Federalism and India #2: Actuals

In Accelerating India’s Development, Karthik Muralidharan looks at the Indian experience with federalism. It is not comparable to most other countries in many ways because most Indian states have huge populations:

“Each of India’s fifteen most populous states would rank among the forty-two most populous countries in the world.”

This means the first level of federal drilldown, the state, is still too large a unit of governance. Which is why states are split further into districts, blocks, urban and rural bodies. But even districts, on average, have far more people than 85 countries in the world! Therefore, Indian federalism needs to go several layers deep to achieve the intended purpose.

 

Two examples support this idea. The smaller states (Uttarakhand, Jharkhand and Chhattisgarh) formed out of large states (UP, Bihar and MP) have fared better. And when NT Rama Rao split blocks into even smaller units called mandals, they did better. (Nationally, blocks have around 2-3 lakh people while mandals have only 60-75,000)

 

While the center is criticized (rightly) for over-centralizing political and economic power, states are no better. States don’t like to delegate power or funds to lower-level units of governance within their own state. As Raja Chellian said:

“Everyone wants decentralization, but only until his level.”

 

Historically, the center has had a major say in who becomes the Chief Minister of states if their party wins. That eroded the authority of state-level leaders. The use of Article 356 to dismiss state governments was rampant – it was (ab)used 63 times between ’71 and ’90, though its usage has fallen drastically since then.

 

On the economic front, the center controls the major revenue streams – income tax, corporate tax, customs, and a variety of cess charges. The Finance Commission is a constitutional body that allocates tax revenues between center and the various states. The states always got less – it increased from 32% to 42% only as recently as 2014. Still too low.

 

Then there are centrally sponsored schemes (CSS). The guidelines for such schemes are set by the center, and both center and state need to fund them (the ratio varies by state). The spirit behind CSS is good: (1) it helps promote regional equality; (2) standardizes quality of service; (3) opportunity of economies of scale. It has indeed worked as intended in many cases. But it also means the center has a lot of control/influence on what states spend on. It takes a one-size-fits-all approach. It imposes a lot of administrative cost of paperwork for tracking expenditure. And lastly, it leaves lesser money for the state to spend on what it deems best for itself – the very opposite of what federalism intends.

 

Local government fares just as badly at the hands of the state. It barely gets any funds and its employee count is very low. In the US and China, 60% of government employees work for local government; in India, it is just 10%. Contrary to popular perception of China being a strong, centralized state, the majority of both public spending and employment is done by local governments in China. China then is actually far more federal than India.

 

As you may have noticed, most of these issues have been there for decades. Why is that the case? Why has India been such a centralized country for so long?