THE authors have produced a valuable contribution to the literature on federalism in India. As the title indicates, their focus is on fiscal federalism, the institutions and behaviour that determines how governments at different levels raise, spend and transfer funds. This is narrower than federalism more generally, since that would include political and judicial institutions, which determine divisions of powers more broadly, including spheres of legislative and legal authority and action. At the same time, the book’s introduction begins, ‘Fiscal federalism in India can be viewed, in practice, as a game in politics, economics and public finance played between the Union and States.’ As the introduction elucidates, fiscal federalism has to be considered in a broader context, and its rules only specify part of the larger political economy game that takes place in any country, but particularly in one with India’s scale and diversity.
The book has many strengths. It is clear and concise, while covering the full range of India’s fiscal federal institutions, their historical origins and evolution, and how they have impacted public finances at different levels of government. Each chapter has well defined and clearly titled sections, and almost all include an end-of-chapter summary that reviews the preceding content. A few specific references are provided at the end of each chapter, rather than being gathered at the end of the book. Because the book comes after a period of significant changes in India’s fiscal federal institutions, its timing is particularly valuable. The chapters on the NITI Aayog, successor to the defunct Planning Commission, and the Goods and Services Tax Council, governing implementation of a major recent reform in indirect taxes, represent the first treatment of these developments that is integrated with consideration of the other features of Indian fiscal federalism.
The structure of the book is straightforward and sensible. It begins with the origins of Indian fiscal federalism in the colonial period, then provides an overview of its evolution. This is followed by an excellent summary of the Finance Commission, a core institution of Indian fiscal federalism, including its structure and its performance over the decades. These four chapters are a wonderful introduction to the basics of the subject at hand. The following two chapters consider vertical distribution of funds between the Union and the states, and horizontal distribution across the states, both based primarily on formulaic tax sharing. Each of these chapters provides a clear chronological summary of how successive Finance Commissions handled questions of balance between responsibilities and resources, and issues of equity across subnational jurisdictions. Chapter 8, as its title (The Detail Matters) indicates, provides more detail on various aspects of vertical and horizontal distributions and of the factors that have influenced the methodologies used.
The intervening Chapter 7 discusses grants-in-aid from the Centre to the states, and the varied and ad hoc nature of these grants is reflected, perhaps, in the absence of a summary and of references for this chapter. Instead, the chapter ends with a section titled ‘Issues’, which tries to come to grips with the multiple and sometimes contradictory goals of these grants. Perhaps the lack of conclusiveness in the discussion reflects the problematic status of grants-in-aid in Indian fiscal federalism, as compared to formula-driven tax sharing.
The topics in the book’s first eight chapters represent the core, one might say, ‘classic’ issues of Indian fiscal federalism. They are slightly more than half the book’s length. The next eight chapters, together with an Afterword, provide a more varied consideration of specific topics and recent developments. Chapter 9 tackles what could have been the most important modification (also summarized in Chapter 2) of Indian fiscal federalism in the nation’s history, the creation of a constitutionally protected third layer of local governments. The treatment of this topic is again clear and concise, with historical background and a straightforward assessment of the weaknesses of local governments in terms of revenue autonomy and fiscal control. However, topics that could have been given more attention include the differences between urban and rural local governments, the political and constitutional constraints to strengthening local governments, and the reasons for states’ varied failures to decentralize effectively. Some of these are mentioned in Chapter 2 but not revisited here.
Chapter 10 considers the Goods and Services Tax (GST) Council as a new institution of ‘cooperative’ fiscal federalism. Indeed, the authors view the GST Council as ‘a shining example’ of this cooperation, since the Centre and states were able to come together to share a common tax base. What is important to realize is that the structure and assignment of indirect taxes that had evolved prior to the 1980s was so inefficient that reforms were desperately needed. The various versions of Value Added Tax (VAT), which provides the conceptual underpinnings for the GST, and the overcoming of uncoordinated, cascading sales and other indirect taxes, were a story of bargaining and cooperation that preceded the GST Council, and that could possibly have been described in more depth.
Chapter 11 turns to asymmetric federalism, which can have several dimensions, political and cultural as well as economic. Much of this chapter focuses on so-called Special Category States, which were, to some extent, a creature of the Planning Commission. Divisions of states, particularly that of Andhra Pradesh (AP) into AP and Telangana, have created demands for expanded inclusion in this classification, because of the more favourable terms for transfers from the Centre. Given the demise of the Planning Commission, and the projected extinction of Special Category States, at least in their current incarnation, this chapter might have better followed Chapter 12, which covers the Planning Commission’s chequered history.
