with states regarding public expenditure: This is because State governments depend on the Centre for their revenue receipts.
2. Homogenisation of social sector policies: In a diverse country like India, states have their own unique socio-economic conditions, cultural differences, and varying levels of development. Therefore, their needs and priorities in the social sector can differ significantly.
3. Functioning of regulatory institutions: Regulatory institutions often operate under the purview of the central government. Their functioning can influence the power dynamics between the center and the states.
4. Powers of central agencies: The extent of powers held by central agencies can sometimes be seen as encroaching on the autonomy of states. Striking a balance between centralized authority for national interests and respecting the autonomy of states is crucial.

What can be the impact of center-state federal frictions on the economy?

There are three important economic consequences of this:

Firstly, the spread of the Centre’s span of activities leads to a situation where the Centre starts crowding out the States in terms of investments.
For instance, PM Gati Shakti. The flexibility of States in formulating their State master plan is curtailed by the centralization of planning and implementation of the national master plan. This has become a reason for underinvestment by States, which can hamper regional economies.

Secondly, unhealthy fiscal competition between the Centre and States is developing. State governments are engaging in competition with other States and with the Centre, in place of healthy fiscal competition among different regions/States.
For instance, welfare provisioning. States’ revenues, especially non-tax revenues, remain flat due to a lack of avenues for raising non-taxes (For e.g., profits of state-owned companies) due to the direct provisioning of many utilities and services by the Centre.

Thirdly, it may lead to inefficiencies associated with ‘parallel policies’. Federal friction can lead to the Centre or the States duplicating the other’s policies.
For instance, pension schemes. Though States joined the National Pension Scheme (NPS) initially, some States have started to roll back to the Old Pension Scheme (OPS). The fiscal costs associated with OPS will have long-term consequences for the economy.

Read more on OPS vs NPS here.

What needs to be done?

The interdependence between Centre and States is inevitable, especially in a large, diverse, developing society and needs to be preserved.

Question for practice:

A declining trend in center-state relations has implications for the broader economy, and not just for the polity. Explain.