Is the strain between the Opposition-ruled States and the Centre a matter of development needs or is it politics at play?

A. Kalaiyarasan: The federal coalition of regional parties that emerged in the 1990s offers lessons for understanding single-party dominance now and its implications for federalism. During that time, economic and institutional reforms were more of a federal nature. There was a greater interaction between Centre and states on a range of issues. The abolition of the Planning Commission, and the changes in resource allocation before and after 2014, shows a shift.

Yamini Aiyar: In the 1990s, regional parties began to assert their presence on the national stage. With the emergence of the BJP, we are back to single-party dominance. Crucially, the BJP’s Hindutva politics is the antithesis of the politics of accommodation. Effectively, as ‘one nation’ politics started dominating, regional parties that represent regional anxieties and political identities are increasingly becoming the voices for deeper federal accommodation.

Post-liberalisation, the role of institutions, such as the Finance Commission, has changed. The GST Council has not done any better in strengthening the federal spirit.

A. Kalaiyarasan: The introduction of GST, which was expected to collectively arbitrate the tax rate, came at the expense of States’ fiscal rights, as decision-making is now concentrated in the hands of one party. Even the voting mechanism built into the GST Council reflects this imbalance. The question is whether the recent change respects the federal spirit envisioned in the design of the GST. The States surrendered their sovereignty as much as the Centre to build this grand bargain of GST. Ideally, this should have been discussed within the GST Council before being declared. Now, it looks like the Centre takes the call. Historically, at least till the 1990s, the Planning Commission had an effective role, particularly in guiding public investments. Post 2014, it is out of the picture. Now, the only instrument available for resource allocation between the Centre and the States is the Finance Commission. The concern is not only regarding the total share of the States in the divisible pool; more increasingly, certain States are concerned about horizontal devolution or horizontal imbalance. The poorer States depend largely on fiscal transfers. This is making the southern States question whether they are being penalised via the allocation of the Finance Commission because it is inherently supportive of the northern States given the inverse-income formula — poorer states would receive a larger share — built into the Commission’s design. We need to focus on the broader issue of inequality, not merely the fiscal transfer challenges under single-party hegemony. This is not simply a political problem; it is a structural one.

Yamini Aiyar: At the heart of the fiscal federal architecture that India adopted was a commitment to the principle of redistribution. When southern States raise this issue, they are not necessarily arguing against the principle of redistribution; they are responding to a structural reality of spatial inequality. There is a lot of lack of good faith by the Centre as it has used and misused its constitutional powers and institutional hold to centralise decision-making. Fiscal centralisation has always been a challenge in India’s federalism. You are seeing a lot more tension in the formula that the Finance Commission has used. The States have rightly challenged the fact that the Indian government is extremely centralised vis-a-vis the GST.

Cess and surcharges, which are not devolved to the States, have been on the rise in the recent years. How are the economies of States affected?

A. Kalaiyarasan: The fiscal structure shows that the Centre, more than the State, is weak. The Centre of the 1990s could invest in a productive way. If you look at borrowings, 80% of every rupee it has borrowed is actually utilised for revenues (expenditure). The only entity now building infrastructure is the State. Even the wealthiest States have not been able to generate employment. Overall growth has not been inclusive in terms of job creation, leading to increased regional inequality. There is also a perverse flow of resources. Southern States cannot deny that the resources are coming from the northern region in the form bank credit if one looks at the credit deposit ratio, and poorer migrant labour, which helps maintain a low-wage equilibrium. Jobless growth is also being partly a product of the way in which our federal economy is integrated. In India, the relatively smaller regions are compensating or subsidising relatively larger regions. Without strong growth, good jobs and good wages, during every election, political parties try to compensate and engage in competitive populism. They give different sets of guarantees that come at the expense of productive investment.

Yamini Aiyar: The Indian government’s use of cesses and surcharges over the past decade reflects a lack of good faith. The move towards greater centralisation of social spending, driven by electoral incentives, is a matter of concern. The Centre is squeezing States and encroaching on their responsibilities through mechanisms such as centrally sponsored schemes. This kind of political impasse is because the Centre has not lived up to its bargain. One of the tensions that we have in the economy is structural spatial inequality in growth patterns. Some of the structural challenges is around wage growth and capital flows. So, how do we address this question of coordination within our federal structure? What are the institutional systems and political mechanisms needed to enable this coordination? Without the Planning Commission, the Finance Ministry determines how centrally sponsored schemes should be allocated to the States. Is this appropriate or do we need a different mechanism for determining development financing?

Have regional parties allied with the BJP failed to balance their politics and the need to protect their regional interests? How different is the current single-party dominance diffferent rom what the country saw under Congress rule in the 60s and 70s?

A. Kalaiyarasan: Regional parties thrive in contexts of national coalition governments, and so does regional capital — it has been pivotal in coalition-era politics. Any capital generated from below has the support of regional parties. It serves as an electoral resource for the party to assert its position. The aspect of capital has been somehow been weakened over the last decade. This has implications for the electoral strategies of regional parties. The centralisation has not only weakened regional capital and local entrepreneurship but also reshaped electoral financing with the coming of electoral bonds.

Yamini Aiyar: The difference between coalitions in the 1990s and 2000s and the coalition today is that there was a much broader dependency on regional parties for the Congress and even briefly during the A.B. Vajpayee era. The culture of governance was about cooperation and negotiation. There are two key parties that are holding the NDA together today at the Centre. The style of governance, which is more a culture of centralisation and not of deliberation, also shapes the bargaining hand. The two critical regional parties (TDP and JD(U)) that are part of the coalition are going through their own churn. So, their impulse is to hold on to power in their regions rather than engage in a battle for federalism at the national level. Perhaps, they see an alliance with the BJP as an instrument that serves their purpose of being able to consolidate power in their regions.

How will the southern States cope with the delimitation exercise post the Census and the ‘one nation, one election’ proposal?

A. Kalaiyarasan: With delimitation, we are going to have a situation where the larger populated States have more political power and the relatively less populated regions have more economic power in terms of per capita income. So, how can regions without economic growth wield political influence? The delimitation question should not be seen in isolation but from the context of our larger political economy.

Yamini Aiyar: The ‘one nation, one election’ proposal seems to be another carefully crafted tool that uses the logic of efficiency and a broader public disenchantment with the role of money and muscle in politics. It is unlikely to solve the challenges that the public has. The argument that India needs to have is about the structural challenges of its democracy.

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