Federalism And India’s Human Capital

Context: Leveraging the true potential of multi-level federal system in India represents the best way forward towards developing human capital.

Government Initiatives: to promote human capital

• National Health Policy of 2017 highlighted the need for interventions to address malnutrition.
• On the basis of NITI Aayog’s National Nutrition Strategy, the Poshan Abhiyaan was launched as part of the umbrella Integrated Child Development Scheme.
• Union Budget 2021-22 has announced a ‘Mission Poshan 2.0’ and the Samagra Shiksha Abhiyan.
• The Fourteenth Finance Commission increased the States’ share in tax devolution from 32% to 42%.

Overview of federal structure in India to foster human capital:

• Division of powers: 
  • Between Centre and States: under Schedule 7
    • Public Health is on the state list.
    • The broader subject of economic and social planning is in the Concurrent List - education was shifted to concurrent list through 42nd Amendment Act 1976.
  • Between States and 3rd Tier governments: 11th and 12th Schedule include education, health/sanitation, and social welfare for panchayats, and public health and socio­economic development planning for municipalities.
• Fiscal distribution: while the Constitution assigns the bulk of expenditure responsibilities to States, the Centre has major revenue sources. To address this vertical imbalance – 
  • By fiscal transfers through tax devolution (unconditional and therefore more meaningful decentralization) and grants-in-aid (may be conditional). (Article 275)
  • In addition, the Centre can make ‘grants for any public purpose’ under Article 282 of the Constitution. (always conditional).

Issues with the federal structure: hindering the development of human capital

• Lack of finances to the 3rd Tier: The Constitution lets States determine how Panchayats/municipalities are empowered, resulting in vast disparities in the roles played by them.
  • E.g., Collection of property tax, a major source of revenue for third-tier governments, is very low in India (under 0.2% of GDP, compared to 3% of GDP in some other nations)., 
  • Many states have not constituted the State Finance Commission on time.
• Centralized nature of India’s fiscal architecture: Centrally Sponsored Schemes (CSSs) have formed a sizeable chunk of intergovernmental fiscal transfers over, almost 23% of transfers to States in 2021-22.
• Miscellaneous nature of transfers under Article 282: The Supreme Court in Bhim Singh vs Union of India had observed that “Article 282 is normally meant for special, temporary or ad hoc schemes”.
• Issues in the design of CSSs: Overly prescriptive, input-based as oppose to being output based and based on a cost-sharing model (preempting the States’ fiscal space)

Way Forward

• Centre should play enabling role: E.g. Encouraging knowledge-sharing between States.
• Rationalize State’s priorities to focus on human capital development.
• Centre should refrain from offsetting tax devolution by altering cost-sharing ratios of CSSs and increasing cesses. The unconditional nature of these vertical transfers should be effectuated in spirit.
• Reforms in CSS: Heavy reliance on CSSs should be reduced; should be outcome based
• More powers to Panchayats and municipalities need to be vested with the functions listed in the Eleventh and Twelfth Schedules.