DOLING IT OUT IN DROPS: ARE THE STATES BEING SQUEEZED OUT OF FUNDS BY THE CENTRE?

Is the Centre financially squeezing the States? The question arises as the Union government has been increasingly sharing less revenue with the States at a time when the ability of the States to generate revenue has weakened and their borrowing capacity curtailed.

- 

In 1962, several States complained to the Third Finance Commission (FCIII) about a “tendency to centralise resources and functions belonging to the States”. The Commission reported a widespread sentiment among States that their autonomy was being eroded through directions on State subjects and unilateral financial decisions by the Centre.

This discontent had emerged despite the Congress ruling at the Centre with a massive mandate and heading most major State governments. The Commission observed that “federal finance in India today (1962) is such that the States are dependent on central assistance on an ever-increasing scale. This dependence is diluting, on the one hand, the accountability of State Cabinets to their legislatures, and on the other, hampering the growth of administrative responsibility in the States.” It called this trend “disturbing”.

More than 60 years have passed since. Indian States have grown more politically, socially, economically, and ideologically apart. A coalition now governs at the Centre, and major Indian States are led by Chief Ministers from at least nine different parties. The 1991 liberalisation had boosted the economies of many southern and western States, whereas much of the east, central, and northern parts continue to lag. Economic advancement and ideological divergence meant that while some States now rival Western nations in social indicators, others mirror sub-Saharan Africa.

Due to such stark inequalities among States, today, the “disturbing” trend seen 60 years ago is still prevalent and has reached a boiling point. The clamour against the dilution of States’ financial rights is louder than ever. The tug-of-war over fiscal federalism is now playing out in increasingly visible and confrontational ways.

Three layers

The latest fight between the States and the Centre over money is unfolding across three distinct layers.