Over to the states (Economic centre of gravity has shifted)

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 Over to the states (Economic centre of gravity has shifted)

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• Ease of Doing Business EODB: The 2019 ranking by World Bank put India at 63, up from 142 in 2014. But at the operational level, many investors report problem in getting things done.
• TOR for 15th FC: When the Union government amended the terms of reference (TOR) for Fifteenth Finance Commission, asking for dedicated defence allocations before sharing anything with the States, the states found it a to be a terrible idea.
• Land acquisition law: When in 2015 the land law was changed, but states protested, the Union govt. backed off. Land is in concurrent list in Constitution, and Union could have had its way.
• States very important now: Clearly, India's states are very important now, unlike in 1950s or 60s. From the 1980s, strong regional leaders "revolted" against the hegemony of the Centre. Example: NT Rama Rao of Andhra Pradesh.
• Yielding to them: So the Centre gave more space to states, but only politically. Economically, nearly all major decisions rested with the centre – for both public and private investment, as it controlled policy.
• Change since 1991: Three things changed the centre of economic gravity from centre to the states.

1. Reforms agenda – First generation economic reforms were union subjects, and were pushed unilaterally. Examples: industrial licencing, import permits, exchange rate, financial sector. But second generation reforms involve the factor markets (land, labour, taxation) which need the consent of states. The way GST came about is proof of it. Finally Centre agreed to fill the revenue gap (if any) of the states, in GST system.
2. Changing fiscal federalism – The Centre collects 60% of total revenue (Centre + states), but spends only 40% of total expenditure. This is asymmetric! States collect 40% and spend 60%. Then, the states now have greater autonomy in spending, as Planning Commission is gone. That leads to many problems like states giving up on some capital expenditure to make way for revenue shocks like farm loan waivers, UDAY loans and income transfer schemes. But wrong expenditure planning will impact developmental outcomes.
3. From (a) and (b) flows the third – States are important in creating the right investment climate in India. EODB will improve if states improve, not just Delhi (Union).

• Time for coordinated action: Hence, both Centre and states need to work together in harmony. Cooperative federalism is the way forward.
• Summary : As the centre of economic gravity has shifted to the states, cooperative federalism will be needed more than ever.

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