Business Standard Manthan: Centre-state relations emerge as talking point

Ahluwalia suggested that a portion of central taxes be set aside for this transfer and the remaining be shared between the Centre and the states

Montek Singh Ahluwalia, the erstwhile Planning Commission deputy chairman, on Thursday batted for a transfer of a portion of central taxes to the third tier of the government -- panchayats and other local bodies -- to enable them to deliver key services such as education and health care to the people.

At a panel discussion with former chief economic advisor Arvind Subramanian, Ahluwalia said various arrangements of the Finance Commission had ignored this aspect.

He said many would say the Finance Commission could not transfer central taxes to this level but some innovative way could be thought of.

He suggested a portion of central taxes be set aside for this transfer and the remaining be shared between the Centre and the states.

While health and education are state subjects, the delivery of these services is done by the sub-state authorities such as panchayats, Ahluwalia pointed out.

The 16th Finance Commission is interacting with stakeholders to work out its recommendations for transferring resources from the Centre to the states for 2026-27 to 2030-31.

Subramanian said accelerating economic growth and hence tax receipts since 2000 had triggered the tussle between the Centre and the states over tax devolution.

“Growth makes states aware of their contribution to generating resources,” he pointed out.

Calling those states that get less fiscal transfer from the Finance Commission than their tax base “donor states” and the remaining “recipient states”, he said despite a higher transfer of funds to the latter, convergence in expenditure had not happened between these two categories of states.

Subramanian attributed this to economic underperformance of the recipient states.  

This is resulting in a perception in some donor states that they are financing the underperformance of those states, Subramanian said.

So high economic growth as well as uneven economic growth among states has resulted in tensions between the Centre and some states over sharing central taxes, he said.

Subramanian said the fundamental problem that could not be addressed was that unless there was some convergence of performance across the states, this feeling would not go.

Without naming Congress MP from Karnataka D K Suresh, he referred to his demand that south India might have to demand a separate country if it didn’t get a rightful share of taxes.

To this, Ahluwalia said those in industrialised states demanding a separate country should not forget that they got a highly protected Indian market. This aspect is never reckoned on, he pointed out.

As southern states worry about delimitation exercises because of population control by them, Ahluwalia said while this could be true of the Lok Sabha, innovative ways could be thought about giving more representation to them in the Rajya Sabha.

He also suggested carving out more states out of big ones.

“It is very sensible to split UP (Uttar Pradesh) into three states. It is equally sensible for Maharashtra to be split into two states. You could say the same about Gujarat,” Ahluwalia said.

“I think the sense of being dominated by a region would go down if we had more states. I think it would provide greater diversity,” he said.

Subramanian said friction in fiscal arrangements and in agriculture would require renegotiating the existing social contracts.

Referring to the rising share of centrally sponsored schemes in gross domestic product, Subramanian said this was de facto centralisation of the growth process.

To this, Ahluwalia said the country should review the Concurrent List of the Constitution to say what should be on the Central List and what should be the State List.

Both the Centre and the states can frame laws on items on the Concurrent List but if there is a clash between the two laws it is the central law that will prevail.  

He said resolving this friction required trust.

“None of this can work if trust is absent. So the biggest social capital that the leadership can invest in is building trust. If they fail to build trust or fail to invest enough in building trust, whatever you do is not going to work,” he said.