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Issue No.: 570 | December 2014
 

Federalism, Governance and Growth

Sunil S. Bhandare
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These are interesting times in India; and many, especially those in business and industry [including foreign investors], perceive these as exciting times. After almost three years of what has commonly come to be described as "policy paralysis” and a non-performing UPA II regime, we now have the NDA government in office for the past six months, under the PM Narendra Modi. He symbolizes "disruptive” political leadership, which is quite distinctive from the conventional mold. And this is visible right since the time of the general election campaigns.

No negative nuances are implicit in this proposition. Like disruptive business models or disruptive innovations and technology, he seems to be bringing about transformational shifts be it in political discourse, policies, official socio-economic programs, institutions of governance or international relationship. What positive outcome this may bring to bear on India’s federalism, governance and growth needs to be watched very carefully. But for an objective assessment, the timeframe cannot be short-term, but has to be at least a period of next two to three years.

In the meantime what stands out is that his leadership has infused high expectations and heightened confidence among various stakeholders about the future of our economy – the prospects of better governance and stronger economic growth. Also, some early indicators of performance based on key macro parameters like inflation rate, balance of payments, exchange rate and investment sentiments are found to be quite encouraging. There is a clear break from the sense of despondency and drift that marked the last three years of the UPA II government.

A Nature of Symbiotic Relationship Turning to the core theme of this article*, let me start with a premise that there exists some kind of a symbiotic or intrinsic relationship among federalism, governance and growth – and growth to be measured by its strength, sustainability and quality. I believe this is a perfectly legitimate relationship to envisage and evolve even in the absence of any expert knowledge about any particular empirical evidence or study relating to cause and effect relationship among these three crucial parameters. Surely, there is a prima facie sound rationale that good governance is a condition precedent for sustainable high growth. For example, India’s two recent phases of high real GDP growth rates of about 7.5% and ~9% in the post-reforms period, namely, in 1993-97 and 2003-08, respectively, were at least partially reflective of good governance, especially in the sphere of fiscal management.

Further, the nature of governance – good or bad – is embedded in a political and institutional system of any given country. In turn, the political and institutional system owes itself to whether the country is unitary or of a federal form. In the case of India, alongside democracy, federalism has become a cornerstone of her constitution. Of course, many constitutional experts and jurists have characterized the Indian Constitution in being "quasi- federal”. It envisages strong states with a stronger center.

While reflecting on our federal structure, a TINA [There Is No Alternative] factor obviously comes to the fore. For the sub-continental size of our country – a nation of over 1.2 billion spanning 29 States and 7 Union Territories with a vast diversity of languages, ethnicity, religion, culture and socio-economic strata, federalism is an act of faith as much as it is an act of principle. Lord Meghanad Desai, in his book the Rediscovery of India puts it well: "India is a collection of many nations – unique among modern democracies. It is a multi-national polity”.

Over the last sixty-five years, the Indian Constitution as well as the federal structure has gone through many trials and tribulations. The most classic illustration of that is the unfortunate phase of the so-called Emergency [1975-77]. Even so, the system has shown remarkable resilience and preserved the basic structure and macro framework of all the key institutions of governance – the legislative, the executive and the judiciary. While unity overrides diversity, one cannot be oblivious of complex issues of "National” "State” or "Local” identities. There are political issues [conflict of interest] about developmental role and responsibilities as enunciated in the Constitution between Center and States. So also, are there serious deficiencies in the decentralization of economic power at the level of local governments, despite the fact that the 73rd Constitutional Amendment has been in operation for almost about two decades now! There are several other vexatious challenges about asymmetric nature of our federalism – inequality among states, regional imbalances, failure to create an internal common market, and so on.

How the NDA government seeks to strategize its approach to these complex issues will determine the evolving nature of governance system and its impact on growth. By all accounts most of the institutions of governance are in place. In the post-reforms period, the need was also strongly felt for creating new regulatory institutions, especially in all those areas which were hitherto in the domain of public sector, be it telecom, electricity, roads, ports, airports or insurance. Moreover, consequent upon the repeal of the Monopolies and Restrictive Trade Practices Act, the Competition Commission of India has come into existence. Like-wise, there has been strengthening of existing institutions of financial sector and capital markets as well as support system for citizens’ issues – for example, creation of a mechanism for Public Interest Litigation, Chief Information Officer, etc. The NDA government proclaims that it would continue to strengthen various regulatory institutions, and also recreate some existing ones – for example, long- pending abolition of the Planning Commission and replacing it with strategic economic policy think tank.

The Thrust of the BJP Manifesto Going forward, in what way would the NDA government push forward its agenda of good governance? In this context, a reference to the BJP Manifesto [BJP-M] becomes extremely relevant, albeit the past experience does suggest there are proverbial gaps in promise and performance in the implementation of the statements of good intentions by almost all the political parties. Thus, while reflecting on future of centre-state relations, BJP- M talks about Team India and evolving a working system, which leads to harmonious relations. It promises to address genuine grievances of every state in a comprehensive manner and "to evolve a model of national development, which is driven by the states. … Team India shall not be limited to the Prime Minister led team sitting in Delhi, but will also include Chief Ministers and other functionaries as equal partners”.

It further promises fiscal autonomy of States while urging financial discipline. It proposes to create ‘Regional Councils of States’ with common problems and concerns, with a view to seeking solutions that are applicable across a group of states. It also talks about giving "the unique status to Union Territories” and promises to focus on developing and strengthening their economies. 

But most important are promises for reviving "the moribund forums like National Development Council and Inter-State Council” and convert them into active bodies. It talks about involving the states in the promotion of foreign trade and commerce; help the states mobilize resources through investments in industry, agriculture and infrastructure. It goes further to emphasize imperatives of integrating the Nation – its Vastness and Voices and "working within the framework of our Constitution and with the spirit of ‘India First’”. Further, it assures the fact that all Indians living in different regions of the country have an equal stake in the progress of the country and they have to be assured of the fruits of the progress.

Specifically on matters of governance, the BJP-M mentions quite an ambitious agenda, which among other things, promises [a] technology-enabled e-Governance - minimizing the discretion in the citizen-government interface; [b] system-based, policy-driven governance - making it transparent; [c] rationalization and simplification of the tax regime - which is currently repulsive for honest tax payers; [d] people’s participation in the developmental process through pro-active, pro-people good governance and creating a four Ps model – People-Public-Private Partnership (PPPP) for developmental projects; and [e] empowering Panchayati Raj institutions with extensive devolution of functions, functionaries and funds, and rewarding the Panchayats with additional developmental grants for their good governance efforts.

In summing up, economic reforms of the early nineties brought about a paradigm shift in India’s formulation of economic liberalism. It transformed the economic landscape with increased participation of private sector, competition and globalization. India has certainly broken the shackle of Hindu and Neo-Hindu growth rates. It has proven its capacity to deliver much higher growth if the government is responsive with policy support backed by good governance. For the past over five years, especially after the economy showed remarkable resilience in the wake of the Global Financial Crisis of 2008, the economy was desperately looking for another major phase of transformational change. But the UPA II government lost the theme of a wonderful growth story in the midst of a series of scams, corruption cases, reckless pursuit of social welfare agenda, overall "policy paralysis” and above all incompetent political leadership.

There is a refreshing new phenomenon driven by a "disruptive” political leadership, which has the capacity to steer the path of "creative destruction” and build a new edifice of stronger federalism, good governance and high growth.

SUNIL S. BHANDARE is a Consulting Economist based in Mumbai. 
Email: sunil.bhandare@gmail.com

 
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