• Before the annual budget it might be worthwhile for all Indians to know how the Federal structure works and which level of government is responsible for what. Perhaps, Modi3 can release a simple white paper on the subject including in Indian languages.

A well meaning and old friend sent me a video of a person asking Prime Minister Modi to clean up the rivers of garbage read plastic. Mind you he did not ask fellow Indians to stop using plastic but instead, perhaps to attract attention, wanted PM Modi to clean the rivers.

The first question I asked is - under the Constitution which government is responsible because India has three levels of government.

From sources I got to know that it is the responsibility of the local government to clean up rivers. If cost of such cleaning is beyond their own resources, they can seek funds from both the Central and State governments. More on this later. 

Let us start with a brief introduction on how India’s fiscal federal structure works. 

Noted economist and respected Vijay Kelkar ji said, “The fiscal federalism mainly comprises allocation of rights and duties related to taxation and expenditure responsibilities and system of transfers between the different jurisdictions/levels of government such as Centre, State and local governments.”1

How does the Federal structure work in Bharat?

According to budgetbasics.org “Article 246 of the Indian Constitution deals with the Seventh Schedule, which divides the responsibilities of the Union and State Governments into three lists: the Union, State, and Concurrent lists. The first two lists, as their names suggest, are about the responsibilities of the Union and States, respectively. The concurrent list (Justice, Forests, Trade Unions, Education) mentions areas where both Union and State Governments can make laws; in case of a conflict, the law made by the Union Government prevails over the one made by the State Government.” Figure 1 lists the main areas under the three lists

The local government type depends on whether area is urban or rural. For urban there are municipal corporation, municipal councils and Nagar Panchayats. The last is a suburban Government body for areas in transition from a rural to an urban area. “The Rural Local Government / Panchayati raj system is a three-tier system with elected bodies at the village, taluka and district levels. These bodies are also known as Panchayati Raj Institutions (PRIs).” Source Power and functions vary across states. See figure 2/3 for responsibilities of local bodies

Snapshot of Key Responsibilities of Centre and state governments

Government expenditure is under schemes which are divided into Central schemes, Centrally Sponsored schemes (Centre and states share funding) and State schemes. Read about them here  

Centre revenue comes from direct taxes (personal and corporate income-tax), GST, Surcharge, Dividend etc. To know how Centre’s Tax Revenue is distributed see figure 4. Besides GST, states earn revenue from stamp duty, motor vehicles tax and state excise duty (tax on liquor and petroleum products). Local bodies levy property and entertainment tax. To know how revenues are shared between governments in India see figure 5 on link

In addition, “Grants-in-Aid are provided from a higher tier of Government to a lower tier.” Grants are statutory and discretionary. Article 275 provides for statutory grants to States, as decided by the Finance Commission, which are in need of financial assistance. Discretionary Grants can be made the Central and state governments. 

So, cash inflows of the state government come from devolution of Central government tax collections, GST, Own Tax and non-tax revenues and grants-in-aid.

To know about Non-tax sources of revenue of each tier of the government

Every five years, the Central Finance Commission decides how revenue is to be shared between Centre and States. To know Weightage Factors see figure 6

Ideally, states should have their own Finance Commissions for distribution of revenue with local governments but states want decentralization only till their level, and not further down.

Back to cleaning of rivers referred to above. Post introduction of the Goods and Services Tax (GST) taxes levied by the local government were subsumed within GST such that it receives fund transfers from the state government.

A problem with the current system is the public holding the Centre accountable for delivering in areas that are in the State List for e.g. Public Health, Agriculture and Labour. Read on.

1. Public health and allied subjects, such as sanitation, hospitals and dispensaries, are the exclusive responsibilities of state governments under the Seventh Schedule of the Indian Constitution whereas the prevention of the extension of infectious or contagious diseases from one state to another (covid19) falls under the Concurrent List of the Constitution, making it the shared responsibility of the Centre and states.

States responsibilities are also shared with Municipal bodies and Panchayats to a certain extent. But, health infrastructure is the primary responsibility of the state governments.

State government spends its budget through Public health and medical education departments. They also give funds to rural local bodies and municipal bodies for certain type of infrastructure. Big corporations like Mumbai have their own resources to spend on health infrastructure and hence do not get money from the state government. But smaller and not so rich corporations may need some support from state government even though they have their own budget for health infrastructure.

Yet well meaning intellectuals and business associations urge the Centre to improve health infrastructure. The Centre supplements effort through opening of AIMS type hospitals and Ayushan Bharat scheme.

