India Federalism

To

Shri K Chandrasekhar Rao
Chief Minister
Telangana

Dear Shri Chandrasekhar Rao garu,

I had earlier written to you on 8-2-2022 welcoming your opposition to the Centre’s unilateral proposal to privatise the Singareni Collieries. Considering it from the point of view of federalism, in that letter I had suggested that the States should come together to counter the growing threat to federalism. For your ready reference, I have enclosed here a copy of that letter.

Of late, the manner in which the Central leadership has been trying to enlarge the Centre’s presence in several areas that legitimately belong to the States, has created serious apprehensions in the minds of the States, on the motives underlying the same. The Centre seems to be deliberately making efforts to disturb the existing Centre-States relations, which are primarily based on the division of responsibilities as laid down in the Constitution and, in addition, nurtured collectively by the Centre and the States through practices and conventions based on mutual respect.

The three-tier democratic structure provided in the Constitution recognises the principle that, closer the decision making authority is to the people, the greater would be its accountability. In a nation that has diverse cultures and regional identities like ours, participative decision making processes alone can deliver beneficial outcomes. The States have a preeminent role in this, especially that relate to the welfare of the people. This is the reason that the Constitution has empowered the States to legislate in all such areas that relate to the overall socio-economic development of the people. In the past, the Centre and the States used to function as equal partners in development and compliment each others’ efforts. Of late, the situation has altered as the Centre is now trying to centralise authority in several ways, to the detriment of federalism. The Central leadership should know that diminishing the strength of the States would automatically weaken the strength of the nation as a whole.

I have cited a few examples of the Centre’s attempts to encroach on the States’ domain.

Centre’s unilateral decision to privatise the CPSEs wholesale 

In my letter dated 8-2-2022, I had explained how the Centre is bent upon selling the assets of the Central Public Sector Enterprises (CPSEs) built assiduously over the last several decades, without consulting the States, ignoring the fact that the CPSEs would not have come up in the first instance without support from the States. It was the States that acquired lands for the CPSEs at less-than-market prices, assuring the land-owners that their lands were being acquired exclusively for a wholly owned government company. Today, without consulting the States, the Centre is moving fast to sell their assets, including the lands, in the name of raising additional fiscal resources for its own budget. What they are doing is prima facie violative of the welfare mandate of the state as spelt out in the Directive Principles and Article 16.

As undertakings in the public sector, the CPSEs have served as an instrument of the State for promoting the welfare of the people, whereas once their ownership gets transferred to private promoters, they will be driven largely by their profit motive.

I had brought to your notice how the Tamil Nadu Finance Minister had rightly demanded a share in the CPSE disinvestment proceeds that accrue to the Centre.

The case of disinvestment of the LIC illustrates the far reaching consequences of CPSE disinvestment.

The LIC is a household name in India. It is the largest provider of social security for the disadvantaged sections across the country. LIC’s resources have largely come from the small policyholders spread over the rural areas and the remotest parts of the country. It is the policy holders who have single-handedly, with minimal support from the government, who have contributed to LIC’s phenomenal growth. The Centre’s role has been that of a Trustee.

The Corporation has been funding infrastructure and social sector projects in the States..

All of a sudden, the Centre has chosen to relinquish its trust progressively in favour of a handful of speculative, affluent stock market investors, without consulting the policy holders, the States and the public at large. Soon, one should not be surprised if the LIC is forced to discard its role of providing social security altogether.

In all fairness, proposals for privatising the CPSEs ought to have been discussed in the State legislatures and in the Parliament but, for reasons best known to it, the Centre is rushing forward, ignoring every norm of democratic decision making.

Cesses and surcharges:

The States are entitled to a share in the Central tax revenues on the basis of the pattern approved by the successive Finance Commissions. In order to minimize the transfer of resources to the States, the Centre has resorted to additional levies such as cesses and surcharges, which do not form part of the pool of resources to be shared with the States. This has the indirect effect of weakening the States’ finances. This problem has been compounded by delays caused by the Centre in transferring resources to the States.

Levying such cesses/ surcharges is regressive from the point of respecting the fiscal needs of the States, who are closer to the people and are directly accountable.

Weakening the States’ finances would also weaken them politically.

Proliferation of Centrally Sponsored / Central Sector Schemes:

In the recent times, there has been an undue proliferation of Centrally Sponsored / Central Sector Schemes, which indirectly shrink the flow of resources to be allocated between the Centre and the States and among the States, which used to be in accordance with the adjusted Gadgil formula, that took into account the genuine needs of the States. Had the States been provided access to those resources instead of the Centre controlling them, the States would have put in place their own schemes to suit the local conditions, promoting greater relevance and public accountability.

Usually, most of these schemes are linked to matching subsidies from the States, unduly tying up their resources. If the States find it difficult to earmark their share of resources, the Centre has the tendency to pass on the blame to the States, without giving up the political advantage that it has gained from such schemes.

