What TN case tells us about the need to ease Centre-state friction

Several developments have taken place over the last two weeks concerning Centre-state relations. One, Tamil Nadu sued the Union govt in the Supreme Court for withholding over Rs 2,000 crore under the Samagra Shiksha Scheme. It claimed the Centre was surreptitiously linking the implementation of the three-language formula to the disbursement of education funds. Two, the NITI Aayog chaired its tenth governing council meeting but three Opposition CMs decided to give it a miss. In the absence of the Planning Commission and the complete neglect of the Inter-State Council, this is the only platform where all the CMs, the PM, and Union ministers meet each other.

Three, even inter-state language wars are escalating as another kerfuffle in Bengaluru over a bank manager refusing to speak Kannada revealed. This time, several political leaders got involved. On social media, all war-related national integration was quickly replaced by the generic north-south flame wars.

Cheque, mate? TN CM MK Stalin with Modi. The state’s decision to sue the Union will have broader implications

While the PM stressed the idea of Team India to realise the goal of Viksit Bharat 2047, these instances highlight yet again that cooperative federalism is merely a nice-sounding idea thus far. What we need are structures in which real cooperation can happen. Here are four such ideas that could be worth considering.

1 | An ‘umpire’ for bargaining
This idea comes from economist Dr M Govinda Rao. He writes in his book, Studies in Indian Public Finance, that India lacks an institution that can act as a credible umpire between various states (horizontal bargaining), and between the states and Centre on the other (vertical bargaining).

The National Development Council, created for this purpose, is defunct. The Inter-State Council hasn’t met for the last eight years. The Rajya Sabha no longer functions as the council of states and Union finance commissions are dissolved after making their recommendations. The NITI Aayog is yet to establish itself as an institution that speaks for the states and the Union equally. The GST Council is perhaps the only remaining bargaining and negotiation platform in our federal structure, but its mandate is limited to sharing taxes on consumption.

The result is that we have no functional institution to truly champion cooperative federalism. One model to consider is Vijay Kelkar’s idea of a NITI Aayog 2.0, one which has fiscal powers to allocate conditional funds to states for long-term transformational goals. But there’s a risk that such powers could transform NITI Aayog 2.0 into a Planning Commission 2.0, restricting the states’ fiscal autonomy. Thus, we need a debate to construct a new institution for cooperative federalism.

2 | More funds with less strings
All federalism debates almost exclusively focus on just one issue: horizontal devolution, i.e. the formula used for sharing resources between states. It also gets inaccurately framed as a ‘north vs south’ debate — how the taxes collected from the south are frittered away in the north. But the problem really lies in vertical devolution i.e. how the tax resources are split between the Union govt and all states as a whole. If the Union govt keeps less money to itself, all states stand to gain together.

This is why the TN petition has broader implications beyond who wins this case. It is an opportunity to increase vertical devolution to states. As long as there are centrally sponsored schemes, which are designed by Union ministries and only implemented by states, the Centre is within its rights to change the scheme’s design. States must demand that grand schemes falling under the state and concurrent lists be scrapped and that they receive untied funds instead. This way, they an decide their priorities while the Union can focus on a select few centrally sponsored schemes, mainly focused on states that need its help. This point was raised by the TN CM at the NITI Aayog meet as well.

3 | All-party delegations to states
As the recurring language wars illustrate, trust levels between states are dipping. Lok Sabha seat reapportionment stemming from delimitation; charges of unfair fiscal redistribution; and the insider-outsider debates sparked by local reservations will only worsen the situation. Like India’s all-party delegations meant for global outreach after the Pahalgam attack, we need a domestic mechanism where states send delegations to other states explaining their visions for development and growth. Such efforts could perhaps bridge the gap.

4 | Union-state sub-groups
Another interesting idea comes from Andhra CM Chandrababu Naidu, who proposed three sub-groups at NITI Aayog on GDP growth, population management, and leveraging artificial intelligence. While these themes are not set in stone, this approach could allow states to partner with each other and with the Centre.

Creating a Team India ain’t easy, but it could happen with the right systems in place.

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