Federalism Under Siege: States United Against Centre's Sweeping Resource Framework

New Delhi, November 28, 2023 – India's delicate federal structure is facing its most significant test in decades as the Union Government's proposed 'National Resource Allocation Framework' (NRAF) draws sharp criticism and unprecedented pushback from state governments, opposition parties, and civil society groups, igniting a fervent debate over fiscal autonomy and the delicate balance of power.

The sweeping proposal, unveiled last week, is being decried by numerous states, cutting across political affiliations, as a direct assault on their financial independence and constitutional rights.

Key points

* Union Government's proposed 'National Resource Allocation Framework' (NRAF) sparks nationwide uproar, facing accusations of undermining states' fiscal autonomy.

* States, regardless of political affiliation, express strong reservations, fearing reduced control over development funds and a fundamental shift in centre-state financial dynamics.

* Opposition parties unite in condemning the move, terming it an assault on federalism and demanding its immediate withdrawal or significant modifications.

* Economic experts and former bureaucrats warn of potential regional disparities, implementation challenges, and a dangerous erosion of the fiscal space essential for tailored state development.

* Civil society groups highlight concerns about centralisation's detrimental impact on local self-governance, grassroots initiatives, and India's inherent diversity.

The contentious National Resource Allocation Framework (NRAF) is ostensibly designed to 'optimise national resource deployment' and 'ensure equitable growth across all regions of the country.' However, the provisions embedded within the framework have sent ripples of alarm through state capitals.

At its core, the NRAF proposes to mandate that 40% of state-own source revenue (SOSR) derived from centrally collected taxes – such as corporate tax and customs duty – be pooled into a 'National Development Corpus.' This Corpus would then be administered directly by the Union Government for projects deemed of 'national priority,' distinct from the existing vertical and horizontal devolution of central taxes recommended by the Finance Commission.

Adding to the consternation, the NRAF also seeks to make a significant portion of Centrally Sponsored Schemes (CSS) conditional on states adopting specific 'national priority' frameworks, further reducing state discretion over how these funds are utilised.

States argue that this effectively bypasses the constitutional mandate of the Finance Commission, which is tasked with recommending the distribution of tax revenues between the Union and the states, and fundamentally undermines their financial independence guaranteed under Articles 268-281 of the Constitution.

“This NRAF is a direct assault on the economic sovereignty of states.

It's an attempt to turn our federal system into a unitary one, where states are mere implementation agencies for Delhi’s diktats,” stated Kerala Chief Minister Pinarayi Vijayan during a press conference in Thiruvananthapuram. “Our unique socio-economic landscape and development priorities cannot be dictated by a one-size-fits-all approach from New Delhi.”

Echoing this sentiment, Telangana Finance Minister T.

Harish Rao commented, “We contribute significantly to the national exchequer through our economic activities.

To then have a substantial portion of our own source revenue dictated by the Centre, outside the constitutional framework of the Finance Commission, is simply unacceptable.

This will cripple our ability to fund essential welfare schemes and infrastructure projects tailored to our populace.”

Economic policy analysts have also raised serious concerns.

Dr.

R.

K.

Pachauri, a former Union Finance Secretary and a respected voice on fiscal policy, observed, “While the intent to streamline resource allocation for national priorities might be noble, such a fundamental shift needs careful constitutional scrutiny and extensive consultation with all stakeholders.

The current NRAF proposal risks creating a top-heavy system that may not adequately address diverse regional needs and could exacerbate existing inequalities rather than resolve them.”

Defending the framework, Dr.

Anant Hegde, Union Minister of State for Finance, asserted, “The NRAF is designed for collective prosperity and national cohesion.

It ensures that development reaches every corner of India, especially those regions historically underserved due to fragmented resource allocation.

This is about fostering a truly integrated national vision, not political opportunism or centralisation.” He emphasised that the framework would bring greater transparency and accountability to public spending.

However, civil society organisations disagree vehemently.

Ms.

