February 25, 2015,
Any big change requires big ideas, decisive leadership and happy coincidence of circumstances. Nothing illustrates this better than the unfolding story of cooperative federalism in India.
As chief minister of Gujarat, Narendra Modi had often argued that the central government implemented schemes were at odds with the state’s needs and priorities. For example, schemes that provided funds for electrification were at best of limited value to Gujarat since it had already achieved near 100% electrification. This state could have spent the money provided for such a scheme more productively if allowed to use it for other purposes.
In advancing this view, Modi was joined by other chief ministers such as Vasundhara Raje of Rajasthan who argued that the vast numbers of central schemes further restricted their fiscal space because many of them required matching contributions by them from their otherwise untied funds. Once these matching funds were committed to access central schemes, states were left with very limited funds for even the most important expenditure items such as enforcement of law and order.
Nevertheless, this system has remained entrenched in one form or another in the last several decades on account of coincidence of three factors. First, outside of state leaders and a few economists and policy analysts, advocates of the view that true federalism means giving greater fiscal space to states and trusting them in setting their own priorities have been few and far between.
Second, the Finance Commission – appointed once every five years – plays a key role in the division of tax revenues between Centre and states. Consistent with the first point, successive Finance Commissions held untied funds to the states at or below 30% of the divisible tax pool. Only the 13th Finance Commission exceeded this mark, setting the states’ share at 32%.