From the Union Budget for 2022-23, it is evident that the quantum of resources diverted to Centrally Sponsored and Central Sector schemes together constitute Rs 3,82,000 Crores, not an insignificant amount by any stretch of imagination. Its share in the total resource transfer to the States has increased in leaps and bounds over the last few years.

Legislative overreach:

There are many subjects that legitimately belong to the legislative domain of the States. Even in the case of those subjects that come under the Concurrent List, the earlier governments usually allowed the States to exercise their legislative authority, with minimal interference.

In recent years, the Centre has tilted the balance in its favour in a highly intrusive way. The recent examples of this are the three Farm Bills and the Electricity Bill, which have, as it is to be expected, met with stiff opposition and, therefore, had to be revoked for the time being. Soon after the elections in the five States are over, the Centre may once again revive them unilaterally.

In the specific case of electricity, unmindful of the fact that it is the State power utilities that have contributed to the phenomenal spread of electrification in the country, the Centre of late has been making all round efforts to weaken them in many ways.

For example, the Centre has forced the States to absorb expensive solar electricity generated by centralised solar plants promoted by the corporate businesses, come in the way of the States renegotiating the skewed Power Purchase Agreements (PPAs) executed in the past with the private businesses to safeguard the consumers’ interests and painting the State DISCOMs as villains by asking the PSU banks not to provide credit to them, conveniently ignoring the fact that 80% of the delivered cost of electricity at the consumer’s end is contributed by the Central utilities, private thermal power plants, nuclear power plants etc. On the other hand, it is the State utilities that have provided a social security cover for the disadvantaged sections, facilitated a breakthrough in the country achieving food security and promoted small enterprises, all through a system of cross-subsidisation across different consumer groups, ranging from highly remunerative ones to the most disadvantaged sections. By rushing through the electricity Bill, the Centre has proposed to eliminate cross-subsidisation, assign the remunerative load segments to private businesses, favour private solar plants and weaken the bargaining strength of the States to re-negotiate the Power Purchase Agreements with the private promoters for safeguarding the consumers’ interests.

This constitutes a deliberate attempt to weaken the States financially and politically.

Minerals:

In recent years, the Centre has tweaked the laws and regulations relating to extractive minerals including coal to diminish the authority of the States. This has allowed the Centre to auction coal and other mineral deposits unilaterally, without consulting the States. Even in the case of funds collected by the States from the mining companies for the benefit of the mining-affected communities, the Centre is trying to encroach on the States’ authority to utilise those resources.

Considering that India has limited deposits of minerals like Iron Ore, Coal, Bauxite, Zinc, Copper etc. which, at the present rate of depletion may not last long, the Centre should take the States into confidence in evolving an optimum policy of using them for domestic purposes. It is widely known how iron ore of good quality is being exported by the Centre at the cost of some domestic steel plants.

States’ Borrowings :

The Centre has been selectively invoking its authority under Article 293 to exercise control over the States’ power to borrow for meeting their respective fiscal requirements. While fiscal prudence is a necessary ingredient of good governance, the responsibility for it should be left to the State legislatures and the public at large. To use it for the narrow purpose of gaining political leverage is unacceptable. It is not as though the Centre has been a paragon of fiscal prudence, considering the profligacy of public expenditure at the Centre.

Covid mismanagement:

There are several other areas in which, during the recent years, the Centre has placed the States at an unfair disadvantage.

For example, it was the Centre which mismanaged Covid vaccine procurement initially, attracting considerable public criticism, but later, in some States where there was not enough vaccine stock available, it tried to wash its hands off the responsibility, placing the blame squarely on the States. It is a clear case of the Centre claiming undue credit and placing undue blame on the States.

In contrast, during the campaigns for eradicating equally virulent diseases like small-pox, polio etc. in the past, the progressive leadership at the Centre at that time worked in total harmony with the States, provided them the necessary technical support and partnered with them equally to achieve outstanding results. To say that India has for the first time vaccinated such a large section of the population for prevention of Covid is to give the false impression that the present leadership at the Centre alone achieved it for the first time. Both the Centre and the States had always risen to the occasion in the past and earned global recognition for their collective effort to eradicate small-pox etc.

Even today, there are millions who remain unvaccinated against Covid, vulnerable to the virus, in case another virulent mutant emerges. This fact is conveniently glossed over.

Weakening institutions:

We have seen how the Central leadership has systematically weakened the institutions that exist as independent entities meant for safeguarding the interests of the States and the people at large. This cuts at the roots of a democracy, a prospect that should make all those interested in the well-being of the nation to sit up and take urgent notice.

These are all important issues on which the States, especially those like-minded, should come together, put up a collective front against any attempt on the part of the Centre to diminish their authority and prevent what appears to be an onslaught on federalism.

Regards,

Yours sincerely,

E A S Sarma
Former Secretary to Government of India
Visakhapatnam


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