Asymmetric Federalism in India

M. Govinda Rao and Nirvikar Singh

 Asymmetric Federalism in India

M. Govinda Rao and Nirvikar Singh∗

Introduction

There can be a variety of motivations for various units to come

together to constitute a federation. The political and economic theories
of federalism attempt to understand the rationale for the “coming
together” to form federations and once they are formed, analyse the
conditions for “holding together”. The political impulse for the smaller
units to federate has to be found in issues of freedom, security, political
stability and strength while keeping a separate group identity. Similarly,
access to a larger common market, reaping economies of scale in the
provision of nation level public goods and availability of wider choice in
the bundle of services to meet diverse preferences are some of the
economic reasons for the smaller units to come together to form a
federation. Each federating unit will try to bargain terms advantageous
to it to join the federation while the federation will try to attract entry and
control exit. In this situation, symmetry in intergovernmental
relationships may not be possible.

“Asymmetric federalism” is understood to mean federalism

based on unequal powers and relationships in political, administrative
and fiscal arrangements spheres between the units constituting a
federation. Asymmetry in the arrangements in a federation can be

∗
The authors are respectively, Director, National Institute of Public Finance and Policy, New
Delhi, 110067; India and Professor of Economics, University of California, Santa Cruz. CA
95064. U.S.A.
The author is grateful to Amaresh Bagchi and Richard Bird for extremely useful discussions
and detailed comments on the earlier draft of the paper. The usual disclaimers apply.

3
viewed in both vertical (between centre1 and states) and horizontal
(among the states) senses. If federations are seen as ‘indestructible
union of indestructible states’, and centre and states are seen to exist on
the basis of equality; neither has the power to make inroads into the
defined authority and functions of the other unilaterally. However, such
‘purists’ view of federalism is rarely, if at all, seen in practice. Even
when the constitution guarantees near equal powers to the states, in the
working on federal systems centre dominates in political, administrative,
as well as fiscal spheres. There is considerable volume of literature on
central domination in Indian federalism in the assignment system in the
constitution and central intrusion into the states’domains in the working
of the federation.2 Unlike the classical federations like the USA, Indian
federation is not an ‘indestructible union of indestructible states’. Only
the union is indestructible and the states are not. Article 3 of the
Constitution vests the Parliament with powers to constitute new states by
separating territories from the existing ones, alter their boundaries, and
change their names. The only requirement for this is that the `Bill’for
the purpose will have to be placed in the Parliament on the
recommendation of the President and after it has been referred to the
relevant state legislature for ascertaining their views (their approval is
not necessary). The federation is not founded on the principle of
equality between the union and states either. The central government in
India has the powers, and it actually does invade the legislative and
executive domains of the states (Chanda, 1965; Rao and Sen, 1996;
Rao and Singh, 2000). However, the nature and basis of relationship
between the centre and states is not the objective of this paper.

The focus of this paper is the usually understood aspect of

asymmetry in fiscal arrangements in Indian federalism, namely, unequal
arrangements and special treatments for some units within a federation.
Such an arrangement is quite feasible in an arrangement evolved from
bargaining and accommodation. It may also be desirable to have
special powers and asymmetric arrangements to accommodate diverse
group interests and identity and therefore, has an important role in
‘coming together’ federalism as well as ‘holding together’ federalism.
But such accommodation can only be at the margin and cannot violate

1
The words “centre”, “union”, and “federal”are used interchangeably in this paper.
2
For a survey of literature on centripetal bias in Indian constitution and in the functioning of
Indian federalism see, Rao and Chelliah, (1997).

4
the basic fabric of equality and fair treatment of jurisdictions. This would
also require transparency in the arrangements.

It is important to make a distinction between unequal

arrangement or asymmetry that are (i) transparent and rule based
evolved to facilitate the smooth functioning of the federation; and (ii)
those that are opaque and discretionary caused by the balance
administrative and political power and expediency. The first may be
built into the constitutional arrangement itself or may be evolved through
conventions for the smooth functioning of the federation. This type of
asymmetry is transparent and rule based and play an important role in
building the nation. In contrast, the second type of asymmetry can
simply be the result of administrative and political power play in a
federation. In India for example, the dynamics created by the end of
single party rule in the centre and states, emergence of coalition
government at the centre, and regional domination of regional parties in
the coalition and welding power in the states can create asymmetries in
the functioning of the federation on political considerations. This can
have serious repercussions for the future of federalism.

The paper examines the asymmetric features in Indian

federalism and evaluates its contribution. Section 2 will explore the
conceptual issues — the causes and consequences of asymmetric
federalism. In section 3, we trace the evolution of Indian federalism and
analyse the factors contributing to the asymmetric arrangements in
political, administrative, and fiscal relations. In section 4, we bring out
asymmetric arrangements arising out of constitutional arrangements or
conventions evolved over the years. In this, we discuss the special
arrangements in the Indian constitution to accommodate special cases,
such as Jammu and Kashmir, and the various north-eastern hill states.
The recent political developments and asymmetric treatments due to
administrative and political exigencies are analysed in section 5. The
important conclusions of the paper are summarised in the last section.

II. Asymmetric Arrangements – Some

Conceptual Issues

5
 According to Riker (1975), federalism is an outcome of rational
bargain among various constituents. The bargain may be for political or
economic gains. In the political bargain, the constituents give up
political autonomy for security from external threat. The economic
bargain is to enable a common market and to ensure optimal provision
of public services by reaping economies of scale and catering to diverse
preferences. However while striking the bargain, the constituents try to
preserve their valued identity and seek special status. Motivation for
special status may be purely for expanding economic opportunities and
securing freedom from exploitation by larger and more powerful
members of the federation. The objective may be purely political — of
enhancing freedom and representation to constituents or to maximize
political power and influence. It may also be cultural or religious — of
preserving group identities. It may simply be a means of
accommodating diverse group interests within a unified framework.

