Why Modi will be last PM of a powerful Centre
Last week, while industry and politics were biting their nails in anxious wait for Narendra Modi government's first full Budget, the country witnessed the presentation of several other budgets as well. The Indian economy doesn't run with just one Budget but is also driven by a congregation of 29 Budgets. As Victor Hugo had famously remarked, "All the forces in the world are not so powerful as an idea whose time has come''. The time has come to recognise the collective power of the country's 29 state Budgets. Within the next one year India's states will be equipped with financial powers that will change not only the economic policies of the country, but transform the face of its politics as well.
Dilution of the central government's financial powers in favour of states has quietly tip-toed into the country's political arena. The 14th Finance Commission had already embarked on a mission to expand the state's financial powers well before Modi came to power. With the abolition of the Planning Commission, the Modi government played its part in realising this mission - the Budget 2015 is the next step in outlining the changing contours of federalism. Under the new dispensation, the impulse for development will manifest itself not just from Delhi, but also - and perhaps more so - from Jaipur, Bhopal, Lucknow, Chennai, Bangalore and Kolkata. However, states will have to develop the capability and competence to handle the financial authority they have been accorded.
Modi might not have articulated details of the new decentralised economic planning when he did away with the Planning Commission but he decisively put an end to the Centre's dominant role in the allocation of economic resources to states. And what was left was well taken care of by 14th Finance Commission which recommended a new road map for Centre-state relations. Now the states will get 42 per cent share in revenue from central taxes, a full ten per cent increase from the last formula. The Centre will provide funds without too many strings attached. Furthermore, the division of funds among the Centre and states will be done on the basis of a new formula which encompasses contemporary needs of states. After 2016, states' revenue share in central taxes will ramp up by Rs 1.76 trillion. They will also be getting Rs 100,000 crore from allocation of coal mines. Grants and funds which fell under the Planning Commission's ambit will also boost the states' earnings.
Interestingly, there are changes not just in what states earn. States can also now spend their resources with practically no intervention from the Centre. But this constitutes a challenge as well. Finance management of most states is inept and in a shambles. Budgetary procedures are tentative and of a make-do nature. States do not have the contemporary capabilities of debt and cash flow management. The tax machinery is rusting as well. The administrative structure of states has also been deficient chronically. Construction activities are mortgaged to contractor raj. If chief ministers fail to formulate a transparent financial structure of planning and monitoring of the utilisation of fresh fund flows, they will soon have their own grand narratives of corruption and loot of public resources.
Despite political squabbles, a new governance structure has begun to emerge in India. There will be state governments on one side, which will limit the Centre's role in the politics of welfare while on the other side, independent regulators will be replacing the policy-making functions of the federal government. Regulators have already diluted the powers of central ministries is sectors such as telecommunications, electricity, insurance, petroleum, ports, airports, commodities, pharmaceuticals and environment while the Railways and road regulators are next in line. After including SEBI, Competition Commission and State Electricity Regulatory Commission in this domain, the new ruling class of regulators looks more powerful than the political overlords. If the finance panel's recommendations to appoint regulators for water and road transport in the states are accepted, in the next few years the economic destiny of the country will not be decided by politicians, but by professional regulators.
It is too early to presume how history will embrace Narendra Modi. However, knowingly or unknowingly, he has managed to appropriate a substantive historical text to himself. Under his stewardship, the structure of the federal economy is beginning to change radically. Modi will possibly be the last prime minister to represent a powerful Centre. Within his tenure, administrative powers will shift to the new Sultans, the independent regulators and the power of development expenditure will be confined to the states. This transformation is no less significant than the economic reforms of '91.