The issue of the Planning Commission, and its successor, the NITI Aayog (Chapter 13), raise the question of federalism and development. The concepts of ‘classic’ fiscal federalism, involving vertical transfers and horizontal equity, are often implicitly based on a relatively static perspective on the economy – growth and development are not considered. The Planning Commission, the NITI Aayog, and possibly the approach to Special Category status, all foreground economic development. However, there has never been conceptual clarity in Indian fiscal federalism on how growth considerations should affect the nature of intergovernmental transfers or other aspects of federal institutions. The area of urban infrastructure and local government reform is another example of development related issues in fiscal federalism. It is not clear how a relatively short book could have tackled these issues, but they are worth highlighting. Certainly, if development requires investment, and investment requires targeted public funds, those linkages should be recognized in designing and managing the institutions of fiscal federalism. Perhaps one connection that could have been explored in these later chapters is the proliferation and persistence of various discretionary project or programmatic transfers, such as the numerous ‘Centrally Sponsored Schemes’. These are only treated earlier in the book.
Chapter 14, on public debt and the Finance Commission, raises similar issues of conceptualization. The focus of the chapter is on fiscal management, and worries about large or growing deficits and of stocks of debt have been of particular concern for India’s states (though less so than for subnational units in some other nations, such as Argentina and Brazil). The underlying issue, of course, is whether public borrowing leads to productive investment and higher growth, which in turn can make it possible to service or manage the higher public debt. Again, the problem is that the fiscal federalism literature has not given developmental issues enough attention, though there are exceptions.1 Furthermore, as argued here, the practice of fiscal federalism in India has not always dealt clearly with these developmental issues, a point that does not quite rise to the surface in the book.
The final two chapters of the book summarize aggregate transfers from the Centre to the states (Chapter 15), and consider the 15th Finance Commission, which faces unusual challenges (Chapter 16). To some extent, the first of these two chapters sets the stage for the second, since the latest commission’s Terms of Reference (ToR) have the potential to roll back some of the increased flexibility and total of transfers resulting from the recommendations of the last commission. The latest commission also has to deal with the consequences of the implementation of the GST and the end of the distinction between plan and non-plan expenditures. Other items in the ToR are consideration of how grants-in-aid are determined; the requirement to use 2011 population figures, which will have horizontal equity implications; conditions for states to borrow; and possible performance based incentives for the states.
The book concludes with an Afterword, subtitled ‘The Way Forward’. This is an exemplary summary of the issues that face Indian fiscal federalism at this moment in time, and further increases the value of the book. The authors emphasize the potentially centralizing biases of the current government, both in its vision of national economic development, and in the ToR for the 15th Finance Commission. The Afterword also revisits, or in some cases articulates explicitly for the first time, broader conceptual issues of efficiency and externalities, centralization and decentralization, public versus private goods, and specific issues in the operation of the Finance Commission and the NITI Aayog. Indeed, echoing the analysis in Chapter 13, the latter is seen as lacking sufficient effectiveness and impact. Perhaps one should not be surprised by that, in a situation where the national government itself is operating in a relatively centralized manner, with expertise being drawn from a limited range of sources.
These kinds of issues bring one full circle to the political and economic ‘game’ of fiscal federalism. The manner in which democracy functions, the state of the judiciary, the way in which various regulatory institutions work, geopolitics, and social and cultural factors all feed into the manner in which fiscal federalism is conducted in India. What has been of interest in analyzing the Indian experience is how core institutions of fiscal federalism such at the Finance Commission and, somewhat different in categorization, the tax system, have survived the buffeting of these varied forces over many decades. Federal systems tend toward centralization, because of the inevitable dominance of the national authority, but India’s scale and diversity have acted as checks on this bias.
The authors have done a remarkable job of producing a lucid, comprehensive, reasoned and up-to-date account of the working of Indian fiscal federalism. I am not sure that they have really come to grips with analyzing the larger political and economic game that continues to go on with respect to Indian federalism. M. Govinda Rao and I attempted something more in that vein, but much has happened since our work was completed 15 years ago. No doubt, others will keep writing on Indian federalism, including fiscal federalism, and hopefully they will revisit these bigger issues and the larger game being played. (Indeed, Dr Govinda Rao, whose work on this topic has been prolific and path-breaking, receives a special acknowledgment from the authors.) But the authors cannot be faulted for limiting their scope, since they have produced a compact, immensely readable volume that should serve as a primary reference for all scholars of the subject, and any policymaker who wishes to understand this critical aspect of governance in India. Even non-specialists will find the book accessible and informative, and I would actively recommend it to anyone interested in the Indian economy in any of its various aspects.
Nirvikar Singh
Professor of Economics, University of California, Santa Cruz
Footnotes:
1. For India, see, for example, M. Govinda Rao and Nirvikar Singh, Political Economy of Federalism in India, Oxford University Press, New Delhi, 2005; M. Govinda Rao, ‘Making Federalism Work for India’s Development’, Chapter 2, in N.A. Khan (ed.), Challenges and Issues in Indian Fiscal Federalism. Springer, Singapore, 2018, pp. 9-13; Nirvikar Singh and T.N. Srinivasan, Federalism and Economic Development in India: An Assessment, in N. Hope, A. Kochar, R. Noll and T.N. Srinivasan (eds.), Economic Reform in India: Challenges, Prospects, and Lessons, Cambridge University Press, New York, 2013; more generally, see Barry Weingast, ‘The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development’, Journal of Law, Economics and Organization 11(1), pp. 1-31, 1995.