If federalism were an outcome of rational bargain among

constituent units, differences in bargaining strength would be a source of
asymmetry. If the issues at stake have general applicability to majority
of units, then collective bargaining strength could result in greater
decentralisation and all subnational units getting greater autonomy. If
on the contrary, the issues at stake have applicability or relevance to
specific units and if they have the necessary strength to secure the
special dispensation, then this could result in asymmetric arrangements
in the federation. Such special arrangements may be de jure –
enshrined in the constitution itself or established by tradition, or may be
actually observed in practice (de facto) in the working of the federation.
Such arrangements may be evolving. In many cases, special
arrangements are accorded until the units are assimilated into the
federation. In other cases, bargains may have to be struck by giving
special status for holding the federation together. Yet other cases of
asymmetry may arise purely by political alignments in a democratic
polity. The way in which bargains are struck and special demands of
various constituents are accommodated through asymmetric
arrangements, have a vital bearing on the stability of the federation.

Asymmetric arrangements need not necessarily be the outcome

of constitutional arrangements. This can also result from the way in
which administrative, political, and fiscal systems are implemented in a

6
federation. De facto asymmetry can also be desirable and can
contribute to nation building if it is based on transparent principles. At
the same time special arrangements instituted to meet short term
political expediency or administrative discretion can cause secular
degradation of intergovernmental institutions. Such arrangements can
result in arbitrary conferring of special favours and in the long run can
contribute to greater disharmony and instability in a federation.

In a centralised federation, the central government has

considerable scope to discriminate among the units. The potential for
discrimination will be particularly strong when the government at the
centre is weak and states wield significant control over the centre even
in a centralised federation. The issue is pertinent when we consider
that regional parties in some states wield significant power over a
coalition government at the centre.

III. Evolution of Asymmetric Arrangements in

Indian Federalism

III.1. Historical Background:

The distribution of power between the centre and states on the
one hand and the treatment of different states on the other in the Indian
constitution owe much to historical and political factors. Although the
Cabinet Mission sent by the British Government in 1946 saw no virtue in
partitioning undivided India into two different independent nations, it also
recommended that the independent country should be governed by a
federal constitution with the central government dealing with only foreign
affairs, defence and communications, remaining vested with two groups
of provinces, one predominantly Hindu, and the other predominantly
Muslim. However, the insistence of the Muslim League to have a
separate nation for the Muslims led to the formation of Pakistan
comprising Muslim majority regions of the north-west part of the
subcontinent and eastern part of Bengal. In the event, it was no longer
necessary to create a weak federal government. Instead, the founding
fathers of the constitution decided to have a federation with a strong

7
central government to hold together the diverse economic, linguistic,
and cultural entities and to avoid fissiparous tendencies. Centralisation
was also found desirable to unify the country, comprising regions directly
ruled by the British and 216 princely states and territories.3

III.2. Asymmetric Structure at Independence

Thus, asymmetric arrangement in Indian federalism has a long
history and goes back to the way in which the British unified the country
under their rule and later the way in which the territories under the direct
control of the British and various principalities were integrated in the
Indian union. While the territories ruled directly by the British were easily
integrated into the Union, the treaties of accession signed by individual
rulers covered the integration of different principalities. The provinces
ruled directly by the British had a modicum of autonomy and
rudimentary form of parliamentary government as the British loosened
the grip gradually from 1919 onwards. The Constitution that was
adopted in 1951 itself classified the states into four categories. The
provinces directly ruled by the British were classified as Part `A’states.
The princely states which had a relationship with the Government of
India based on individual treaties signed were classified as Part `B’
states. These included the states of Hyderabad, Mysore, Jammu and
Kashmir and 5 newly joined unions of princely states. In the case of
Jammu and Kashmir, the powers special powers were given in the terms
of accession. The remaining princely states acceding to the union were
grouped under Part `C’ states. Finally, the territories ruled by other
foreign powers gaining independence (French and Portuguese) and
areas not covered in the above three categories were brought under the
direct control of the union to form Part `D’states or Union Territories.

Thus, the Union of India in 1947 began with a major asymmetry

between British India and the princely states and even among the latter,
the terms of accession differed depending on the bargaining strength. In
almost all cases, the princely states surrendered whatever notional
sovereignty they had to the new country of India, in exchange for a
guaranteed revenue stream: their “privy purses”. The nature of this
bargain was clear – security and money in exchange for giving up
authority or residual control rights. This is close to the standard view of

3
For a detailed account of the history leading to Indian independence, see, Chanda (1965).

8
federation as a political bargain, with the difference that the successors
of the British in India, the Indian National Congress, were in an
extremely strong bargaining position, even relative to the coalition of the
princes. This was illustrated in the case of the exceptions to voluntary
accession, such as Hyderabad, where military force (the authority over
which was also inherited from the British) ensured integration into the
new union.

III.3. Assimilation of Units after Independence:

While many of the former princely states, particularly the Part
`B’ states continued as administrative units after their integration into
India, this continuation was not an essential part of the bargain.
Furthermore, reorganization of state boundaries from 1953, freely
permitted to the centre by Article 3 of the constitution, gradually eroded
this status. The Constitution allowed sub-state structures for regions
closely tied to some former princely states, but this had little practical
import as the states became almost the sole significant subnational units
of governance. Thus, in general, the princely states ceased to matter as
geographic entities. In this respect, the outcome was completely
different from the standard case of federation, where the constituents of
the federation would normally retain their identities. Broadly, the
asymmetric arrangement was recognition of the different set of
institutions and administrative standards in the country, which over the
years, was unified. The asymmetries present in 1947 with respect to
almost all the princely states disappeared from Indian federalism.

III.4. Special Position of Kashmir:

The sole exception, of course, was the state of Jammu and
Kashmir.4 While this state included several diverse populations and
regions, the overwhelming majority of population in the Kashmir valley
was Muslim, and the state bordered the new nation of Pakistan. The
history of the conflict over Kashmir has been written on extensively,
even though there is no consensus on the interpretation of events in
1947-48. Here, we merely note that the state acceded to the Indian

4
A good discussion on the asymmetric arrangements in Jammu and Kashmir and north-
eastern states can be found in Arora (1995)

9
union under very special terms, which were subsequently incorporated in
the famous Article 370 of the Constitution. This article provided the
state with a unique position in the Indian union, with its own constitution,
a title interpreted as the equivalent of Prime Minister for its chief
executive, and a special assignment of functional responsibilities.
Specifically, the jurisdiction of the centre was restricted to foreign affairs,
defense and communications, with the state’s legislature having
residuary powers. This was a striking contrast to the situation of other
states, where the centre’s assignment of responsibilities was much more
extensive, and where the centre retained residuary powers.

