The Centre is notional, the States the real entities

Relevance: GS Paper II

Why in News?

Decisions regarding the utilization of the country's resources must be a collaborative effort between the Centre and the States, a necessity highlighted by the recent shifts in the political landscape following the 2024 general election.

More About the News: The 2024 general election results have ushered in a surprising shift, indicating greater democratization in India. Regional parties have performed well, securing representation on both the ruling and opposition benches in Parliament. This development is poised to strengthen federalism, essential for a diverse nation like India, which has seen its federal structure fraying in recent times.

Key Issues in Centre-State Relations:

Contentious Political Climate:

• Campaign Rhetoric: During the election campaign, Centre-State relations became increasingly contentious. The push for slogan like ‘400 paar’ (400 seats in Parliament), ‘one nation one election,’ and the Prime Minister’s threats towards corrupt leaders, perceived as targeting opposition states, exacerbated tensions.
• Complaints of Bias: Opposition-ruled states have long complained of biased treatment by the Centre, leading to protests in Delhi and state capitals. The Supreme Court of India noted a pattern of states being compelled to seek judicial intervention against the Centre.

Diverse Needs and Federalism:

• State Diversity: Where states like Assam differ greatly from Gujarat, and Himachal Pradesh from Tamil Nadu requires tailored approaches rather than a uniform policy. Greater autonomy for states to address their unique issues is crucial for maintaining democracy and federalism. 
• Federalism Fraying: Despite initial promises of cooperative federalism when the BJP came to power in 2014, and the cooperative rollout of the Goods and Services Tax (GST) in 2017, federalism has since weakened, increasing discord between the Centre and opposition-ruled states.

Financing and Conflict: Revenue Generation and Allocation:

• Centre’s Role:  The Centre holds a predominant role in raising resources due to its efficiency in tax collection. Major taxes such as personal income tax (PIT), corporation tax, customs duty, and excise duty are collected centrally. The Goods and Services Tax (GST) is collected and shared by both the Centre and the States, but the Centre controls the majority of resources. These resources must be devolved to the States to enable them to fulfill their responsibilities.
• Finance Commission: A Finance Commission is appointed to decide on the devolution of funds from the Centre to the States and to determine each state's share. The Centre sets up the Commission and often dictates its terms of reference, introducing a bias in favor of the Centre and creating conflicts between the Centre and the States. Additionally, there is an implicit bias within the Commissions, assuming that States are not fiscally responsible. This reflects a central perspective that States are not adequately managing their resources and are making undue demands.

Inter-State Tussles & State Demands:

• Resource Needs: The diverse developmental stages and resource availability across Indian states prevent a unified stance among them. Richer states possess more resources, while poorer states need more to accelerate their development and catch up. The Finance Commission aims to allocate proportionately more funds to the poorer states. However, the disparity remains significant despite the efforts of 15 Finance Commissions. Rich states, contributing more and receiving proportionately less, often express resentment. They overlook that poorer states provide a market for their goods, facilitating faster growth.
• Economic Realities: Additionally, savings from poorer states often flow to richer states, furthering their development. The argument that cities like Mumbai, which contribute substantially to corporate and income taxes, should receive more resources is flawed. This contribution is largely due to Mumbai being the financial capital where major corporations are headquartered and pay their taxes, rather than actual production occurring there.

Strengthening Federalism & Equitable Resource Distribution:

• Finance Commission’s Role: The Commission should advocate for equitable treatment of all states by the Centre and reduce friction between rich and poor states by ensuring proportionate resource transfer to mitigate rising inequality. Governance issues at both central and state levels must be highlighted, as they influence investment productivity and development pace. Corruption and cronyism waste resources and erode social welfare.
• Increased Devolution: To mitigate the Centre’s dominance, the proportion of resources devolved to states should be significantly increased from the current 41%. The Centre's role should be curtailed in joint schemes like the Public Distribution System and MGNREGS, where the Centre often seeks undue credit and penalizes non-compliant states. The Centre’s undue assertiveness undermines federalism.
• Balancing Autonomy and National Framework: State autonomy should not imply unrestricted freedom but rather the ability to function effectively within a national framework that serves the greater good. It necessitates a balance between common national interests and diverse local needs.

Conclusion:

It is time for the utilization of the country’s resources to be decided jointly by the Centre and the States, treating them as equal partners. This approach has become more feasible following the 2024 general election results, which promise a more balanced and cooperative political landscape. Addressing financing and conflicts through a more equitable and collaborative framework can strengthen federalism and promote better governance across India's diverse states.