June 28, 2015

The Growing Centralisation

Prabhat Patnaik

WHAT we are witnessing under the Modi regime is a significant reduction both in the relative amount of resources made available from the centre to the states, and also in the states’ ability to make their voices heard on matters of national economic policy. Such centralisation has been one of the chief hallmarks of the Modi administration.

This fact however gets camouflaged by the central government’s  acceptance of the recommendation of the Fourteenth Finance Commission to increase the share of the states from 32 to 42 percent in the divisible pool. This increase in the states’ share creates the impression that we are seeing an increased not a reduced accommodation for the states; and the NDA government, while accepting the Commission’s recommendations (which it is obliged to do under the Constitution), has made a virtue out of necessity and claimed that it is ushering in an era of “cooperative federalism”.




But this impression of increased resources for the states is completely misleading. Even though the states’ share has increased in the devolution of resources routed through the Finance Commission, not all devolution is routed through the Finance Commission. In fact there are three channels though which resources flow from the centre to the states. One is the award of the Finance Commission; the other is plan assistance from the centre to the states (which used to be routed earlier through the Planning Commission); and the third is discretionary transfers of various sorts which are departmentally- routed. Now, even though the Finance Commission has increased the share of the states in the pool of resources over which it presides, the central government has used this very increase as an excuse to make cuts in the amount of plan funds made available to the states, so that the overall amount of resources transferred to the states from the centre as a percentage of GDP has gone down despite the Commission’s award.

According to calculations made by Sona Mitra of the Centre for Budget and Governance Accountability (CBGA), the total resources transferred from the centre to the states as a percentage of GDP has been steadily declining for some time now, from 6.4 percent in 2010-11, to 6.1 percent, 5.8 percent and 5.6 percent respectively in the next three years; the revised estimate for 2014-15 is 5.4 percent. In 2014-15, however, the union budget had provided for an increase in this share to 6.1 percent; in the NDA’s budget for 2015-16, the budget estimate itself has been reduced to 5.8 percent. And one can safely predict that just as the budgetary provision of 6.1 percent last year got reduced to 5.4 percent in the revised estimates, likewise the lower provision of 5.8 percent in the current year’s budget will be further whittled down, especially because, as many observers have noted, the current year’s union budget greatly over-estimates the revenue inflows. The reduction in “plan assistance” from the centre to the states in other words will more than offset the increase in the Finance Commission-mandated transfers, so that the total resource position of the states is likely to be worse than before.

Added to this is the other phenomenon, namely the dismantling of the Planning Commission itself. The Niti Aayog which has replaced the Planning Commission does not transfer plan resources to the states any more, and indeed has no longer any access to resources. It was originally presented as a “think tank” for the government, but even that role has eluded it. The status of its deputy chairman and members has been so downgraded that the bureaucracy which is extremely sensitive to “status” has reportedly started giving it the cold shoulder. Secretaries of central ministries for instance do not bother even to attend meetings convened by the deputy chairman of the Planning Commission and send their junior underlings instead. The transfer of plan funds to the states is now done by the ministry of finance. And herein lies a tale.

Even though the Planning Commission was in one sense always a departmental body of the union government, it had nonetheless a certain independent standing that derived from its long history (going back to the pre-independence years when its predecessor The National Planning Committee had been set up), the vision that had underlain its formation, and the many distinguished persons who had served on it, starting from PC Mahalanobis to DR Gadgil and Sukhamoy Chakravarty. Despite being a departmental undertaking, it had nonetheless enjoyed a certain quasi-autonomous status.

This had two important implications. First, it had served as a counterpoint to the ministry of finance, even after the latter had been strongly infiltrated by Fund-Bank personnel. Not surprisingly, such a quasi-autonomous body, whose existence was linked to the anti-colonial struggle, was anathema for imperialism and the institutions of international finance capital, the World Bank and the IMF.