III.5. Integration of North-Eastern Hill States

The process of administrative reorganization of India focused on

the creation of new boundaries based on the main principle of language.
Typically, separate religious, caste, ethnic or tribal identities within these
boundaries were not the basis for further divisions. One major exception
to this has been the north-eastern part of India, where there is a distinct
difference in ethnicity from the rest of India, and several strong divisions
based not only on language, but also on culture and other traditions
(“tribal”, if one wishes to use that term). This part of India contains the
states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, and Tripura. Of these, only Assam has a population
comparable to other typical Indian states. Most of these states were
upgraded from the status of Union Territories,5 this reclassification
giving them, at one level, a political status equivalent to that of larger
states such as Bihar, Madhya Pradesh, and Uttar Pradesh. Each state
carries equal weight in mustering the 50 percent of states required to
ratify an amendment to the constitution.

Furthermore, there are various clauses in Article 371 which

accord special powers to north-eastern states. These provisions have
been introduced through amendments, typically at the time of
conversion of a union territory to a state, or in the case of Sikkim, after
its accession to India. The safeguards provided to these states through
these special provisions include respect for customary laws, religious

5
At independence, of course, this entire region except North Eastern Frontier Area (NEFA)
was administratively part of Assam province, and the union territories themselves were created
by separation from Assam. Meghalaya was directly carved out of Assam state, while Sikkim
was formerly an Indian protectorate. See, for example, Brass (1994) for a chronology.

10
and social practices, restrictions on the ownership and transfer of land,
and restrictions on the migration of non-residents to the state. State
legislatures are typically given final control over changes in these
provisions.

Thus, there are various provisions in the Indian Constitution to

protect group rights, and to compensate for initial inequalities in the
social system. Thus the constitution, while recognizing the idea of
fundamental human rights at the individual level, does not assume an
idealized initial condition of equality, either in pure economic terms or
otherwise. Thus there are allowances for separate laws to govern
different religious groups, and there are provisions for various kinds of
“affirmative action” for extremely disadvantaged groups. The first kind
of provision simply respects diversity (though this can create issues of
unequal treatment across subgroups, e.g., women in two different
religious groups). The second attempts to correct for specific inequities,
recognizing that legislative equal treatment from very unequal initial
conditions would not achieve desired equity goals. Conceptually, at this
level of ethical or normative judgement, there is no difference between
these provisions and the ones for the indigenous residents of north-
eastern states, except that the latter happen to be geographically
concentrated into reasonable administrative units. If that is the case,
then the relationship to federalism is not essential.

IV. Asymmetries in Practice in Indian Federalism

IV.1. Economic Asymmetry

The coming together of units with diverse history, resources,

policies and institutions in a bargain to form a federation would certainly
entail de facto asymmetry in terms of inter-state differences in
geography, demography, and economy. At present, there are 28 states
6
in Indian federation in addition to 7 Union Territories.

6
Union Territories are governed directly by the Central government. However, two Union
Territories namely, Delhi and Pondicherry have their own elected governments and legislatures.

11
 The wide differences in the economic characteristics between
the states in Indian federation are highlighted in Table 1. It is seen that
in terms of area the biggest state, Rajasthan is 90 times bigger than the
smallest state, Goa. Similarly, in terms of population size, Uttar
Pradesh, the state with largest population is 308 times bigger than the
smallest state, Sikkim. The density of population varies from 13 in
Arunachal Pradesh to 901 in West Bengal. Maharashtra, the state with
the highest Net State Domestic Product (NSDP) had 284 times that of
the state with the lowest NSDP, i.e., Sikkim. There are significant
variations in per capita incomes as well. In 2000-01, Goa, a small state
in the western coast had the per capita NSDP of Rs. 44613, which was
almost 9 times that of Bihar with Rs. 4813.

For the sake of convenience of analysis, the states have been

classified into special category states and non-special category states.
The former states are those, that are given a special status in dispensing
plan assistance by the central government. The non-special category
states in turn are classified into high-income, middle-income and low-
income states based on their per capita NSDP.7 It is seen from the
table that 10 special category states with covering 14 percent of
geographical area of the country have just about 5 percent of the
population and they generate just about 4 percent of the NSDP. The
importance of non-economic factors in determining the structure of
federalism is underscored by the fact that most of the special category
states are not economically viable. Even among non-special category
states, there are states that are too large like Madhya Pradesh, Bihar,
and Uttar Pradesh even after carving out the three new states of
Chattisgarh, Jharkhand, and Uttaranchal respectively from the territories
of these states in 2000.

Within the non-special category states, there are wide variations

in area, population, and income levels. The high income states with
about 18-19 percent area and population generated 29 percent of NSDP
whereas the low income states with 43-45 percent of geographic area
and population accounted for only 28 percent of income. There are wide
variations in the sizes and income levels within each of the categories of
states as well. On the whole, among the non-special category states,

7
The states with per capita NSDP more than 15% of the average are classified as High
income states and those with less than 10% of the average are classified as low income states.

12
the most populous state (Uttar Pradesh) had 123 times the population of
Goa, the least populous state and the income differences between the
highest and lowest income state was 36 times.

