Countries are organized either as “Unitary ” (France) or as “Federations” (India, Brazil, the United States). In the first group, a national, or a central, government, makes the economic decisions for the whole country’s territory. In the second group, a Constitution has generally assigned various government’s economic functions between the central government and the sub-national government, and, to a lesser extent, between the states, or the regions, and the local jurisdictions which operate within them. Generally, large countries, such as India, Brazil, the United States, Australia and similar ones, have chosen a federal structure, one that is assumed to better reflect and satisfy the preferences of citizens in different areas which may have different cultural background and economic needs. In a country as large and as diverse as India, these differences are obviously an important consideration and may require the adaptation of some policies.
At the time when the constitutions for federal countries are drafted, it is impossible to anticipate future developments and, thus, the future preferences and needs of the populations. It is therefore impossible to allocate, in a permanent and unchanging way, the present and future governments’ responsibilities, among the three government tiers. With the passing of time, and with the changing socio-economic environment of the country and of the world, different needs are likely to arise, needs that were not contemplated at the time when the Constitution was drafted. The new needs will require different allocation of responsibilities than the ones described in the Constitution. In all the Federations now in existence, there are growing conflicts among the different government tiers related to their specific responsibilities. This has become a common experience.
In his 1959 classic and influential treatise,The Theory of Public Finance, Richard Musgrave assumed that it would be more efficient to allocate the redistribution of income and the stabilization of the economy (two recently new government responsibilities) to the central government leaving much of the allocation of resources (apart defense spending) mainly to sub-national governments. He believed that this allocation of responsibilities would better reflect the governments’ controls over national tools, such as tax levels, and the incidence of taxes and public spending. However, this was the view of just one influential economist. The constitutions of many countries, including that of India, do not necessarily follow Musgrave’s directive. Over the years, needs that had not been felt in the past have acquired growing importance. This put pressures on the constitutional arrangements determined in the past. For example, both the stabilization of the economy and the redistribution of the economy had not been important objectives in the past, when the tax burden in India had been only 8 percent Of GDP. They became progressively more important with the passing of the years leading to large increases in tax levels and in public spending. This raised increasing questions on which level of government should determine how to use the additional revenue.
The book “Challenges to Indian Fiscal Federalism” by T. M. Thomas Isaac, R. Mohan and Lekha Chakraborty makes a strong case that the Indian central government has been appropriating increasing shares of revenue and of the power of decisions, thus reducing the power to act of the sub-national governments.
This book makes a valuable statistical case for the above view. It will be endorsed by many but will be challenged by others who consider stabilization as not a “neoliberals” preoccupation. India went through a period when a continuation of its macro economic policies could have led to financial crises.
The strong merit of the book is having stated its case eloquently and with a lot of statistical support. It has made a strong case that recent national policies diverted resources away from poverty alleviation. But, as is often the case with debates about economic policies, it may not convince those who worry about policies that may lead to financial crises. This is not an endorsement of policies followed in recent years.
The author is Former Director of the IMF and Deputy Minister of Finance of Italy. The link to book “Challenges to Indian Fiscal Federalism” by T. M. Thomas Isaac, R. Mohan and Lekha Chakraborty is here: https://mayday.leftword.com/challenges-to-indian-fiscal-federalism.html?___store=in.
The views expressed in the post are those of the author only. No responsibility for them should be attributed to NIPFP.