India Needs a New Federal Compact

What is needed is a robust and institutionalised system of resource federalism as an intrinsic part of fiscal federalism

- HASEEB A. DRABU

Over the last three decades, the nature of the economic regime in India has undergone an unrecognisable transformation. Business Today, an offspring of liberalisation, launched as it was a year after the economic reforms of 1991, has been a witness to India moving from state socialism to business liberalism, closed economy to an open one, and a controlled economy to a regulated one. The fragmented and protected markets across 14 states and six Union territories in 1956 are now a unified common economic space across 28 states and eight Union Territories.

The Indian economy was just about $30 billion in 1951, which is roughly the size of the Jammu & Kashmir economy today. The bigger states like Maharashtra, Tamil Nadu, Karnataka, and Uttar Pradesh have their sights set on becoming $1-trillion economies. Collectively, the states now raise more revenues and undertake more public expenditure than the Centre.

Despite this, the states continue to be tied to the apron strings of the Union in a federal system, whose foundational framework is infirm, and the design as laid out in the Constitution of India, simply outdated. The needs, requirements and policy instrumentalities of an open regulated economy are very different from those of a closed economy for which the current framework has been designed.