Table 1 : Some Characteristics of States in Indian Federalism

Area Population Density NSDP Per Percent Percent Percent
(Sq. Km) (in ‘000) of Pop 1999-00 capita age of age of age of
Rs. million NSDP total total total
(1999- area populati NSDP
00) on
High Income 601800 194065 322.5 4065770 22461 18.31 18.90 28.74
States
Gujarat 196000 50597 258.1 896060 18685 5.96 4.93 6.33
Goa 3800 1344 353.7 58620 44613 0.12 0.13 0.41
Haryana 44000 21083 479.2 424880 21551 1.34 2.05 3.00
Maharashtra 308000 96752 314.1 2131510 22604 9.37 9.42 15.07
Punjab 50000 24289 485.8 554700 23254 1.52 2.37 3.92
Middle 725000 302633 417.4 4867930 17635 22.05 29.47 34.41
Income
States
Andhra 275000 75728 275.4 1117530 14878 8.36 7.37 7.90
Pradesh
Karnataka 192000 52734 274.7 862980 16654 5.84 5.13 6.10
Kerala 39000 31839 816.4 569260 17709 1.19 3.10 4.02
Tamil Nadu 130000 62111 477.8 1143090 18623 3.95 6.05 8.08
West Bengal 89000 80221 901.4 1175070 14874 2.71 7.81 8.31
Low Income 1409300 458682 325.5 4022290 9013 42.87 44.66 28.44
States
Bihar 94000 82879 881.7 383260 4813 2.86 8.07 2.71
Chattisgarh 135100 20796 153.9 213310 10405 4.11 2.02 1.51
Jharkhand 79700 26909 337.6 232270 9223 2.42 2.62 1.64
Madhya 308000 60385 196.1 677780 11626 9.37 5.88 4.79
Pradesh
Orissa 156000 36707 235.3 311950 8733 4.75 3.57 2.21

13
 Table 1 : Some Characteristics of States in Indian Federalism
Area Population Density NSDP Per Percent Percent Percent
(Sq. Km) (in ‘000) of Pop 1999-00 capita age of age of age of
Rs. million NSDP total total total
(1999- area populati NSDP
00) on
Rajasthan 342000 56473 165.1 710200 13046 10.40 5.50 5.02
Uttaranchal 53500 8480 158.5 Na Na 1.60 0.83 0.00
Uttar Pradesh 241000 166053 689.0 1493520 9323 7.33 16.17 10.56
General 2736100 955380 349.2 12955990 14605 81.89 93.02 91.59
Category
States
Special 594000 63662 107.2 63930 10695 17.78 6.20 4.52
Category
States
Arunachal 84000 1091 13.0 14270 13352 2.56 0.11 0.10
Pradesh
Assam 78000 26638 341.5 2533300 9720 2.37 2.59 1.79
Himachal 56000 6077 108.5 106570 17786 1.70 0.59 0.75
Pradesh
Jammu & 222000 10070 45.4 121820 12373 6.75 0.98 0.86
Kashmir
Manipur 22000 2389 108.6 28580 12721 0.67 0.23 0.20
Cont’d..

Meghalaya 23000 2306 100.3 29040 12063 0.70 0.22 0.21

Mizoram 21000 891 42.4 12880 14909 0.64 0.09 0.09
Nagaland 17000 1989 117.0 23300 12594 0.52 0.19 0.16
Sikkim 7000 540 77.1 7580 14751 0.21 0.05 0.05
Tripura 10500 3191 303.9 41930 13195 0.32 0.31 0.30
Uttaranchal 53500 8480 158.5 Na na 1.60 0.83 Na
All States 3276600 1010562 308.4 13595290 14359 99.67 98.40 96.11
Uts 10974 16453 1499.3 549870 31211 0.33 1.60 3.89
Total 3287574 1027015 312.4 14145160 13778 100.00 100.00 100.00
Notes: na – Not available. All State NSDP figure do not include SDP from
Uttaranchal. NSDP figures of uts exclude SDP from Dadra & Nagar Haveli,
Daman and Diu, and Lakshwadeep.

The above discussion brings out that economic viability has

never been a consideration in demarcating the states in India. Nor has it
been a factor in reorganization of the states despite the fact that the
constitution empowers the central government to reorganize them.
Thus, to begin with, intergovernmental relationships are placed on an
uneven economic keel. Naturally, uniform assignment system in an
unevenly endowed federating system results in large differences in fiscal
capacities. Varying sizes of states in terms of area and population,
demographic compositions, different terrain and topography cause

14
significant variations in the unit cost of providing public services varying
expenditure needs and places a heavy burden of equalisation on the
intergovernmental transfer system.

The implications of inter-state differences in economic

conditions on fiscal variables of the states are shown in Table 2. The
table brings out some important fiscal features of Indian federalism.
First, variations in economic characteristics has resulted in significant
differences in revenues collected in different states, partly owing to
differences in the capacity to raise revenues and partly due to
differences in their collection efficiency. By and large, the ratio of
revenues to SDP is positively related to the level of per capita. The low
income states had lower revenue ratios than the middle income states,
which in turn had lower ratios than the high income states. Second, the
ratio of revenues to NSDP was much lower in special category states
than general category states even when the latter had comparable levels
of NSDP. The singular exception to this is the case of Sikkim, which
had retained the power to levy income taxes while acceding to the
country. Thus, unlike other states, Sikkim has the power to levy income
tax and federal income tax cannot extend to Sikkim. Third, the small
size of jurisdictions in these states implies that they cannot reap
economies of scale in providing services. Besides, hilly and
inhospitable terrain in these states means that the unit cost of providing
public services will be higher than in other states. It is thus not
surprising to see overwhelming dependence of special category states
on central transfers. Thus, in 2001-02, non-special category states on
average raised revenues to finance over 50 percent of their current
expenditure whereas in special category states it was just about 20
percent. Thus, central transfers financed more than 80 percent of the
expenditures of special category states. In per capita terms, transfer to
special category states is more than four times that of the average
transfer received by general category states.

