Editorial Simplified : Over to the States | GS – II


Relevance :  GS Paper II


Theme of the article

With the economic centre of gravity shifting to states, India’s growth hinges on cooperative federalism.


Introduction

In the World Bank’s Ease of Doing Business index released last month, India ranked 63, an impressive jump from its lowly rank of 142. Yet, there is anecdotal evidence of investors being frustrated by venality, indifference and corruption at the operating level.


The growing importance of states in India’s economic management.

  • In the early years of our republic, the Centre dominated across all domains — political, economic and administrative — and states, even those led by leaders with political heft, acquiesced to this unequal arrangement.
  • The reaction to central dominance came in the early 1980s when strong regional leaders started agitating against “the hegemony of the Centre”.
  • As a consequence, the Centre yielded to the states, but largely in the political space. Much of the economic policy control stayed with the Centre which decided not just public investment but even private investment through its industrial and import licensing policies, leaving the states on the margins of economic management.
  • That arrangement started to change with the onset of reforms from 1991. Three trends, in particular, have shifted the economic centre of gravity from the Centre to the states
    • The first is the change in the content of the reform agenda. The Centre could push through the reforms of the 1990s without even informing, much less consulting, the states. In contrast, the second-generation reforms on the agenda now shift the emphasis from product to factor markets like land, labour and taxation, which need, not just acquiescence, but often the consent of states.
    • The second factor driving the economic centre of gravity towards states is the changing dynamics of our fiscal federalism. Together, states collect 40 per cent of the combined revenue, but spend as much as 60 per cent of the combined expenditure. More important than the aggregates is the greater autonomy that states now enjoy in determining their expenditure. Thus, the states now not only get a larger quantum of central transfers but also get to decide on how to spend that larger quantum. And how states manage their public finances matters much more than before.
    • The third major trend behind the states’ growing importance in economic federalism is their critical role in creating a conducive investment climate in the country. Much of the responsibility for improving the ease of doing business rests not with Delhi but with the states. This highlights the need for coordinated action.

Conclusion

India’s prospects, including our aspiration for a $5 trillion economy, depend on the Centre and the states working together. If ever there was an opportune moment for a big push on cooperative federalism, it is now.