The next prime minister of India will wield even less authority over his Cabinet colleagues than Dr Manmohan Singh. The next government in Delhi will be pushed around by powerful state chief ministers even more than the United Progressive Alliance in its second term (UPA-II) has been. This is the new normal that the recent state elections signal — a weak Centre and strong states. Over the next two years, the real challenge as regards reforms will be to create or strengthen the institutions that allow the economy to prosper and unity to be maintained despite the weakening of the Centre.
However, a small caveat is in order. A weak prime minister may actually help matters by allowing a clever and enterprising minister to push through some major reform. This happened in H D Deve Gowda’s United Front government: P Chidambaram, the then finance minister, instituted a seminal change in tax rates with a three-slab structure of 10-20-30 per cent, which has survived till today. But the caveat is small because most major reforms require action by several ministries, and that becomes quite impossible in a coalition where each partner is warily waiting to stab the other in the back and the prime minister lacks the authority to get the coalition members to sheathe their knives.
There is a plus side of the strengthening of the states vis-à-vis the Centre. The responsibility and the capacity to deliver public support for development rest largely with the state governments. They build the dams, the roads, the schools and the hospitals. They hire the teachers, doctors, engineers and others who run public services. The pace of industrial and infrastructure growth depends on the probity, transparency and speed of the clearances they have to give. Their action or neglect is the main determinant of environmental quality. Thus, stronger and more independent state governments, accountable to an electorate that votes for performance, may help rather than hinder development. We already see signs of such a shift in the replacement of identity-based electoral loyalties with a tougher perform-or-perish attitude even in caste-ridden states like Uttar Pradesh and Bihar.
The biggest danger lies in the politics of Centre-state financial relations. The Finance Commission mechanism has retained its credibility because its leadership has been entrusted to apolitical experts. If the recommendation of the recent committee on public expenditure to get rid of the distinction between Plan and non-Plan grants is accepted, then the next Finance Commission will have a remit that will allow it to depoliticise the bulk of Centre-state financial transfers. The one danger is a weak Centre accommodating the demands of coalition partners for yet another big-ticket centrally sponsored scheme, or for special treatment to rescue the states they govern from financial mismanagement. The terms of reference of the next Finance Commission must ask the body to make some recommendations to constrain the central government’s discretionary powers as regards Centre-state financial transfers. The other institution that matters and whose independence has to be protected is the Reserve Bank of India (RBI). The apex bank plays a key role in the management of the borrowing programme of the Centre and the states.
An expanded role for the Finance Commission and the RBI will help reduce the leverage of the Planning Commission over state spending. That, in fact, is necessary if one wants to depoliticise Centre-state financial relations. The Planning Commission would then have to find its role as the manager of a policy dialogue between the Centre and the states and civil society, and as an independent evaluator of performance.
Another challenge is to ensure that competition among the states does not lead to fragmentation of the market. That is why the Centre must bend over backwards to ensure that the goods and services tax is agreed on and implemented before political confusion hits India in 2014. Reducing market fragmentation also requires reforms in the laws on agricultural marketing as well as the removal of local entry taxes or discriminatory taxes on interstate transport. In the longer term, investments to improve the logistics of interstate trade will help in the emergence of a national market that is the best guarantor of national unity.
We must also ensure that policy confusion and dithering by a weak Centre do not hold back what the states can do for themselves. Tolerance of diversity in policies and delivery systems will allow innovation at state level. Allowing many flowers to bloom may be a better way to ensure performance than some one-size-fits-all reform.
There are certain areas of development policy in which strong states cannot substitute for a weak Centre. Macroeconomic management, foreign trade and foreign investment policy, and regulation of infrastructure like power lines, telecom, national highways that traverse state boundaries are some examples. Effective federalism requires that the impending weakness in higher direction is compensated by vigorous implementation of fiscal responsibility norms, reduced discretionary powers and more regulatory independence at the Centre.
The new normal can perhaps be accommodated in the functioning of the economy, since the interstate networks of corporate investment, trade and labour migration are now strong enough to create dependencies that any performance-oriented state government will respect. But a weak Centre may pose bigger problems for internal security, external defence and foreign policy. We have already seen signs of this in the case of the Teesta accord with Bangladesh and the United Nations vote on Sri Lanka — in both cases the national interest was compromised to accommodate provincial concerns. Pending proposals such as the establishment of the National Counter-Terrorism Centre and a Chief of Defence Staff will help. But much more needs to be done if democracy, human rights, national security and an independent foreign policy are to be preserved.
The grim political prospect that confronts us is not a product of personality deficiencies; it is a necessary consequence of the failure of the two national parties, the Congress and the Bharatiya Janata Party, to forge a vision of social democracy or nationalism that is compelling enough to persuade India’s young voters to move beyond their inherited regional, religious and caste identities. In 2014 many in these two parties will walk into the sunset. Can one hope that, as penance for their failure, over the next two years India’s policy makers will focus exclusively on massive governance reforms to protect the republic in the turbulent politics of identity that lie ahead?