Meena Devi, Director of Jan Jagran Manch, a Delhi-based civil society group working on grassroots governance, stated, “Empowering local bodies and fostering true democratic decentralisation means empowering them financially.

By centralising more funds and decision-making, the NRAF could cripple grassroots initiatives, making local governance subservient to central mandates and ultimately undermining the spirit of the 73rd and 74th Constitutional Amendments.”

Official data reveals the gravity of the potential impact.

As per the 15th Finance Commission’s recommendations, states are currently entitled to 41% of the divisible pool of central taxes.

The NRAF proposal, if implemented in its current form, could potentially reduce states' untied funds – money they can spend at their own discretion – by an average of 15-20% of their annual budgets.

For high-revenue generating states like Maharashtra, Tamil Nadu, or Karnataka, this could translate to an annual reduction of Rs 25,000-40,000 crore in discretionary spending, significantly impacting their ability to fund critical welfare schemes, infrastructure projects, and state-specific subsidies.

Data from the Reserve Bank of India’s ‘State Finances: A Study of Budgets’ consistently highlights states' increasing reliance on central transfers; critics argue NRAF would redefine, not resolve, this dependency, potentially exacerbating fiscal stress.

Background

India's fiscal federalism has a rich and complex history, evolving significantly since independence.

The Constitution delineates clear responsibilities and taxing powers between the Union and state governments, with the Finance Commission playing a critical role in mediating resource distribution every five years.

While the Planning Commission (now NITI Aayog) historically allocated significant grants for state plans, its successor has a more advisory role, pushing the Finance Commission’s recommendations to the forefront of fiscal transfers.

Past reforms, such as the introduction of Goods and Services Tax (GST), also involved intense negotiations between the Centre and states over revenue sharing and autonomy.

The current NRAF proposal comes amidst a political climate where the Union Government, with a strong mandate, has often been perceived as seeking greater centralisation of power, leading to recurrent centre-state tussles on various policy fronts, including agriculture, education, and law and order.

What it means

The NRAF signifies a critical juncture for Indian federalism, potentially redefining the constitutional compact between the Centre and states.

Its implementation could lead to a significant shift of power and financial control from state capitals to New Delhi, eroding the fiscal space states require to address their unique development challenges and priorities.

While proponents argue for greater efficiency and national cohesion, critics warn of an increased risk of regional disparities, reduced local responsiveness, and a fundamental alteration of the country's federal character.

This move could also set a precedent for future central interventions in areas traditionally falling within state purview, leading to a more unitary rather than cooperative federal model.

Reactions

Reactions have been swift and decisive.

Opposition parties across the political spectrum, including the Indian National Congress, Trinamool Congress, Aam Aadmi Party, DMK, and various Left parties, have formed a united front, issuing a joint statement condemning the NRAF and demanding its immediate withdrawal.

Several Chief Ministers have announced plans for an all-party meeting to strategise further action, including the possibility of non-cooperation.

In contrast, leaders from the ruling party and its allies have staunchly defended the framework, accusing the opposition of 'politicising' a vital national reform.

Economic think tanks remain divided, with some supporting the potential for streamlined resource allocation and others cautioning against the dangers of an over-centralised system.

Legal scholars are actively debating the constitutional validity of the NRAF, particularly concerning its potential infringement on state list subjects and the enshrined role of the Finance Commission.

What happens next

Expect an exceptionally heated winter session of Parliament, with the NRAF becoming a central point of contention.

State governments are likely to continue their political mobilisation, with the possibility of forming an inter-state committee to present a united front to the Union.

Legal challenges in the Supreme Court from states, invoking Article 131 concerning disputes between the Union and states, are also a strong possibility.

The Union Government might engage in direct negotiations with dissenting states, potentially offering some concessions or modifications to the NRAF to mollify strong opposition.

Regardless of immediate outcomes, the NRAF is poised to become a significant electoral issue in upcoming state assembly elections and the crucial 2024 general elections, with its implications reverberating across India’s political landscape for years to come.