Govt pushes fiscal federalism: funds for schemes like NREGA to come without riders

Fiscal federalism is making headway under Narendra Modi. The first overt signal on this came in August, when he abolished the Planning Commission, whose main job was to play middleman on funds transfers between centre and states. Nobody is complaining.

Then, the government made it clear that if states wanted to legislate their own laws or reforms on subjects in the concurrent list, they should go right ahead. So, when Rajasthan’s Vasundhara Raje amended three labour laws, the centre gave its nod. The laws which received presidential assent earlier this month include the Contract Labour Act, the Factories Act and the Industrial Disputes Act. The laws make it easier for factories employing less than 300 people to fire staff without government clearance. These changes will make business less reluctant to hire labour in future.

Presidential assent does not mean the centre will not legislate in these areas, but it will allow state laws to over-ride its own laws. Article 254(2) of the constitution specifically allows this.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

Article 254(2) says: “Where a law made by the legislature of a state with respect to one of the matters enumerated in the concurrent list contains any provision repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the legislature of such state shall, if it has been reserved for the consideration of the President and has received his assent, prevail in that state: provided that nothing in this clause shall prevent Parliament from enacting at any time any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by the Legislature of the state.”

Today’s Economic Times (19 November) informs us that Modi is moving ahead with plans to transfer funds for centrally-sponsored schemes to the states instead of demanding additional outlays from them.

Currently, flagship schemes of the centre like NREGA, the Sarva Shiksha Abhiyan, the Jawaharlal Nehru National Urban Renewal Mission, and the National Rural Health Mission (among other schemes) have huge total budgets of more than Rs 6 lakh crore. ET says that funds for these schemes will be given to states without seeking nit-picking details from them, including proof of their contributions, utilisation certificates, et al.

The idea of the centre funding schemes which only states can implement was actually designed to preserve the patron-client relationship between centre and states. In the mai-baap sarkar days of various Nehru-Gandhi family-led dispensations, it emphasised the importance of the dynasty even while making the states supplicants.

Now, if the new proposal for the direct transfer of funds to states goes through under the Modi government, it will make the centre-state partnership more equal. It will push federalism.

Clues to the government’s thinking were noted in Arun Jaitley’s budget for 2014-15.

The budget had some curious numbers which showed a dramatic increase in state plan funding.

As we noted at that time , the budget shifted huge outlays from the central to state heads. Suddenly, state plans financed by the Centre moved up from 26 percent of the total plan expenditure to 59 percent this year.

In P Chidambaram’s last fiscal year (2013-14), states got Rs 1,19,039 crore out of Rs 4,75,532 crore of total plan outlays; this year (2014-15), they get a huge Rs 3,38,408 crore from the total plan kitty of Rs 5,75,000 crore.

In terms of magnitude, it means resources equal to nearly 1.6 percent of GDP have been shifted from centre to states. In 2013-14, central assistance to state plans was 1 percent of GDP; this year it is 2.6 percent.

The move to abandon the remaining riders attached to the grant of central funds to states for centrally-sponsored schemes will complete the picture.

Federalism is a commitment Modi looks likely to honour.