The politics of fiscal federalism: Rs 1,85,000 cr bonanza to states shouldn't result in regional cronyism

The NDA government has sought to fundamentally alter the Centre-State funding patterns as part of its idea of “cooperative federalism” which is so close to Prime Minister Narendra Modi’s heart. For instance Central assistance for critical developmental programmes being implemented by states relating to health, child development, education, rural drinking water, housing etc has been reduced drastically by about Rs 75,000 crore in finance minister Arun Jaitley’s budget for 2015-16. Former finance minister P.Chidambaram has described this as a big blow to central funding of welfare programmes which seek to reduce inequality. However, the NDA government has argued, supported by many reputed economists, that the reduction of Rs75,000 crore in the central funding of development programmes is more than compensated with the States receiving an additional Rs1,85,000 crore from the total taxes and duties collected by the Centre. The States will get an additional Rs1,00,000 crore on a net basis every year. The NDA has accepted the 14th finance commission recommendation to increase the States’ share of total taxes collected by the Centre from 32% at present to 42% from 2015-16. This is the single biggest increase in the share of taxes the Centre will transfer to the states. So the NDA has rejected Chidambaram’s argument by saying the States will get Rs 1,85,000 crore of direct additional funds which they can use to fill any gaps caused by the reduced Central plan assistance to States by Rs 75,000 crore which were funding Sarva Shiksha Abhiyan, Integrated Child Development Programme, Rashtriya Krishi Vikas Yojna, Accelerated Irrigation Benefit Programme, Backward Region Grant Fund etc. [caption id=“attachment_1597711” align=“aligncenter” width=“640”]  Reuters[/caption] When this writer asked P Chidambaram what he thought of the NDA’s argument that the States get much more of direct funding on a net basis, the former finance minister said he would first see how the states actually use those additional funds. Only then will he be able to comment on whether the Centrally sponsored development funding is indeed getting replaced by better development initiatives by the state leaders. One apprehension is what if regional leaders resort to wasteful expenditures like laptops distributed by the UP government some years ago. Another argument is crony capitalism and corruption is far more rampant in State politics which does not even get captured by the CAG which is mostly focused on big cases of Central corruption. It is well known how a lot of the state government funding of various programmes is captured by regional capitalists, like the late Ponty Chadha in Uttar Pradesh, who had cornerned contracts for l mid day meals schemes and sand mining etc. Economic Advisor to 14th finance commission Prof.Pinaki Chakraborty has in an article in Economic and Political Weekly calculated that the States will get Rs5,23,958 crore as direct tax transfer from the Centre in 2015-16 as against Rs 3,37,808 crore they got in 2014-15. Pinaki says that is indeed a huge increase of over Rs 1,85,000 crore of direct fund transfer going to states. Pinaki says state Chief Ministers are free to continue the good welfare schemes run so far through Central assistance and can just convert them into fully state run schemes if they so desire. The idea is the States have much more flexibility to use their funds the way they want to. Pinaki argues this has been done without compromising the Centre’s fiscal space. The Centre has enough to provide for its own ongoing programmes. So the NDA is essentially saying that the States now have much more direct funding but they will also have to be accountable for how they spend the net additional Rs1,00,000 crore they have every year. The States will greater financial powers come greater responsibility. The States which get the additional Rs1,00,000 crore from 2015-16 will have to show results on the ground while implementing their own exclusively designed development programmes in health, education, agriculture, sanitation,housing and drinking water. In future they cannot really complain that the Centre is not giving enough funds for these programmes. The NDA has also decided to transfer to the coal bearing states an estimated Rs 10 lakh crore plus to be collected over 25 years from the auction of coal mines. Thus will give a huge boost to coal bearing states of West Bengal, Chattisgarh, MP, Jharkhand and Orissa which have historically suffered from serious backwardness. This will place special responsibility on these states to spend such monies on well designed inclusive development programmes. It will be unfortunate if such bonanza consolidates regional cronyism without any checks and balances. One will have to wait and see how a new political economy emerges from such bonanza. From the BJP’s standpoint this is an interesting political strategy to adopt. It may be recalled that the RSS and Jana Sangh always believed in a strong unitary system of political governance. Evidence of this historical stance is available in the initial manifestos of the Jana Sangh. Today the BJP, with a simple majority in Lok Sabha, is promoting substantial fiscal federalism but with the hope that this could be combined with the broader idea of promoting cultural nationalism. Indeed, it is a new kind of dialectics the Parivar may be working on. Author is executive editor amar ujala group.