Dr. Syama Prasad Mookerjee Research Foundation

NITI Aayog: Cooperative Federalism in action

By Shakti Sinha

Sceptics of the decision to set up the NITI Aayog, who criticised the Prime Minister for either hurting the interest of the states by abolishing the Planning Commission, or simply packaging ‘old wine in new bottle’ have been proved completely wrong. The decision to accept the recommendations of the Fourteenth Finance Commence (FFC) would revolutionise the relationship between the Union and the States and make cooperative federalism a reality. Narendra Modi has shown that he is not only a person   who means what he says but also is someone who understands that States must be empowered if India is to grow strongly, abolish poverty and take its rightful place in the comity of nations.

As we argued in the past,[1] the Planning Commission had hijacked the fiscal devolution process laid down in the Constitution, which envisaged a role only for the Finance Commission in determining how this would be done. The founding fathers of the Constitution realised that in a vast developing country like India which was in the process of initiating, generating and sustaining economic growth, governments, both Union and in the States, would evolve. Government would take on new responsibilities, the balance between the Union and the States would undergo changes across time and sectors. Therefore to lay down a definitive formula would be to restrict the flexibility that the governance structure and processes would require along the way. They also had in mind that though the States would have the major responsibilities in meeting social and economic challenges, it was administratively and politically more convenient to collect revenues through agencies of the Union government. Sensibly they mandated the establishment of a finance commission that would give its recommendations to guide fiscal devolution every five years. No permanent body meant no baggage and successive finance commissions have exercised both independence and pragmatism while making their recommendations.

What has changed is that the FFC has moved beyond incrementalism when it recommended that 42% of tax revenues devolve to the States, from the existing 32%. To put it in perspective, the two previous finance commissions had devolution numbers going up by 1% and 1.5% respectively. A number of commentators have expressed themselves that all previous finance commissions had seen their recommendations accepted by the executive. Paradoxically, this made successive finance commissions cautious as none wanted to be the first commission whose recommendations would be rejected. The FFC has been bold and must be commended. And much more the Modi sarkar is to be complimented that it accepted this revolutionary change but even more that the FFC had the confidence that the present government genuinely believed in cooperative federalism and it would accept such a bold approach. The FFC has also removed the false dichotomy between Plan and Non-Plan revenue expenditures are concerned and looked at them holistically. A special provision to 11 states has been made who had structural revenue deficits into which all erstwhile special category states are placed with others like Bengal.

The new fiscal devolution package is very much in sync with the thinking behind the abolition of the Planning Commission and the establishment of the NITI Aayog. One, that all fiscal transfers would be formula driven as envisaged by the Constitution. Two, since the concept of Central Assistance to State Plans (CAS) that had come into play and had moved beyond its own formulae (Gadgil, revised Gadgil, Gadgil-Mukherjee etc) and become fairly discretionary in the hands of government of India exercised through the Planning Commission, the latter would no more be able to dangle carrot and sticks before State governments. No doubt, PM Modi’s own experience as Chief Minister convinced that this was a perversion of the Constitution and acted as a brake on the ability of progressive States to forge ahead with their own initiatives. Accepting the recommendations of the FFC has made this control and check function a thing of the pas and makes the NITI Aayog a completely different body from the Planning Commission.

However, an even more perverse practise has almost been eliminated but not entirely, as will be clear from the following narrative, in the interest of being non-disruptive. A substantial portion of fiscal flows from the Union to the States was through the implementation of centrally sponsored schemes (CSS), like Rashtriya Krishi  Yojana, Sarva Shiksha Abhiyaan (SSA), MNREGA and a host of others. (At one time there were over 200 CSSs, though it has come down to 66, a not insignificant number.) In effect Government of India devised and part-funded development programmes in sectors that were the responsibility of States under the Constitution. The basis for allocation to States was non-transparent and not consistent across CSSs.  Worse, States had to commit to a certain share of the expenses which they had to first spend before central funds would flow. This had the two perverse ramifications. The first that since these programmes had uniform design, they did not take into consideration state/region specific circumstances. States had no role to play in their design. And two, in effect it pre-empted States’ own priorities and resources. Most States being cash-strapped could not resist signing up for additional flow of resources even though many of them were not a priority for them, nor did it contribute to the building capacity in the States.

The net effect of this structure of fiscal transfers was that the amount of devolution which was around 38% (Finance Commission, CAS, CSS) which would go up now to 45%, a very substantial hike. The implicit understanding, which can be confirmed only when the budget is presented and its allocations known, is that other than very major CSSs like MNERGA and SSA , all others would fold into the devolution package. The finding pattern of these two programmes cannot be abruptly changed but government would have to develop a phasing-off schedule to make it consistent with the logic of FFC recommendations.

But what of the NITI Aayog itself? It can safely be said that it is gathering steam even as it sorts out its priorities, realign the personnel it inherited from the Planning Commission and obtained directions from its governing council on its immediate tasks. The NITI Aayog is multi-faceted in its roles. It is a platform that bring the Union and the States to determine national priorities; it is to champion the interests of States by having the latter nominate an officer who would work with the Aayog; bring about greater coherence and coordination between ministries in GOI; form time-bound action-oriented  sub-groups of States with common interests, problems and regional projects; a think tank for Union and State governments using in-house expertise and pool of external domain experts; monitor implementation of development programmes and projects; assist States in preparing development plans for villages upwards and aggregate them ; and collect and disseminate best practise that would lead to greater development effectiveness.

Prior to the first meeting of the governing council held on February 8th, the Prime Minister held a meeting of the NITI Aayog a couple of days earlier. In addition to its members and permanent invitees, a number of distinguished economists were also present. This meeting helped identify key issues. Accordingly the first meeting of the NITI Aayog deliberated on these and formed sub-groups of Chief Ministers that would suggest further rationalisation of CSSs; promote skill development and creation of skilled manpower within states; and evolve institutional mechanisms and identify technological inputs to make Swach Bharat a long-term commitment. These sub-groups are to deliver on their tasks in a time-bound manner and then dissolve. True to form many Congress Chief Ministers wanted the Planning Commission to be revived, particularly for determining the size of Annual State Plans. A particular Chief Minister in her inimitable style boycotted the meeting though it passed unnoticed. Little did these critics know that in less than three weeks, they would get a fiscal bonanza, that henceforth they would not be required to kow-tow to the Planning Commission or anybody else for allocation of fiscal resources, that they were free to decide their own priorities and programmes consistent with their needs and circumstances.

Prime Minister Modi by rallying all States under the banner of Team India, making the NITI Aayog a body where the Union and States are partners in development planning & policy making, and making a revolutionary break in fiscal devolution that would empower States has demonstrated that cooperative federalism is not just a slogan but a guiding principal of the NDA government. The NITI Aayog has become a valuable platform in this partnership to ensure “sabka saath sabka vikas.”


[1] ‘NITI Aayog: unleashing the substantial potential of the Indian people’, Nationalist, Issue 1, Feb 1, 2015

(The author is former Power & Energy Secretary Govt of Delhi, Chief Secretary Andaman & Nicobar, former Jt. Secretary PMO and a member of the SPMRF Advisory Board. He writes extensively on security and governance issues.)