Table 2: Revenues and Expenditures of the States – 2000-01 (RE)

States Per Poverty Per Own Per Per capita Per cent
capita ratio capita revenue as capita current of own
SDP (percent) own percentage trans- spending revenue
(rupees) 1999-00 revenue of SDP fers (rupees) to current
(rupees) spending

High Income 22461 17.83 2931.6 13.1 500 4386.6 66.8

States

15
 Table 2: Revenues and Expenditures of the States – 2000-01 (RE)
States Per Poverty Per Own Per Per capita Per cent
capita ratio capita revenue as capita current of own
SDP (percent) own percentage trans- spending revenue
(rupees) 1999-00 revenue of SDP fers (rupees) to current
(rupees) spending

Gujarat 18685 14.07 2684.6 13.2 863 5167.6 52.0

Goa 44613 4.4 14310.3 15.8 588 11904.8 120.2
Haryana 21551 8.74 3209.7 12.1 502 4107.9 78.1
Maharashtra 22604 25.02 2741.3 11.1 448 3852.6 71.2
Punjab 23254 6.16 3333.2 10.2 494 4712.7 70.7
Middle Income 17635 20.3 1868.8 10.6 658 3400.4 55.0
States
Andhra Pradesh 14878 15.77 1930.2 10.7 713 3320.2 58.1
Karnataka 16654 20.44 2148.1 11.3 686 3580.9 60.0
Kerala 17709 12.72 2295.8 10.2 690 3689.4 62.2
Tamil Nadu 18623 21.12 2342.5 11.3 658 3594.3 65.2
West Bengal 14874 27.02 1091.0 5.5 576 3092.7 35.3
Low Income 9182 34.28 858.5 9.3 673 2261.3 38.8
States
Bihar 4813 42.6 338.2 8.9 724 1515.5 22.3
Cont’d…
Chattisgarh 10405 NA 1264.0 4.9 NA 2455.2 51.5
Jharkhand 9223 NA 1128.0 9.0 NA 2229.4 50.6
Madhya Pradesh 11626 37.43 1061.9 11.5 624 2695.5 39.4
Orissa 8733 47.15 900.5 9.3 969 2785.3 32.3
Rajasthan 13046 15.28 1297.2 10.4 693 2864.2 45.3
Uttaranchal NA NA 1295.5 NA NA 4912.7 26.4
Uttar Pradesh 9323 31.15 791.2 8.1 598 2135.6 37.0
General Cat. 14605 25.97 1606.3 11.0 660 3060.9 52.5
States
Special cat. 10695 1032.2 9.7 2896 5126.7 20.1
States
Arunachal 13352 33.47 1067.8 5.3 7985 9992.3 10.7
Pradesh
Assam 9720 36.09 798.7 7.2 1216 3317.0 24.1
Himachal 17786 7.63 1660.5 7.8 3070 7420.6 22.4
Pradesh
Jammu & 12373 3.48 1150.4 7.9 4602 6080.0 18.9
Kashmir
Manipur 12721 28.54 406.0 3.1 3971 6032.3 6.7
Meghalaya 12063 33.87 1066.8 6.3 3149 5878.4 18.1
Mizoram 14909 19.47 679.0 3.8 9602 12845.6 5.3
Nagaland 12594 32.67 506.8 3.7 6332 7291.0 7.0
Sikkim 14751 36.55 5998.1 15.9 7945 12200.6 49.2
Tripura 13195 34.44 729.6 4.8 3376 5838.9 12.5
Uttaranchal na 1295.5 Na 4912.7 26.4
All States 14359 26.1 1570.1 10.9 768 3191.1 49.2
Source: 1. Finances of State Governments, 2001-02. Reserve Bank of

16
 India
2. CSO, Ministry of Planning, Government of India

IV.2 Asymmetric Design of the Transfer System:

Thus, the different position of special category states is reflected

not only in structural asymmetries and fiscal arrangements, but very
importantly in the methods and patterns of central transfers to states. In
some respects, the small size of these states is an advantage in this
dimension. Transfers that are high in per capita terms for these states
may not place a significant cost on the rest of the nation. In fact, even
the entire group of these states has a population share that is just about
five percent and the rest of the members of the federation may not
perceive this as a significant cost. Also, this small size encourages
these states to combine politically for some purposes, in councils that
allow them to coordinate policies, or to collectively negotiate with the
centre. This is in contrast to the insignificance of zonal councils for
other states.

To understand the asymmetry, it is necessary to refer briefly to

the transfer system in Indian federalism. There are three sources of
transfers from the centre to states. The first is the statutory transfers
made on the recommendation of the Finance Commission appointed by
the President of India every five years. The second channel of transfer is
the assistance given for plan purposes by the Planning Commission.
Finally, individual central ministries design transfers to enhance outlay
on specified services in the states as desired by them. These central
sector and centrally sponsored schemes are in the nature of close-ended
specific purpose transfers with or without matching requirements and are
included in the plan schemes. There are over 200 such schemes
initiated and administered by various central ministries. The allocation of
resources in different states is also influenced by regional policy
followed by the central government including the direct central
investments.

The framers of the constitution intended that transfers to states

should be based on the recommendations of an impartial semi-judicial
body appointed by the President every five years, namely, the Finance
Commission. So far eleven Finance Commissions have made
recommendations. However, over the years, with the centralised

17
development planning gaining focus, the Planning Commission gained
importance as a dispenser of both grants and loans. Thus, the scope of
the Finance Commissions has been confined to examining the non-plan
requirements of the states and providing transfers to meet these
requirements, and the Planning Commission has been assigned to deal
with the plan requirements. Initially, the volume of central assistance for
state plans as well as its grant-loan composition was determined on the
basis of the approved plan projects in different states. Since 1969,
however, the allocation is determined on the basis of a formula
determined by the National Development Council (NDC).8 However,
over the years, with increased earmarking of central assistance for
specific schemes, formula based component of central assistance for
state plans has been reduced and in 2002-03, it is estimated at just
about 46 percent. In addition, the central ministries exercised discretion
in transfers by increasing them under the central sector and centrally
sponsored schemes. Thus, as shown in Table 3, the Finance
Commissions transfer about two thirds of the transfers and this has
remained broadly constant since the early 1970s. However, transfers
given for both plan schemes and specific purpose transfers for central
sector and centrally sponsored schemes have increased over time.
What is more important, increasing proportion of assistance for state
plan schemes has been kept outside the formula based distribution
scheme and the proportion of normal assistance distributed according to
the formula is just about 46 percent of the total state loan assistance in
2002-03. Thus, on the whole discretionary element in the transfer
system has shown a steady increase over the years. These are
discussed in greater detail below.

