Spending Power Is Not Political Power, Earning Power Is.

The States may be spending more on paper, but how much freedom do adolescents have to spend their pocket money? Spending power is not really political power. Earning power is political power. If the States were to themselves collect the money they spend, I’d call that real political power.

In a recent article, Swaminathan Aiyar argues that “The most excessive concentration of power relates to state capitals, from which power must be devolved to cities and districts.” His point is that the States account for 62% of government spending, which means we must shift the focus of the decentralization debate to within the States.

I beg to differ. The States may be spending more on paper, but like adolescents, they have not much freedom in how they spend it. Spending power is not really political power. Earning power is political power. If the States were to themselves collect the money they spend, I’d call that real political power. Let’s look at the data.

I’m not sure how Swaminathan Aiyar gets his numbers, but using 14th FC recommendations over FY 2015-16 to 2019-20, this is what I get (excluding aid, loans, etc):

Central revenue expenditure: 60,99,448 cr (32%)
State revenue expenditure: 1,29,80,292 cr (68%)

This means the Centre spends only 32% of the total public money in India. 68% of the money is spent by States. Swami’s numbers are 38% and 62%. Maybe he includes foreign aid to the Centre. Anyway, our numbers are quite close, so let me proceed to make my point.

My point is, while the Centre is spending only 32%, how much revenue is it pocketing in the first place? It’s a whopping 63%. Again, here are the numbers based on 14th FC recommendations for FY 2015-16 to 2019-20

Total revenue receipts: 1,91,04,281 cr
Central revenue receipts: 1,20,62,932 cr (63%)
State revenue receipts: 70,41,349 cr (37%)

What does this mean? The States have to spend 1,29,80,292 cr but they’re allowed to get revenue only of 70,41,349 cr. That is, the Centre is unnecessarily accumulating 59,38,943 cr. What does it do with this unnecessarily accumulated cash? It gives it away as tax devolution (roughly 66%) and grants (34%).

Although Swami makes the simple assumption that the spender wields power, the facts are more complicated. It’s actually the revenue collector who wields power. Since the Centre collects 63% of all revenue, it is possible to conclude that it wields its influence over all 63% of government spending in India.

In short, Swami’s conclusion, that the real decentralization that needs to take place is within the States, is not exactly supported by the facts presented above.

An Alternate Way To Run India’s Finances

Neither the own money nor the aid money of the States needs to be collected by the Centre. It can simply get out of this whole business of collecting and distributing money. Each State can collect all the money it needs from its own people, and we can call this as state money. In case there are States that send in any aid, it can simply be added to this and utilized with thanks.

The Government of India is under the impression that the States are fundamentally incapable of dealing with money. The idea has stuck that they can neither make money nor spend it in the right way. One can see this in the sermons the Centre gives the States on how to spend the money it gives them, both tied and untied. While it is true that the Centre collects the money in question, we must not forget that it actually comes from the people of the States. The Centre doesn’t have people of its own.

The funds that a State gets from the Centre is of two types. The first is money that originally went from the State to the Centre and returned, which we can call as the State’s own money. The second is money coming in from the wealthy states via the Centre, which we can call as aid money. Every State gets its own money back, although the wealthy States get only a fraction thereof. And then, of course, it’s only the poorer States which get any aid money.

As far as own money is concerned, it takes simple commonsense to conclude that the States can collect the necessary tax from the people directly instead of looping the Centre into the affair. This requires a reduction in the Centre’s powers, not any sort of ‘growing up’ or ‘evolution’ on the part of the States.

As far as aid money is concerned, the whole concept is based on the theory that it is good for everyone concerned. But it is important to note that this theory, right or wrong, assumes one society which the rich and the poor are part of. But this is not the case here. It is nonsensical to talk of, say, the Kannadigas and the Biharis being part of one society. They are part of one political unit, yes, but that doesn’t make them one society however much one might pretend they do.

In fact, Indian states can be called nations going by the universal understanding of the term. When a rich nation supports a poor one, it is not out of any compulsion by some sort of Central Government of the world, but out of its own self-interest. Even in the case of one State supporting another in India, there is no fundamental reason why the Centre should collect aid money and decide how to distribute it.

There are some who are concerned that if the Centre gets out of the loop, the wealthy states will no longer support the poorer ones. Opinion is divided on whether aid money to entire States is useful at all, but the worst way to address the concern is to use Central coercion. Although coercion can appear to be the ideal solution till the last moment, it can ultimately lead to the secession of the wealthy States, as has happened elsewhere in the world.

Nor is it true that if States stop giving or receiving aid money the idea of India simply dies. What dies is the thinking that aid money is central to the idea of India. It helps to note that this aid money didn’t feature in Mahatma Gandhi’s idea of India. He wanted Gram Swaraj or the independence or self-sufficiency of the village, which ruled it out.

Thus, neither the own money nor the aid money of the States needs to be collected by the Centre. It can simply get out of this whole business of collecting and distributing money. Each State can collect all the money it needs from its own people, and we can call this as state money. In case there are States that send in any aid, it can simply be added to this and utilized with thanks.

The Centre needs funds to do things the States don’t need to. As I see it, the Centre should hold only defence and external affairs portfolios and leave everything else to the States. The funds to run these portfolios, too, need not be collected by the Centre directly from the people. Over and above state money, the States can collect federal money  (money to run the Federation of India) and pass it on to the Centre.

[Photo credit: livemint.com]