Amaresh Bagchi: Policing the common market

We need an independent authority to guard the common market

Of the many virtues for which federalism has emerged as the best founding principle for polities around the world, the one that has come to the fore in recent years is the facility it offers to the constituents to operate in a large market.

The economic gains from competition and a free flow of goods and factors of production over a large area are so overwhelming that many countries, even when reluctant to surrender their sovereignty, have come forward to forge a common market among themselves, the European Union being the classic example.

Experience however shows that for a federation to deliver on its promise of providing a large internal market depends critically on the authority and effectiveness of the national government to police the common market and ensure an unhindered mobility of goods and factors across sub-national jurisdictions.

A review of the operation of federalism in India in the last 50 years would show that India's federal system has performed rather poorly in this regard. This is unfortunate and ironic.

For, India's Constitution confers ample power on Parliament to enforce the operation of a free market within the country.

Reflecting the recognition of the great potential that India offers for a large common market, our founding fathers, very thoughtfully, had devoted one full part of the Constitution (Part XIII) to trade and commerce within the country with a clear mandate in its opening Article (Article 301): " ... trade, commerce and intercourse throughout the territory of India shall be free".

This is analogous to the celebrated "commerce clause" of the US Constitution that empowers Congress to regulate commerce not only with foreign nations but also among the states (Article I, section 8, clause 3).

The commerce clause has been the bedrock of the common market in the US and greatly instrumental in the flowering of the US economy to what it is today. Sadly, this has not been the case in India.

The main reason for this is that while mandating free trade within the country and empowering the Centre "to regulate interstate trade and commerce" (Entry 42 of the Union List) the Indian Constitution also provides that restrictions can be imposed by Parliament on internal trade (and similarly by state legislatures on trade within their territory) as may be required in "the public interest".

Distrustful of the market, policy makers who guided the destiny of India after independence proceeded to impose restrictions on trade and commerce in the country through regulations in various forms, invoking "public interest".

Initially, the controls applied to a limited number of commodities. Their ambit widened enormously with the enactment of the Essential Commodities Act in 1955, permitting the Centre (besides the states) to exercise control over production, pricing, distribution, and stockholding of almost all products.

Following this legislation controls came to be imposed on production and trade over a wide range of commodities by both the Centre and the states. Often the same commodity was subjected to control by more than one level of which, an official committee appointed in the seventies (the Dagli Committee) found, no one seemed to keep any account.

The result was a regime of controls that thwarted the market forces and segmented the Indian market setting at nought the mandate of Article 301.

Along with the regulations imposing physical restrictions on the free flow of goods across states came the tax on interstate trade in the form of the central sales tax (CST).

Designed to regulate the taxation of interstate trade, the CST turned out to be a vehicle for taxation that enabled the states of origin to export their tax to residents of other states, thereby not only creating interjurisdictional inequity in the sharing of tax bases but also acting as a source of distortion in the flow of trade and location of industry within the country.

Following liberalisation, the Essential Commodities Act, which served as the main apparatus for putting fences on the flow of trade within the country, has now been largely repealed. But vestiges of many of the restrictive regulations remain.

A classic example is the Maharashtra Cotton Monopoly Procurement Scheme (MCMPS). Enacted by the state legislature in 1971, the scheme empowers the government of Maharashtra to acquire all raw cotton produced within the state (in reality, brought for sale in the state mandis). Originally due to expire in 1980 the law authorising the state's monopoly has been extended from time to time, and despite sharp criticism as a glaring impediment to the operation of a common market, continues to be in force even now. There are complaints of many other regulations impeding free trade within the country.

No one exactly knows how many regulations one has to obey to set up an enterprise or ply intertstate trade, and investors not adept at getting around them feel deterred at every step.

One also hears of cries for reservation for sons of the soil in employment and preference for local products (the Bihar-Assam row over railway staff recruitment and the "informal" ban on the screening of non-Kannada films in Karnataka being two recent examples).

Similarly, while moves are afoot to replace the state sales taxes with destination-based value-added tax, which, if implemented fully, will remedy the ill effects of origin-based trade taxes, some of the taxes that impede interstate trade like the entry tax will remain.

How, one may ask, could such practices survive in the face of Article 301? Could the judiciary not intervene?

In the US, relying on the commerce clause courts have played an active role in guarding the common market. Practices that can adversely affect interstate commerce even indirectly have been frowned upon by the US Supreme Court.

In a classic judgement Chief Justice Marshall held that Congress's power to regulate commerce "does not stop at a state's boundary but extends to activity within a state that affects other states". In the EU, any violation of common market canons is liable to be punished by the European Court of Justice.

In India while judicial intervention has helped to contain the damage to internal trade caused by the attempt by some states to discriminate against goods produced in other states, it is only blatant discrimination that has been negatived. State taxes have been held violative of Article 301 only when they impinge "directly or immediately on trade".

The Centre too must bear a large share of the responsibility for such outcomes since under the Constitution any state regulation that violates Article 301 requires the President's, that is, the Centre's assent.

Seldom does the Centre seem to exercise this authority. Often political expediency seems to prevail, as the repeated extension of the MCMPS demonstrates.

Anticipating the need to insulate the implementation of the common market mandate from politics the Constitution makers provided for the creation of an authority to oversee the operation of Part XIII (Article 307).

Despite endorsement by the Sarkaria Commission, neither the Centre nor the states have shown any liking for such an authority, presumably, fearing loss of power. The National Commission to Review the Working of the Constitution has also come out strongly in favour of appointing a Trade and Commerce Commission to see that all barriers to internal trade are eliminated.

It is time the recommendation was heeded and an adequately empowered authority set up to protect the common market and see that trade, commerce and intercourse throughout India are indeed free.

(The author is Professor Emeritus, National Institute of Public Finance and Policy)