Inefficiency, corruption and coercion are offshoots of being non-federal

Two excerpts from an editorial in the DNA today:
There is a basic flaw in the Centre-state relationship in India’s ostensibly federal system — constitutional experts choose to describe it as quasi-federal — which leans towards the Centre rather than the states.

There are two other points of contention. One is when states seek Central assistance to deal with natural calamities like drought and flood, it gives the Central government and the party in power the option of playing benefactor when, in reality, it is little more than a constitutional mechanism. The other point has to do with foodgrain procurement and storage. The state governments are supposed to draw whatever is due to them from the centrally-managed storage system. Again, it is made to appear that the Central government is doling it out to supplicant states. This distorts the federal balance. A dispassionate debate on the functioning federalism is much needed now.
It is heartening to see mainstream media talk about federalism, something which is inevitable in a linguistically diverse country such as India.

Excerpt (i) is something we've discussed repeatedly on this blog. Excerpt (ii) is largely accurate, but there is one subtle point which I don't completely agree with, and I'd like to discuss it here. The point I'm going to point out further enhances the message of the DNA editorial that federalism is the right way ahead; it does not diminish the message.

To get to it, then, it is true that the Central government is not really a benefactor to states which contribute heavily to Central revenue (such as Karnataka, Tamil Nadu, Maharashtra). In fact, there is sufficient evidence that the Centre is actually a malefactor (for want of a better word) which depletes the earnings of affluent states, returning only a trivial fraction of their actual earnings.

But can we make the same statement in the case of economically backward states (such as the classical BIMARU ones)? No. In the case of these states, the Centre is indeed in a position to be a true "benefactor of supplicants", and that is how it indeed behaves. And that, my friends, is a big problem.

Why is it a big problem, you ask? Because, even if it be granted that the affluent states must "dole out" the backward states, the anti-federal nature of our constitution makes it very difficult for that doling out to be done with any chances of success.

Why? Simple: Where do all those Central funds come from? The economically developed states, where else? The Centre is basically spending someone else's (X's, say Karnataka's) money on someone else (Y, say Bihar). As explained beautifully by Nobel economist Milton Friedman, this is the worst possible and most wasteful way of spending money. Here's why, in his own words:
There are four ways in which you can spend money.

You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.

Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!

Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get.
Clearly, the Constitution of India, by virtue of its quasi-federal nature, encourages the Centre to spend money in the fourth way; and the bigger the Central government is, the more money it spends in the third way. By design, the Central government cannot be concerned about how much money it draws from the affluent states, nor be concerned about maximizing the returns from that spending; at the same time, it uses a lot of the People's money to pay for its own operating costs.

Hence, if (and only if) the people of Karnataka decide to dole out financial grants to Bihar, they must dole it out directly. Having to pass through the Central government triggers inefficiency in the doling out, and encourages corruption by elevating a nobody to the status of benefactor (then, the Centre is deep in the third way).

Besides, coercing Karnataka to dole out financial grants to Bihar is out of question and clearly undemocratic. This coercion is what happens when the Centre spends money in the fourth way, which is what it is designed to be in.


Anonymous said...

Atlast, one media in India could use it's 6th sense and conclude that we need to rule our country as a union of federal States. Probably, we need to have a good South Indian Media for raising our voice.

When we are thinking about de-centralized and federal model for India, the current government is going ahead with it's agenda of snatching away the educational institutions from the State Control. Unfortunately, this time also, except for TamilNadu, no other States are protesting.

elango said...

tamils are the people who fight for their rights. Others wants the fruits of the fight.

ಉಉನಾಶೆ said...

I can spend somebody else’s money on somebody else ...
ಯಾರದೋ ದುಡ್ಡು ಎಲ್ಲಮ್ಮನ ಜಾತ್ರೆ

Anonymous said...

Truly agree with the idea.... in a way it makes sense to utilise wealth generated from bangalore, (which good number of americans think as capital of India) for places like north karnataka, which still lack basic amenities than actually fund some other state through the Centre, enriching some ministers/parties en route. I'm not against upliftment of Bihar, but what i mean is Nitish Kumar will take care of Bihar, or Modi Gj, what about KA, ppl still don't know who the real CM is!

Media is presenting only half the picture.

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