The Hindu Business Line : Finance Commission and States

In the coming decade, it may not be enough for the Centre to rely only on pre-existing arrangements such as the Finance Commission to ensure a smooth relationship with the States

The 13th Finance Commission has submitted its report. Given its remit, and the experienced leadership it had, one expects from the Commission a set of sensible proposals on the sharing of taxes between the Centre and the States. Finance Commissions are, however, not expected to be politically sensitive. So it is probable that the 13th Finance Commission has not taken into account what has been happening in, and to, the federal relationship, especially in the last two decades, coinciding with the onset of economic reforms. In a nutshell, the unequal relationship between the Centre and the States has slowly, surely but imperceptibly changed with the States becoming less helpless. Some of this has to do with the nature of coalition governments at the Centre; but a great deal also has to do with the manner in which some States have managed their economies. Three States stand out in this regard in the decade just gone by: Andhra Pradesh, Gujarat and Bihar. Andhra Pradesh has been growing at between 6-7 per cent for nearly 15 years. Gujarat has been growing steadily at over 6 per cent since Mr Narendra Modi took over in 2001. Bihar under Mr Nitish Kumar since 2004 has recently notched up a growth of over 11 per cent. In the 1990s, it was Tamil Nadu and Karnataka which performed in this manner. Similar but less striking trends can be seen in several other States, many of which are small in size. The laggards have been the erstwhile prosperous ones, notably Uttar Pradesh and Maharashtra, with the latter having slipped dramatically owing largely to the poor governance which itself has been a consequence of intense political rivalries.

One major problem that could emerge over the next few years — in some cases it is already manifest — is the disjunction between economic power and political clout. The latter is not merely a question of seats in the Lok Sabha, although that is important; it is also the enhanced ability of a State to cock a snook at the Centre. With a gradual reduction in financial dependence of the States on the Centre, the non-Congress States are likely to plough their own furrows, as Gujarat, Andhra Pradesh, Tamil Nadu and a few others have done. Indeed, even in the Congress-ruled States, signs of rebellion cannot be ruled out as was seen recently in Andhra Pradesh over the Telangana issue.

In sum, in the coming decade, it may not be enough for the Centre to rely only on pre-existing arrangements such as the Finance Commission to ensure a smooth relationship between the Centre and the States. These instruments are important but could well become less relevant in the years to come. The Centre needs to start looking beyond the urgent to the important without delay.

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