The economics and politics of the union

This is an ambitious book. It aims to "deal with the system, institutions, and outcomes arising from the interplay of political and economic forces in Indian federalism", as the authors put it.

But it's not just a history of the politics of Centre-state relations, nor an academic exercise analysing the various political forces that act on Centre-state finances.

Instead, the intention of the authors is clearly prescriptive""the study is firmly placed against the backdrop of economic reforms, and the objective is to see how the states could be induced to carry out reforms.

At a time when much of the heavy lifting of economic reform, from restructuring state electricity boards to building infrastructure, has to be done by the states, this kind of research could be very useful.

The authors divide the book into three parts""Part 1 gives the background of the subject, including a historical review of the Indian federal system, and the theories of federalism.

This part contains a fine analysis of the reasons for conflict in Kashmir and earlier in Punjab, and the authors point out the dangers when religion becomes a tool for political mobilisation.

Economic growth, or bribing away dissidence, could provide a way out. "Economic liberalization that increases growth also goes hand-in-hand with a reduction in central political control with respect to matters such as industrial investment. Reducing central power in such dimensions may complement the achievement of more effective bargaining mechanisms between the Centre and the states," they say.

Conversely, of course, competition among states can also be a catalyst for growth. The authors point out that in a democracy, where electorates, political parties and the free media can compare the performances of state governments, these governments will be forced to compete.

Part 2 details the economics of Indian federalism, with chapters on the assignment of taxes and expenditures, inter-governmental transfers and fiscal overlapping, concurrency and competition.

This section takes a close look at the fiscal arrangements between the Centre and the states purely from an economic viewpoint.

Part 3, on "Political Economy and Intergovernmental reforms", is the heart of the book. The authors consider the political factors that have shaped India's fiscal transfer system.

The creation of the Planning Commission, for example, was a political gambit aimed at reducing the influence of the technically-oriented Finance Commission.

The authors point out that an explicit decision was taken to exclude plan transfers from the scope of the Finance Commission.

Over the years, there has been a steady erosion in formula-based plan transfers, and discretion in resource transfers also came about through project-based transfers governed by various central government ministries.

Coalition politics at the Centre has had a major role""much has been written about Chandrababu Naidu's ability to garner a disproportionate amount of resources from the NDA government at the Centre.

The authors carry out empirical analyses on the impact of political variables on resource transfers, and come to the conclusion that "the political and economic importance of the states has a positive influence on per capita transfers."

Perhaps the origin of ministers also has an effect""all one has to do is consider the number of new trains and new railway lines or zonal headquarters sanctioned to various railway ministers' home states.

Analysing the regional dimensions of economic growth, the authors conclude that "neither the regional policy of the Centre nor Centre-state transfers have been effective in their stated goals....The differences in infrastructure and institutions that seem to explain interstate differences have been persistent, and neither Finance Commission transfers, Planning Commission transfers, nor centrally sponsored schemes have made a substantial dent in regional inequalities in India".

That's a sobering thought, because liberalisation is very likely to lead to greater disparities between states.

The authors make the point that the states were used to operating with soft budget constraints and their finances have deteriorated in the post-reform squeeze, negatively affecting spending on education and health.

They take note of the flaws in local government and argue for drastic reforms. States such as Kerala, operating from a very different perspective from that of economic liberalisation, have taken the lead in decentralisation.

In their policy recommendations, the authors argue for a simpler and clearer transfer system between the Centre and the states.

They say that, "removing a significant portion of centre-state transfers outside the political economy arena, clearly targeting them towards horizontal equity objectives, and doing so in a manner that does not create perverse incentives for recipients, is both feasible and desirable".

It's a pity that this book does not take into account the Twelfth Finance Commission's recommendations, which have been considered as path-breaking by many experts.

Letting states raise loans from the market and writing off a portion of a state's dues if it reduces its revenue deficit to within a stipulated parameter, are some of the far-reaching changes. So is the introduction of VAT.

But while the scope of the book is impressive, it appears to focus too much on the finances of inter-state transfers and the authors' own suggestions for reform, rather than trying to understand the forces at work that are shaping the federation.

How is it, for instance, that economic reforms could be carried out by a weak central government under Narasimha Rao? And while analysing Centre-state relations is important, how does one account for the vast differences in governance between states like UP and Bihar, and the southern states?

A study of Indian federalism should have taken into account the different strategies that states have adopted to woo capital, including foreign capital, and get loans from multilateral institutions.

A case study of Chandrababu Naidu's Andhra Pradesh would have been absolutely essential in such an analysis. It would also have been interesting to understand the compulsions of the Left Front in supporting completely contradictory policies in Delhi and in Kolkata.

A reference to the Chinese experience, where local governments have driven reform, foreign direct investment, and economic growth, could have been helpful.

The failure to address such questions reduces this book to an instructive but rather narrow study.

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Political Economy of Federalism in India

M Govinda Rao and Nirvikar Singh
Oxford University Press
Pages: 422;
Price: Rs 675