How health facilities can be improved through collective funding and action needs debate.    Parties need to rise beyond politics. Read What is Indian Medical Association

Read  We blame the Centre for low GDP, but India is run by the States

2. Agriculture - Under The Seventh Schedule - State List (Article 246) state governments are responsible for ‘Agriculture, including agricultural education & research, protection against pests and prevention of plant diseases’ (no 14), ‘Water, that is to say, water supplies, irrigation and canals, drainage and embankments, water storage and water power to subject to the provision of entry 56 in List I’, (no 17), ‘Land, that is to say, right in or over land, land tenures including the relation of landlord and tenant, and the collection of rents, transfer and alienation of agricultural land; land improvement and agricultural loans; colonization’ (no 18), ‘Money-lending and money-lenders; relief of agricultural indebtedness’ (no 30), ‘Land revenue, including the assessment & collection of revenue, the maintenance of land records, survey for revenue purposes and records of rights, and alienation of revenues’ (no 45), Taxes on agricultural income’ (no 46), ‘Duties in respect of agricultural land’ (no 47).”

Thus, education, land, labour, industry and power come under the Concurrent List. (education moved from the state to Concurrent List in 1976.)

Arising from the above, state responsibility includes building irrigation canals, water conservation, promoting drip irrigation, providing & pricing of electricity, maintenance of land title records, land leasing rules for contract farming, markets in which farmer can sell, levy of mandi taxes, monitoring use of pesticides and management of Agricultural Produce Market Committees (APMCs). Read  Solution to Farm Distress lies with the state government

This matter of Centre State interphase in agriculture has many facets that are beyond the scope of this article. 

Conversely, the Central government decides minimum support price for wheat and rice, declares MSP for others, pricing of fertilisers and subsidy, international trade policy, maintenance of buffer food stocks, quantum and pricing of farm credit though many of these responsibilities did not exist when the Constitution was adopted in 1950.

The point being made is that farmer welfare is largely dependent on the actions of the state government. The Centre has stepped in because states have not delivered and or perhaps, to expand its sphere of influence. For example, the Centre intervened with the Atal Bhujal Yojana as states are not competent for water management, according to Prof Adarsh Vig of Guru Nanak Dev University. Source

In the recently concluded Lok Sabha, both parties spoke about farmer welfare when in reality the Centre has a limited role to play. In states like Punjab where freebies, like free power, have reduced state’s resources the buck for farmer distress is transferred to the Centre. 

Is it time to move Agriculture to the Concurrent List and have the equivalent of a GST Council for Agriculture?

3. Labour Codes were recently introduced by the Centre. But, maximum compliances are governed by state governments. In October 2020, Gautam C and Rishi A wrote in ORF, “India’s businesses function in a regulatory universe of 1,536 Acts that demand 69,233 compliances and 6,618 filings across the Union and state governments. Statistically, almost all the compliances (97.1%) are governed by state governments and 937 by the Union government.”

The Centre has done its bit by assimilating 44 Union labour laws into four Codes.

Unless states frame enabling rules and regulations, it will adversely affect employment, investment, growth and foreign direct investment.

Also, school and college education (not IITs/IIMs) is essentially handled by the states. Further, any medical qualification granted to a student has to be from a college approved by the Central government for the degree to be recognized under the Indian Medical Council Act, 1956. Thus, ground level budgetary allocation for women and child safety ultimately rests with state governments and their police.

The above are a few examples. What was relevant about 1935 to 1949 needs a review in the 21^st century!

Dr Arghya Sengupta wrote in his book The Colonial Constitution (Author is Research Director, Vidhi Centre for Legal Policy), “A significant portion of the Government of Act 1935 made it, unchanged, to the final version of the Constitution adopted by the Assembly in November 1948.” Pg 27  

Is it time to revise the Constitutional listing of functions and responsibilities of the Centre and states—in the spirit of cooperative federalism?  

Through a process of give and take states need to find a middle path. Note that the Constitution does not give any state the right to secede.

Columnist Narayan Ramchandran quoted Ambedkar in the MINT, “The Drafting Committee wanted to make it clear that though India was to be a federation, the federation was not the result of an agreement by the states to join a federation and that the federation not being the result of an agreement, no state has the right to secede from it.”  Read  India is a Union of States not a federation like USA

Read  Who amended the Constitution 106 times

References

1. Towards India’s New Fiscal Federalism by Vijay Kelkar 2019 – Prof. Sukhamoy Chakravarty Memorial Lecture at Indian Econometric Society

2. Federal Structure of India

Also read

1. Why government borrowing must be within limits

2. Freebies could damage hard won fiscal success

3. Freebies are paid for by the common man

4. India is a Union of States not a federation like USA

5. Finance Commission of India