India was not the only country where such a body had been created; on the contrary, several newly-independent third world economies had embarked on “planning” of one kind or another, inspired by the example of the Soviet Union. And a condition for the imposition of neo-liberalism on all these economies was to uproot that inspiration, to dismantle such “planning” bodies, to shift the centre of decision-making from all such bodies to finance ministries (and Central Banks) where “experts” from the Fund and the Bank were being inducted into key decision-making positions, and to give the finance ministry within each country priority not only over the “planning” body, but over all other government ministries, making it into a super-ministry with Fund-Bank personnel at its helm.

Given the long history of the Planning Commission in India, such a transformation, which had been achieved in Africa and elsewhere with relative ease, was difficult to replicate here. Manmohan Singh had played a clever trick by actually appointing an ex-employee of the World Bank as the deputy chairman of the Planning Commission itself, thus putting an arch neo-liberal economist at the helm of planning! But even this was insufficient. So, Modi has gone the entire length, and eliminated the Planning Commission altogether, which had been the desideratum of international finance capital. The Niti Aayog, as is becoming increasingly evident, was just a fig-leaf. The real aim was to get rid of the Planning Commission at the behest of international finance capital, which has been achieved.

The second implication of the existence of such a body is that it played a sort of mediating role between the centre and the states. Not only did the state governments meet the Planning Commission once a year to finalise their annual plans, in the course of which they raised and discussed important policy issues, but the National Development Council, of which state chief ministers were members and to which the Planning Commission had to report, was the designated authority for finalising the Five-Year plans. The entire mechanism, of the Planning Commission and the NDC, thus provided scope for the state governments, singly and collectively, to make their voices heard on major economic policy issues. These voices might not have been heeded by the centre, but they had to be heard. The dismantling of this entire mechanism, and the handing over of the task of providing plan assistance to the states to the ministry of finance of the central government, has left the states with no institutional voice at all in the shaping of the country’s economic policy.

The state governments at present therefore not only have relatively smaller resources at their disposal, but are also left without any forum where they can express their views on matters relating to the economic policy of the country. Their only point of contact with the centre is the ministry of finance, whose army of ex-officials from the Fund and the Bank would hardly bother to take any note of their views.

It may be thought that since the state chief ministers are members of the governing council of the Niti Aayog, they may be able to make their views heard at the meetings of that council, which can in fact take the place of the NDC. But, as the Niti Aayog itself has become inconsequential, its governing council is hardly likely to carry much weight.




We are thus witnessing a process of growing centralisation. Such centralisation is always favoured by the Fund and the Bank, because  they can then control all major decision-making by having a few persons of their choice placed at key positions. The obverse of this is a reduction in the powers, the status and the resources of the states. And if the Goods and Services Tax (GST), which is to replace the major revenue yielding taxes of the state governments but whose precise shape is not yet clear, takes the form, not of fixing only the floor rates that the states should abide by, but of stipulating uniform rates (in fact two uniform rates, one levied by the centre and the other by the states) across the entire country, then individual state governments’ discretion in the matter of tax rates and hence capacity to raise additional tax revenue would be completely negated. They would then be simply bound by these uniform rates, and not be in a position to determine their own tax rates. The power of state governments would then be further attenuated in the name of having a unified “national market”, which is what the GST is supposed to achieve (as if such a market did not exist till now).

This centralisation has an implication that must not be lost sight of. Typically in India it is the state governments that have been entrusted with the responsibility of undertaking social expenditure and welfare expenditure. How successful they have been in discharging this task is a separate issue, but this has been their domain. Any erosion of the powers and resources of the state governments must necessarily therefore mean a curtailment of such expenditure.

Ironically, the central government, on the plea that the Fourteenth Finance Commission has transferred more funds to the states and that they should therefore be spending more under these heads, has already curtailed its own welfare spending. But if the state governments too are short of resources, which they are, and hence do not manage to make up for the curtailment in welfare spending by the centre, then there is an overall squeeze on the poor and the marginalised people. Greater centralisation thus has a clear class implication: it is an essential part of the re-shaping of the economy in a manner that suits international finance capital but squeezes the poor and the marginalised.