Opinion – Towards Cooperative Federalism

“Cooperative Federalism” has become the new buzzword in the media today. This article pays attention to what this term means, its desirability and implications with a special focus on the “Economic Federalism”.

Cooperative Federalism

It refers to the emerging new form of federalism in India, where the States and Local Bodies play a greater role in the formulation of policies at the national, state and local body levels. It aims to create a synergy between the Centre, States and Local Bodies so that they work cooperatively and not blocking each other.

After 65 years of independence, the states are no longer in the same diffident position that they once were at the time of independence. For a large and diverse country like India, the needs and aspirations of her states would obviously be strikingly different. Thus there should be a greater voice and powers to the states to workout on her own set of priorities. For example, launching the Pradhan Mantri Jan Dhan Yojana or the Sarva Siksha Abhiyan for a state like Kerala would be futile, as her socio-economic indicators far exceed the targets set by these Central Sponsored Schemes. Cooperative Federalism allows the state to prioritise her needs and work towards satisfying them. However, there should some convergence between the goals and aspirations of the States and the Union so that the nation as a whole moves in a particular direction towards a common vision. Thus cooperative federalism is not about each state moving in its own direction, but about moving towards common long term goals allowing greater flexibility to the states in realising them.

Towards Cooperative Federalism

The newly elected government headed by a Prime Minister, who had served as the Chief Minister of Gujarat, had taken up several initiatives in pursuit of Cooperative Federalism. We shall now take a look at some of them in detail.

Scrapping of Planning Commission

The role of Planning Commission in approval of State Plans and devolution of discretionary Grants-in-aid based on Gadgil-Mukherjee formula has been one of the frictional points in the Centre-State financial relations. In this regard, the government’s decision to scrap this institution and replace it with a think-tank, the National Institution for Transforming India (NITI) Aayog is a positive move towards cooperative federalism.

Greater Financial Autonomy of the States

States have very limited taxation powers and thus are dependent on the Union for the financial support. There are three channels of fund transfers from Union to the States, which are:

  • Through the Finance Commission which includes (i) Share in Central pool of taxes and (ii) Statutory Grants-in-aid. These transfers correspond to about 60% of Union transfers to States.
  • Through Central Sponsored Schemes (CSS) which correspond to about 30-35% of the Union transfers to the States. These funds are made available to the States on various terms and conditions which the States must satisfy to receive them. These are being severely opposed by the States because in the absence of these schemes, the States would receive the same funds in unconditional format, which the States can use as per its own needs and priorities.
  • Remaining funds flow through Planning Commission in the form of Plan funds and “discretionary” Grants-in-aid.

In order to strengthen the financial position of the States, the 14th Finance Commission had made several recommendations which are accepted by the government. They are:

  • Vertical Devolution – Increase the share of States in the Central pool of divisible taxes from 32% to 42%. This significant jump will allow greater flow of unconditional funds to the States.
  • Horizontal Devolution – Formula based devolution of funds among the states which is based on factors like Population, area, forest cover, etc. Moving towards formula based and away from discretion will allow greater flow of unconditional funds to the States in a non-partisan manner.
  • Guidelines on transparent provision of various funds for disaster management under the National Disaster Management Act.
  • Allowing the funds to flow through the States for Local Bodies and doing away with the mechanism of transfer of funds directly to the implementing institutions bypassing the State government.
  • Setting up of an Institutional Mechanism for the devolution of sector-specific grants based on a transparent formula, moving away from the use of discretion.

This will significantly improve the financial autonomy of the states.

Greater Financial Autonomy of the Local Bodies

Local Bodies, unfortunately, have very poor abilities to raise its own revenues through taxes and other forms. As a result they are largely dependent on the Union and the State governments for financial support.

Mechanisms of funding for local bodies:

  • Grants and funds from the Centre
  • Grants and loans from the State
  • Resource mobilisation by the local bodies

Some of the recommendations of the Fourteenth Finance Commission in strengthening the fiscal position of the local bodies are as below:

  • Improve the resource mobilisation capabilities of the local bodies.
    • Tax Revenues
      • Devolution of greater taxation powers by the State over various subjects like Entertainment tax, tax of fairs and weekly markets, tax on advertisements (like hoardings etc.), vacant land tax, property tax and increasing the annual limit of tax on professions from Rs. 2,500 to Rs. 12,000 by suitably amending the Constitution.
      • Reforms in State Finance Commission in making recommendations on improving tax base and tax collection capabilities of the local bodies, besides allocating greater resources from States to the local bodies.
    • Non-tax revenues
      • Revenues from management of community resources like lakes, ponds, irrigation canals etc.
      • Collection of charges for provision of basic services like drinking water, sanitation, roads etc.
      • Share in royalties of mining activities.
      • Muni Bonds (Municipal Bonds) must be promoted which can improve the capabilities of the Urban local bodies to raise public capital for urban infrastructure.
  • Union grants to the local bodies must go through the State government.
  • Improving the audit and performance estimation mechanisms of the local bodies so as to improve their efficiency. Comptroller and Auditory General (CAG) must continue to render advice in this regard.

Central Sponsored Schemes

Central Sponsored Schemes (CSS) is one of the most frictional points in Indian federalism. CSS have been launched in order to drive the nation as a whole towards desirable goals using the expertise of the Centre.

Problems with the Central Sponsored Schemes:

  • Union’s encroachment on the State subjects of Schedule VII of Indian Constitution, as the Union has launched several CSS on States’ subjects like education (Sarva Siksha Abhiyan), agriculture (Rashtriya Krishi Vikas Yojana) etc.
  • Undermining the role of the local bodies as often the CSS have been found to bypass them and setup their own implementing agencies. For example, National Rural Health Mission operates through District and Village Health Committees, Sarva Siksha Abhiyan through Community Based Organisations, and several other such schemes like mid day meal scheme where the local bodies are not involved.
  • Financial burden on the States’ resources as these Central Sponsored Schemes have financial components to be contributed by the States.
  • The local priorities are completely ignored. For example, the schemes like Sarva Siksha Abhiyan do not make any sense for an advanced state like Kerala as its literacy, enrollment and retention rates are much greater than the targets of the scheme.
  • Effectiveness and performance estimation of these schemes can not be easily done at the Centre level.
  • No convergence between the schemes launched by the States and the Local bodies.

In this regard, the NITI Aayog had constituted a sub-committee of Chief Ministers to look into the issue of what Central Sponsored Schemes can be withdrawn.

Also the Fourteenth Finance Commission had recommended that the number of Central Sponsored Schemes must be limited and be adequately flexible so as to meet the State specific needs. It also recommended that the funds for these schemes must only flow through the States and to the Local bodies avoiding direct devolution to the implementing agencies.

The Union budget for the year 2015-16 also witnessed de-linking of Central funding for 8 CSS like National Mission on Food Processing, Backward Regions Development Fund, National e-Governance Plan etc. On the other hand it had changed the Union-State contribution formula for 24 CSS like ICDS, National Health Mission etc., placing more onus on the States. This has been made due to the greater allocation of unconditional transfers to the States based on the recommendations of the Fourteenth Finance Commission.

Road ahead

There is little doubt about the desirability of Cooperative Federalism. But that alone doesn’t guarantee greater socio-economic development. It places greater onus on the States to deliver on it. For example, this year in the Union budget, the allocations in the Agriculture sector had gone down significantly because of greater devolution of unconditional funds to the States. The Centre has conceded the long standing demand of the States towards Cooperative Federalism and now it up to the States to walk the talk and turn this into tangible results.


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