IV.3. Finance Commission Transfers:

Finance Commission transfers comprise of tax devolution and

grants. The Commission’s methodology is to assess fiscal position of
centre and states, projecting revenues and non-plan expenditures of the
states for the ensuing five years, augmenting the projected revenues by
recommending share of central taxes to individual states based on the
chosen general economic indicators and filling the remaining gap

8
NDC is an intergovernmental body presided over by the prime minister of the country and has
cabinet ministers, members of the Planning Commission and chief ministers of states as
members.

18
between non-plan expenditures and revenues with grants in aid. This is
called the “gap-filling”approach.

Table 3: Central Transfers to States Through Various Channels

Rs. billion
Finance Commission Other
Transfers Plan Grants grants Total
Tax Grants Total State plan Central Total
Devolution scheme Scheme
Fourth
Plan 45.6 8.6 54.2 10.8 9.7 20.5 9.3 83.9
(1969-74) (54.2) (10.2) (64.6) (12.8) (11.6) (24.4) (11.0) (100.0)
Fifth Plan 82.7 28.2 110.9 29.1 19.3 48.4 5.4 164.7
(1974-79) (50.2) (17.1) (67.3) (17.7) (11.7) (29.4) (3.3) (100.0)
Sixth Plan 237.3 21.4 258.7 73.8 69.0 142.8 15.1 416.5
(1980-85) (57.0) (5.1) (62.1) (17.7) (16.6) (34.3) (3.6) (100.0)
Seventh
Plan 494.6 62.7 557.4 155.2 165.1 320.3 35.2 913.1

(1985-90) (54.2) (6.9) (61.0) (17.1) (18.0) (35.1) (3.9) (100.0)

Annual
Plan 172.0 34.5 206.4 57.2 55.4 112.5 10.2 329.4
1991-92 (52.2) (10.5) (62.7) (14.2) (16.8) (34.4) (3.1) (100.0)
Eighth
Plan 1318.5 147.2 1465.7 483.4 364.7 848.4 58.4 2373.1
(1992-97) (55.6) (6.2) (61.8) (20.4) (15.4) (35.7) (2.5) (100.0)
Ninth Plan 2300.9 239.9 2540.8 777.0 469.4 1112.9 189.5 3972.6
(1998-02) (57.9) (6.0) (64.0) (19.6) (11.8) (28.0) (4.8) (100.0)
Note: Figures in parenthesis are percentages to total transfers.
Source: Indian Finance Statistics/Public Finance Statistics, Ministry of Finance,
Government of India.

Discretionary elements even enter into the formula based

transfers of the Finance Commission. The Commissions determine the
shares of the centre and states in central taxes broadly on the basis of
judgements pertaining to their relative requirements, but mostly on the
basis of past shares. For the period 2000-05, the Eleventh Finance
Commission recommended that 29.5 percent of the net collections from

19
central taxes should be transferred to the states. The relative shares are
determined on the basis of general economic variables with weights
assigned, as shown in Table 4. It is in the process of choosing the
variables and assigning weights for them that relative shares of the
states may be influenced. This, however, need not necessarily be a
source of unacceptable asymmetry as the formula used by the
Commission is transparent.9

Table 4: Criteria and Relative Weights for Tax Devolution

Criterion Weight (percent)
1. Population 10
2. Income (Distance Method)* 62.5
3. Area 7.5
4. Index of Infrastructure 7.5
5. Tax Effort** 5.0
6. Fiscal Discipline*** 7.5
Note: *The distance method is given by: (Yh-Yi)Pi/Σ(Yh-Yi)Pi where, where, Yi
and Yh represent per capita SDP of the ith and the highest income state
respectively and Pi is the population of the ith state .
** Tax effort (η) is estimated as (η) = (Ti / Yi) / (0.5 1/Yi) where, Ti is the per
capita tax revenue collected by the ith state and Yi is the per capita state
domestic product of the ith state.
*** estimated as the improvement in the ratio of own revenue of a state to its
revenue expenditures divided by a similar ratio for all states averaged for the
period 1966-99 over 1991-1993.

It is because of this that the framers of the constitution intended

that the distribution of transfers should be mainly undertaken through the
Finance Commission which is supposed to be a statutory semi-judicial
authority. However, the constitution of the commission, and the
approach and methodology adopted by them and their recommendations
have been a subject of controversy in recent times. Notable among the
criticisms is the use of poverty ratio as a criterion for distributing the tax
shares of the states by the Ninth Finance Commission. It was argued
that poverty alleviation is not an objective of general purpose transfers,
and this should be taken care of by the direct anti poverty interventions
initiated by rural development and urban development ministries. It is
also argued that the transfer system should not be used to reward a

9
There was, however, considerable controversy on the use of the variable ‘poverty ratio’in tax
devolution formula in the first report of the Ninth Finance Commission. See, Bagchi (1988).

20
state not making enough effort to alleviate poverty. More important
criticism was the discretionary transfer made by the Ninth Finance
Commission for the slum clearance in Bombay (Mumbai) and Calcutta
(Kolkata) (Bagchi, 1988; Guhan, 1989). The Tenth Finance Commission
was similarly criticised for making transfers for one state (Andhra
Pradesh) as a compensation for the loss of revenue by following the
prohibition policy.10

More serious criticism of the Finance Commissions pertains to

the ‘gap-filling’methodology. It is alleged that ‘fiscal dentistry’practised
by the commissions have led to enlargement of ‘budgetary cavities.’
The states can gain more by lowering their tax effort and indulging in
profligate spending. In fact, serious deterioration in states’ finances
seen in recent years is in part attributed to the transfer system (Rao,
2002). This has resulted in the states resorting to frequent overdrafts.
As the states had to seek greater ways and means assistance, each of
the states was made to sign a memorandum of understanding (MoU)
with the centre to initiate measures to bring about correctives. What is
notable, however, is that the contents of the MoU signed by individual
states have not been placed in public domain. It is not known whether
the conditionalities are different for different states.

