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Federal power in exchange of GST: Modi should offer states a hard bargain

If there is only one thing that Narendra Modi can accomplish by 2019, what should that one thing be?

The answer should be an irrevocable shift to greater federalism. He can talk passionately about skill-building, toilets, cleanliness, smart cities, financial inclusion, and pucca homes for every household by 2022, but beyond providing the money to states, the Centre can do little about these goals. In the end, it is states that have to deliver. His target of a Swachch Bharat by 2019 will not happen in all states because some states will not follow his lead.

Narendra Modi. PTI

Narendra Modi. PTI

The Grand Bargain Modi should offer states is greater and irrevocable federalism if they sign up for the goods and services tax (GST).

No prime minister, howsoever powerful, can make all states pull equally in the direction he wants them to. This is not only because there are different political parties at work but also because different states have different priorities. India will thus always be a multi-speed country where different states will follow different routes to development. Some will grow faster, and others slower; some will do better on human development indices (HDI), some will do worse.

In view of this, the only way to get all states moving in the same general direction is to accept a paradox: it is only by letting states do their own thing that they will ultimately pull in the same direction.

The reason why this will happen is simple: when some states pull ahead on growth, other states will have to do similar things in order to compete with that state for investment. When some states do better on HDI, laggard states will be forced to catch up.

In fact, Modi will also have to acknowledge that some BJP states will move faster than the Centre. Post-May 2014, for example, it is Rajasthan that is blazing a new trail in reforms. Labour laws (Factories Act, Industrial Disputes Act, and Apprentices Act) have been amended to bring in investment and jobs. Now, there is talk of changing the Land Acquisition Act imposed by the Centre. Rajasthan plans to do away with several onerous conditions (70-80 percent land owner consent, and the Social Impact Assessment) and offer higher compensatory payments instead. Chief Minister Vasundhara Raje is even talking of implementing Rajasthan’s own version of a unique ID called the Bhamashah scheme to empower women heads of households.

Not all of Raje’s reforms will necessarily work, and not all of them may be well-advised, but one thing is clear: if they are not tried out, we will never know.

Another thing is equally clear: imposing a common law from the Centre on all states can create more problems for all. In the dying days of the UPA government, for example, the Congress party legislated a growth-retarding land acquisition law, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Ac t, 2013. The Gandhis pushed the law even though almost no state was in favour of it, but in the run-up to the elections, no party (BJP included) wanted to be seen as anti-farmer. We are now stuck with it.

Narendra Modi should stop shoving more such laws down the throats of states from Delhi — even if they are for supposedly good causes.

In fact, he should push for one major constitutional change that will give a clear boost to federalism: an amendment to the concurrent list of subjects on which both states and Centre can legislate.

He could do one of three things:

One, abolish the concurrent list altogether and put all these subjects on the state list. This is the best option.

Two, he could amend article 254(2) of the constitution which says that if a state legislates on a subject on which the Centre already has a law, the state law can prevail in the state provided the Centre agrees. He could amend article 254(2) to say that whenever a state amends a law on which there is a central legislation, the state law will automatically prevail in that state.

Three, if neither constitutional amendment is possible, Modi can make an open declaration to the effect that any state which wants to write its own laws on any concurrent list subject will be allowed to do so. His government will automatically offer presidential consent for the law.

Options one and two would be the best, for a constitutional amendment would ensure that federalism does not have to depend on the benevolence of the party in power at the Centre.

The only anti-federal move Modi should allow — in fact champion — is the goods and services tax (GST). It encroaches on states’ fiscal autonomy, but the GST is key to making India one market — and an efficient one at that.

Modi’s grand bargain with states should be to get them to sign on to GST and offer them greater powers to legislate in return. Even Congress Chief Ministers would be happy with this deal.

Who knows, strongly federal minded Congress chief ministers will weaken the hold of the Gandhi family on the Congress party. With a weakened Gandhi dynasty, a Congress-mukt Bharat would be one step closer.

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