Centre’s onslaught on federalism- Time to come together and resist


Respected Chief Ministers


During the last few years, there has been a growing trend on the part of the Centre to diminish the role of the States under the Constitution in several ways, including by reducing the share of tax receipts to be devolved to the States on the basis of equitable allocations recommended by the Finance Commission and, instead, imposing Central schemes on the States by direct bank transfers to beneficiaries under different Central and Centrally Sponsored Schemes (CSs & CSSs) which erode the political leverage of the States.

In this connection, I refer to an earlier letter of mine addressed to you in September, 2022 (https://countercurrents.org/2022/10/centrally-sponsored-schemes-violate-the-spirit-of-federalism-also-wastes-public-resources/?swcfpc=1) in which I had raised the following concerns:

  1. The 15th Finance Commission referred to the resource-expenditure asymmetry between the Union and the States. While the shares of the Union and the States in resources are around 63% and 37% respectively, the corresponding shares in expenditure are around 38% and 62%. There is thus a need to correct this asymmetry by increasing the States’ share in resources, a concern that is addressed by the successive Finance Commissions (FCs). In fact, the 15th FC did recommend an increased share, though marginal, in tax receipts to be devolved to the States.
  2. However, by increasing levies such as cesses etc., which lie outside the divisible pool of resources under the Constitution and by steeply increasing the share of funds transferred under CSs & CSSs under Article 282 of the Constitution, which are outside the domain of the FC, the Centre has deftly diminished the role of the FC and, instead, brought within its own direct control an increasing share of tax receipts to be allocated among the States, mostly through direct bank transfers to beneficiaries, on the basis of norms unilaterally prescribed by the Centre, without consulting the States. In effect, this has considerably eroded the political presence of the States at the ground level, giving undue political advantage to the Central leadership.
  3. For example, in 2014-15, the share of FC-based fund transfers, in proportion to the total funds transferred to the States, was 49%. In contrast, the share of FC-based funds transferred to the States declined to 8.9% as per the 2023-24 Budget estimates. In other words, the Centre, by diverting an increasing portion of the national tax receipts from the FC-related divisible pool, is moving away from an equitable entitlement-based allocation of resources among the States towards a more subjective, unilateral way of allocating resources, which tends to increase the political clout of the Central leadership at the cost of the States.
  4. Since most CSs & CSSs are forumated with little consultation with the States, their relevance for different regions remains doubtful. Direct bank transfers (DBTs) which characterise most CSSs may not promote inter-State equity in the allocation of resources. If the information accessible at the official DBT portal (https://dbtbharat.gov.inis any indication, only six States cornered 36% of the total amount covered by DBTs this year, not necessarily in line with FC-recommended pattern.
  5. A more worrisome aspect of this is that the Central leadership is also using some of these Central schemes to impose its own ideology on the States. For example, the Ministry of Finance in 2022 set apart an amount of Rs 50,000 Crores to be given to those States that toe its line of selling their public sector undertakings to private companies and monetising public assets, an idea that some States may not support. Unfortunately, in terms of resource allocation, those States that fail to fall in line lose and those that accept the ideology gain.
  6. There has also been an underlying move on the part of the Centre, through some of these CSSs, to divert funds to enrich big businesses at the cost of the States and the public. For example, the Prime Minister’s Kisan Bima Yojana has become more beneficial to private insurers than to the farmers (https://countercurrents.org/2022/09/pmfby-does-it-provide-insurance-for-farmers-or-for-private-corporates-request-for-a-performance-audit/?swcfpc=1)The nation has witnessed how the Central leadership has tweaked the laws and the rules to benefit big businesses, how a few favoured big business houses have been enabled to secure monopoly over critical infrastructure projects and so on. One recently announced “production linked subsidy” (PLI) scheme has been tailor-made to grant a subsidy of over Rs 75,000 Crores to a private group to cover 50% cost of its project, especially at a time when the Central leadership has not hesitated to curtail MGNREGA and other social sector schemes which benefit the rural workforce.
  7. In addition to imposing such blatantly objectionable inequities on the States, the Central Ministries, instead of owning their failures, are passing on the consequent liabilities to the States, which cripple their economies. For example, there has been a continuing mismanagement of coal supplies, especially coal supplies from private coal miners and mismanagement of the railway logistics. Instead of owning its responsibility, the Centre is forcing the States to absorb highly expensive imported coal, which largely benefits a few domestic oligarchs owning overseas coal mines, thereby compounding the already serious financial health of the State power utilities and adversely affecting the interests of the electricity consumers.

These represent only a few among many similar concerns about a well orchestrated move on the part of the Centre to weaken the States.

In particular, I would invite your attention to a well analysed article authored by an eminent economist, Prof Prabhat Patnaik (https://www.newsclick.in/fm-nirmala-sitharamans-misleading-statement-increased-transfer-states) which, on the basis of facts, shows how there has been a decline in the share of resources transferred to the States in proportion to the GDP and how this trend also betrays the intentions of the Central leadership to centralise authority in itself to marginalise the States and the other political parties. This is truly worrisome.

Keeping in view the above disturbing trends, it is a matter of urgency that the States should come together to form a “federal front” to resist these moves on the part of the Central leadership and restore the much needed balance in the federal relationship between the Centre and the States.

I sincerely hope that some of you take the lead and create a common platform for discussing these concerns with the sense of urgency and seriousness they deserve.


Yours sincerely,

E A S Sarma
Former Secretary to Government of India

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