In spite of the MoU, the fiscal position has shown a steady

deterioration. Therefore, when the Eleventh Finance Commission was
about to submit its report, an additional term of reference was given to
the Commission to ‘… draw monitorable fiscal reform program aimed at
reduction of revenue deficit of the states and recommend the manner in
which the grants to states to cover the assessed deficit in their non-plan
revenue account may be linked to progress in implementing the
program’. Based on the recommendation of the Commission, the
11
centre has initiated the medium term fiscal reform program (MTFRP).
Accordingly, a small portion of the transfers has been earmarked for
giving grants to the states on achieving five percentage point reduction
in the percentage of revenue deficits to states revenue receipts including
central transfers.

10
Prohibition policy refers to the policy of prohibiting the consumption of sale of alcoholic
products within the state. One state, Gujarat has consistently followed this policy right from
independence and some states like Tamil Nadu and Andhra Pradesh have followed this policy
from time to time for electoral reasons.
11
One of the members of the Commission, however, wrote a note of dissent stating that the
recommended design is inappropriate.

21
 A number of shortcomings in the above scheme have been
pointed out. The amount earmarked for giving grants under MTFRP
constitutes less than 2 percent of the transfers recommended by the
Finance Commission. Along with other incentive based transfer
schemes, this has contributed to further segmentation in the transfer
system. More important criticism from the viewpoint of asymmetry is
that in the case of special category states over 80 percent of their
revenues accrue from central transfers. Inability to reduce the deficit
may be due to reduction in central transfers and this will be seen as the
state’s poor performance!

IV.4. Asymmetry in State Plan Assistance:

Asymmetric design in the transfer system in favuor of special
category states is seen very clearly in the distribution of plan assistance.
Until 1969 plan assistance for state plan purposes was given according
to the various plan schemes approved. To impart greater objectivity, the
NDC approved the formula in 1969 and the assistance has been
distributed to the states according to this formula modified by the NDC
from time to time.

The asymmetry in the plan assistance is seen mainly between

the special category states and non-special category states. The
formula that is applied at present is summarised in Table 4. First, 30
percent of the central assistance for state plans is earmarked to the
special category states even though their population share is only 5.4
percent. Second, 90 percent of plan assistance to special category
states is given as grant and the remaining as loan whereas the
proportion of grants in the plan assistance to other states is just 30
percent (Table 4).

This arrangement can not be entirely justified on equity grounds.

Surely, equity provides some justification for this. They may reflect
higher costs of providing the goods and services in remote mountainous
areas, owing to diseconomies of scale and scope arising from small
sizes of these states, and their internal diversity. Thus, higher per capita
spending than even high income states in these states seen in Table 1
may partly reflect higher costs of provision. Higher transfers may also
be needed to meet the special expenditure requirements, such as higher
levels of security, that are not required in other states. Thus, these

22
states may to some extent be acting as agents of the centre in the
provision of national public good of strategic stability and defence. A
part of the reason for higher transfers to these states may be because,
as they are located in international borders, the centre has not allowed
foreign investments to flow into these regions and therefore has the
responsibility of strengthening the regions to have domestic
investments.

Table 5: Formula for Distributing State Plan Assistance*

Criteria Share in Share Distribut
central of ion
Plan grants criteria
assistance And
(percent) loans
A. Special category states (11) 30 90:10
B. Non-special category states 17) 70 30:70
(a) Population (1971) 60.0
(b) Per capita income,of which: 25.0
(i) According to the `deviation'
method covering only the states with 20.0
per capita income below the national
average;
(ii) According to the `distance' 5.0
method covering all the fifteen states
(c) Fiscal performance,of which
(i) Tax effort 7.5
(ii) Fiscal management
(iii) National objectives 2.5
(d) Special problems 2.5
Total 2.5
7.5
100.0
Note: 1.The formula as revised in December, 1991.
2.Fiscal management is assessed as the difference between states'
own total plan resources estimated at the time of finalising annual plan
and their actual performance, considering latest five years.
3.Under the criterion of the performance in respect of certain
programmes of national priorities the approved formula covers four
objectives, viz. (i) population control, (ii) elimination of illiteracy, (iii)
on-time completion of externally aided projects, and (iv) success in
land reforms.
More important reason for large transfers in these states has to
be found in the political bargain that brought these areas firmly into the

23
Indian union, and keeps them there. This kind of reasoning is
particularly clear for such formal, separate induction into the union as
Sikkim, and for the case of Kashmir, but it also applies to cases such as
Nagaland, where a long insurgency after Indian independence was
finally brought under some control through the granting of statehood with
special provisions, and where an implicit political bargain may require
continuing transfers beyond the average.12

A notable feature of the state plan assistance is the steady

increase in its discretionary component. Although transfers are
supposed to be given according to the NDC formula, over the years,
increasing proportion of the assistance has been earmarked for specific
schemes and kept outside the formula based assistance. In 2002-03 for
example, the normal plan assistance for state plan schemes disbursed
on the basis of the NDC formula constituted only about 46 percent of the
total state plan assistance. The remaining portion included earmarked
assistance such as schemes for hill, border and desert areas, assistance
to north-east and Sikkim, slum development, accelerated power
development, accelerated irrigation benefit program, Prime Minister’s
Gramodaya Yojana (village development plan) and Prime Minister’s
rural roads program.

An important component non-formula based assistance under

state plan schemes is the pass through assistance from multilateral and
bilateral donors to the state governments. In recent years, there has
been a significant increase in lending by multilateral and bilateral donors
to the subnational governments and some discussion of this is in order.
These loans are a part of state plan assistance and therefore, discussion
on this is important. According to the seventh schedule to the
constitution all matters pertaining to international affairs (10), having
foreign jurisdiction (16), United Nations Organisation (12) and foreign
loans (37) fall within the jurisdiction of central government and states are
not allowed to borrow or take aid directly from bilateral or multilateral
donors. However, in recent years, the states have been allowed to
negotiate directly with multilateral and bilateral donors though the loans

12
One other possible reason also involves strategic motives. For strategic reasons, the central
government may wish to restrict private investment, particularly, but not restricted to foreign
investment into these regions. Thus public spending may be a compensation for this
restriction. To some extent, this is also a consequence of features of the political bargain that
restrict non-residents of the state from certain kinds of ownership of property in the state, thus
acting as a restriction on investment.

