Tag: federalism

CO-OPERATIVE AND COMPETITIVE FEDERALISM

 

                                                              (Photo: YouTube)

India opted for quasi-federal structure after Independence. After Independence from 1947 to 1967, India experienced the centralized federalism. From 1967 to 1990, India witnessed confrontational federalism due to the emergence of other party governments at the state level. Since 1990, Co-operative federalism has been developed. The present NDA government has been focusing on the new concept of competitive federalism along with co-operative federalism for higher growth of the country.

In competitive federalism, states would compete with each other over a broad-range issues to provide citizens various services in a hassle-free manner. The policy of one-size-fit-all is replaced with different policies of various states based on their own priorities within the state. This spirit of competition has led to lack of inter-state mutual assistance. The NITI Aayog was formed to empower and strengthen the state governments. It also appointed regional councils to create cooperation among two or more states facing a common set of problems or amicably settle disputes.

While the competition between states, reflected in the World Bank’s Ease of Doing Business index, has generated a lot of enthusiasm, this must be a continuing exercise. There are only few well-off states like Maharashtra, Gujarat, and Tamil Nadu which are competing. The proposed GST law may help some of the less productive states to raise the revenue. But the opposition of few well-off states with respect to revenue loss in implementation of GST system points that there is lack of will in participating in the process of competitive federalism.

We’ve seen various inter-state water disputes such as Krishna water disputes involving Maharashtra, Karnataka and Andhra Pradesh, Narmada water disputes involving Rajasthan, Gujarat, M.P, and Maharashtra, Cauvery water disputes involving Karnataka, Kerala, Tamil Nadu, Puducherry, and various others. For this, under Article 263, an inter-state council was established. The Sarkaria Commission on center-state relations (1983-87) made a strong case for the establishment of a permanent inter-state council. Article 301 to 307 in Part 13 deals with the trade, commerce and intercourse within the territory of India, breaking all the border barrier between the states. Zonal councils have also been established in 1956 to narrow the gap between the states. Cases such as Cauvery water dispute and Sutlej Yamuna link canal issue have seen non-mutual assistance between the states to a wider extent.

Thus, it can be said that co-operative and competitive federalism are two sides of the same coin. This spirit of competition has led to the lack of mutual assistance between and among the states. It is competition with co-operation that will drive the real change.

 

GST and Federalism

The multiplicity of taxes at the state and central levels resulted in a complex indirect tax structure in the country that is ridden with hidden costs for trade and industry. It is to simplify this very indirect tax structure that the government has attempted several tax policy reforms at different points of time. This objective furthered the idea of ‘One Nation One Tax’ and the introduction of Goods and Services Tax (GST) into the financial system. The passing of GST is seen by many as a great leap forward towards achieving economic integration of the Country. GST is one indirect tax for the whole nation, which will make India one unified common market. It is a single tax on the supply of goods and services, from the manufacturer to the consumer. It is essentially tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Many have opined that the GST would effectively be a death knell for federalism in the country. The main concerns in this regard are as follows:

  1. States could lose control over financial autonomy due to GST council being a constitutional body controlling taxpayers.
  2. Loss of revenue: the demonetization move resulted in loss of states revenue which needs to be compensated.
  3. Administrative issues: As to who would have control over taxpayers having less than Rs.1.50 crore annual revenue

The GST Council consists of Union Finance Minister (Chairman), Union Minister of State in charge Finance, and a Minister nominated by each State government. All decisions of the GST Council are made by 3/4th majority of the votes, the centre shall have 1/3rd of the votes and the states together have 2/3rd of the votes. Many critics of are apprehensive of this power of central government and worry that it might have an upper hand in many deliberations of the council.

However counter arguments to these criticisms suggest otherwise. With regard to loss of revenue, as far as loss of revenue to the states, Article 18 of the Act of 2016, provides for compensation to the States for loss for a period of five years. Administrative challenges can be overcome if the states receive revenue that they were receiving.

The Goods and Service Tax is among the most significant reforms since liberalization commenced in 1991. It embodies ‘one economic India’ which is expected to lead to a more productive economy. It was also brought in with an aim to lead to macroeconomic gains. The GST council serves as an example of mutual cooperation among the centre and the states irrespective of party affiliations. Despite scepticism, so far it does not appear the concept of cooperative federalism has been compromised because of GST. Many hope that it will be implemented in the same spirit here onwards as well for it could also be viewed as a leading example for the future of cooperative federalism as a whole.