India's federalism dilemma: Cooperative model or competitive reality?

Much as India desires the existence of cooperative federalism, what it often witnesses is competition

Serious scholars studying and working on the Indian Union instinctively refer to it as “cooperative federalism”.  In this context, the observations made by Chief Justice of India D Y Chandrachud, who retired on November 10, in a lecture delivered in Mumbai on October 26, are interesting and warrant a relook at how we think about Indian federalism. 

 

While stating that “cooperative federalism” is at the core of democratic governance in India, he emphasised that it does not require states to toe the Union government’s policy line.  He referred to the 1977 Supreme Court ruling that the model of federalism in India is predominantly “cooperative, where the Union and the states iron out their differences through deliberations to achieve their shared developmental goals.  However, he argued that federal principles should be nurtured through discussions and dialogues, with cooperation being just one way to uphold them. Equally important are discussions that can vary from cooperation on one end of the spectrum to contestation on the other, both essential in a healthy democracy.  Indeed, contestation can also include competition.

 

The term “cooperative federalism” is a frequently vaunted cliché, often an academic obsession, even when none exists.  It is a normative construct, closely aligned with the concept of a benevolent state.  Albert Breton, an eminent public choice economist and a member of the Royal Commission on the Economic Union and Development Prospects of Canada (1985, popularly known as the MacDonald Commission), was intrigued by the oft-repeated cliché of “cooperative federalism.  He started thinking about whether the basic vertical and horizontal interactions between units were truly cooperative and competitive and wrote an incisive minority report to the Commission titled, “Towards a Competitive Federalism,” and later published it in the European Journal of Political Economy (Vol.3. Pp. 263-329, 1987). 

 

In India, “cooperative federalism” is an obsession among scholars, even when it may not exist.  It was a buzzword during the planned development strategy, where both markets and state governments played limited roles in resource allocation.  Besides, the one-party rule that existed for a long period virtually pressurised states to comply with the Union government’s allocation decisions.  In a sense, there was an extreme form of cooperation that bordered on coercion.  This has two implications.  Coercion to forge consensus is a unitary, not a federal, approach. As Raja Chelliah put it in his L K Jha Memorial lecture, “Centralised planning is a negation of federalism.  Second, the informal mechanism to forge consensus during the one-party rule in the formative years did not allow the creation of formal systems of intergovernmental coordination, bargaining, and conflict resolution.

 

Of course, cooperative federalism is feasible in instances where the parties involved can gain.  But, when the gains are unequal, or when some gain and others lose, the parties will cooperate only when those who gain more compensate those gaining less or those who lose.  This also requires free information, and systems and institutions to facilitate negotiation, bargaining and conflict resolution.  Indeed, there are isolated instances of cooperation, like the decision by the Union and the states to combine multiple consumption taxes to create the goods and services tax (GST).  Both the Union and the states saw that there would be economic gains in terms of creating a national market and enhancing revenue productivity in the medium term through this tax harmonisation, even though it involved the loss of revenue autonomy.  Yet, to facilitate the reform process, the GST Council—a cooperative body of the Union and the states—was created. However, the critical factor in implementing the reform was the promise of generous compensation by the Union government for any revenue loss to the states, ensuring a 14 per cent growth every year from the base year estimate of the merged taxes in 2015-16. 

 

However, with the outbreak of the pandemic, when the Union government discontinued the terms of the agreement, stating that it was “an Act of God,” there was widespread dissatisfaction among the states. This underlines the fact that even in cases where cooperative federalism is feasible, clear rules of engagement, the free availability of information, and robust systems and institutions are essential to coordinate, facilitate bargaining, and ensure conflict resolution.

 

Thus, much as we may desire the existence of cooperative federalism, it remains elusive, and what we often witness is competition.  The intergovernmental competition is both vertical, between the Union and states, and horizontal, among the states themselves.  The competition can be electoral when the political parties compete with one another to gain control, or sharing resources or fiscal space, or to attract investments.  Even in competitive federalism, efficiency gain can be had only when there are some important preconditions, such as “competitive equality” and “cost-benefit appropriability”. 

 

However, asymmetric power, particularly between the Union and the states, makes it difficult to have “competitive equality”. In this context, rules of engagement, systems, and institutions to regulate competition, safeguard against predatory practices, and resolve conflicts are essential for fair and stable federal engagement. 

 

The absence of formal systems and institutions for intergovernmental coordination, bargaining, and conflict resolution is a major vacuum in the Indian Union.  Given the growing disharmony, acrimony and unregulated competition, the need for such an institution is immense. Conflicts between the Union and the states, as well as among the states, must be resolved by the judiciary, which is burdened with heavy workloads and long delays.  There is the National Development Council, but it hardly meets, and when it does, the deliberations descend into speechmaking and airing grievances. 

 

When the Planning Commission existed, there were annual plan discussions. However, after 1991, the states’ participation was largely limited to securing their share of the grants.  The first Administrative Reforms Commission appointed in 1966 recommended that an inter-state council should be set up.  This was reiterated by the Commission on Centre-State Relations chaired by Justice R S Sarkaria in 1983.  The 63rd Constitutional amendment created the inter-state council, but ironically, it was placed within the Union Home Ministry, denying it an independent non-partisan role.

 

With increasing disharmony and acrimony between the Union and the states, and the emergence of coalition governments often led by regional parties at the state level, it is important to have an efficient institution for intergovernmental coordination, regulating competition, and ensuring conflict resolution.  Such an institution is essential to achieving the goal of a Viksit Bharat.

 

The author is former director, NIPFP, and member, Fourteenth Finance Commission.  The views are personal