Need to foster competitive federalism among states: RBI governor

Highlighting the need to nurture the spirit of cooperative federalism in India, the governor of the Reserve Bank of India (RBI), Shaktikanta Das, and former RBI governor Y.V. Reddy weighed in on areas to focus in the current scenario.

They were speaking at the launch of the book “Indian Fiscal Federalism” in Mumbai on Tuesday. The book has been authored by Y.V. Reddy and noted economist G.R. Reddy.

Das pointed out five issues that need to be addressed, especially with respect to the working of finance commissions. First, Das said, is that finance commissions so far have had different approaches to various issues.

“Over the past several decades, finance commissions have adopted different approaches with regard to principles of tax devolution, grants to be given to states and fiscal consolidation issues. While at one level, there has to be a framework for fresh and innovative thinking by every finance commission, at another level, there is a need to ensure broad consistency between finance commissions so that there is some degree of certainty in the flow of funds, especially to the states. This has become even more critical in the post GST scenario,” he added. Das then went on to propose that India should consider giving permanent status to the finance commission.

Second, Das spoke about the need to constitute state finance commissions every five years and make arrangements for their robust functioning. Third, Das said cooperative federalism among states must be fostered, with the sacrifice of some degree of fiscal autonomy to be seen as a trade-off for the larger picture.

Fourth, Das stressed the need to foster competitive federalism among states. “Cooperartive federalism shouldn’t breed inertia,” he said. Last of all, Das said robust expenditure planning is crucial as the centre and states must address social and economic problems without compromising on the fiscal targets. This, he said, was all the more important in a time when geopolitical tensions, natural calamities and other social and developmental issues require governments to spend more.

Y.V. Reddy said the book takes a look at inter-governmental transfers. “The real problem lies in the transfers that are outside the finance commission,” he said, pointing to the transfers dealt with by the Planning Commission earlier and the NITI Aayog now.

While responding to queries from the audience, Reddy also said that from an impressionistic view it seemed like states performed better under regional parties. He then went on to say that centrally sponsored schemes have now become an instrument of national political parties which use them to gain electoral advantage over regional parties.

When asked about the slew of farm loan waivers announced by various states, Reddy who has earlier spoken out for depoliticising farm loan waivers said, “This competitive populism has to stop. Let’s hope it will end with the elections.”