24
are eventually routed through the central government. This has enabled
some states to seek substantial loans from multilateral donors whereas
others have not been able to access the assistance. Naturally, the
questions of propriety and partisanship in the selection of states have
come up. The states ruled by regional parties with pivotal support to
coalition government at the centre may find it easier to access the
facility than the states ruled by main opposition parties. In a situation in
which most of the states are ruled by the main opposition party, the
central government seems to have adopted a policy of going slow on
this aspect of liberalisation, though once started, the process is difficult
to fold back.

The discussion in plan assistance is not complete without

referring to the way in which the states’ borrowing operations are
conducted in Indian federalism. Article 293 of the constitution empowers
the states to borrow internally. They can either borrow from the centre
or from the market. It however, stipulates that they can borrow money
from the market without referring to the central government only if they
are not indebted to the centre. The centralised planning has ensured
that all states are indebted to the centre and therefore, market borrowing
by the states simply implies the allocation of market loans by the
representatives of Union Ministry of Finance, the Planning Commission
and the Reserve Bank of India. The stipulation of statutory liquidity ratio
to the commercial banks ensures that the state governments’bonds are
subscribed by the banking system.

The way in which both central loans and market borrowings are
allocated to states is not made rule based and transparent and therefore,
has attracted resentment by some states. Generally, after meeting the
repayment liabilities, some additional resources are mobilised through
these instruments for spending on plan schemes. Asymmetry can result
from the volume of loans allocated to each state and the extent of
interest rate repression. Until the early 1990s, the rates of interest
charged on market states’ loans were substantially below the market
rates of interest, but thereafter, interest rates have been better aligned to
market rates. The whole process is not rule based and opaque, there is
significant scope for favouring some states over others in the allocation
of market borrowing. This is particularly true in a government ruled by a
coalition of parties and with some members of coalition wielding power
in the states.

25
 There can be tremendous scope for discrimination among the
states arising from the practice of rescheduling and writing off of the
loans on special considerations. In the past, a number of Finance
Commissions were asked delve into states’ indebtedness and
recommend rescheduling and writing off, and it was on the basis of
these recommendations, that rescheduling was done. Referring to the
issue of states’indebtedness was only a convention that was established
and not a constitutional necessity. In recent years, however, the central
government has written off states’loans in Punjab, Jammu and Kashmir
and more recently proposes to write off loans of Nagaland without
referring the issue to anybody, on a discretionary basis. The reasons
advanced for this relief was that these states fought the nation’s battle
on terrorism/insurgency and in the process have had to suffer loss of
economic activity and revenues, and therefore need to be compensated.
They also had to create additional infrastructure to fight terrorism and a
part of the loan spent on this should be written off. Whatever be the
merits of these arguments, such practices have serious moral
implications and the arbitrary manner in which the central government
decides to write off the loans of the states creates asymmetry and scope
for discrimination, which may not be in the long term interest of Indian
federation.

IV.5. Central Sector and Centrally Sponsored Schemes:

The most important scheme of differential treatment, however,
is possible in the assistance given to states under a variety of central
sector and centrally sponsored schemes. The former is funded entirely
by the central government and the states are used merely as
implementing agencies. The latter, however, are closed ended specific
purpose transfer programmes intended to influence states’ priorities in
areas considered important by the central government. These do not
13
have constitutional sanctity, given purely on discretionary basis.
Discretion enters in the choice of schemes, their design and the way
they are implemented.

There are over 200 central sector and centrally sponsored

schemes in vogue at present though, just 10 schemes account for over

13
Mr. K. K. Venugopal, an eminent constitutional expert has opined that giving grants for these
discretionary schemes is under Article 282 unconstitutional. See, NIPFP (1991).

26
75 percent of the total assistance given for central schemes. The
schemes are introduced by various central ministries and sometimes, on
the basis of announcements made by the Prime Minister from time to
time.14 Once introduced, they are continued. While the central sector
schemes are entirely funded by the centre, the centrally sponsored
schemes are shared cost programmes. But the schemes are designed
by the central ministries, and are mostly uniform across states. There is
scope for discrimination between states in the selection of schemes and
in its design. Often, new schemes can be introduced merely to favour a
particular state or group of states. The transfers given under these
schemes have received the strongest criticism, but that has not deterred
the central government from initiating more schemes. Nor has there
been any attempt to consolidate the schemes to allow greater say and
flexibility to states in their design and implementation. The ways in
which these are introduced and designed continue to be opaque.

IV.6. Other Sources of Asymmetry:

In economies subject to centralised planning and particularly in
those that had to traverse through acute scarcities, price and quantity
controls on both inputs and outputs are common. Once introduced,
these controls continue even when they have outlived their utilities,
either because no one bothers to reassess them or they create strong
vested interest for their continuance. In addition, there can be support
prices on various commodities introduced and these tend to be much
higher than border prices, introducing an element of implicit subsidy. All
these price and quantity controls are sources of invisible transfers and
can impact differently on different states. It is impossible to go into the
plethora of such controls and invisible transfers in Indian federalism, but
some important and obvious sources of inter-state discrimination may be
pointed out.

Determination of procurement prices of foodgrains is an

important source of invisible transfer. In an economy with high tariffs,
when the support prices declared by the government are significantly
higher than the prices that would have ruled in the market, and when the
government owned Food Corporation of India guarantees to purchase

14
Independence Day speech is one such occasion to announce new schemes.

27
the commodities at the declared price, the market prices will be
necessarily higher than it would be otherwise. As the support prices are
fixed mostly for agricultural commodities that are relatively price
inelastic, this tends to have significant regional redistribution. This
policy has a discriminatory impact on different states depending on the
product (crop) chosen for fixing support prices and the extent to which
support prices vary from the border prices (international price +
transportation cost). Not surprisingly, determination of support prices on
wheat, rice and other products is a matter of controversy in Indian
federation. It is not uncommon to see some of the regional parties
holding power in the states who are partners in the coalition government
at the centre influencing the determination of procurement prices.

Another recent example of price – quantity control system

impacting on the resource distribution in asymmetric manner is the
allocation of subsidised foodgrains to different states. The central
government has the discretion to allocate foodgrains to states for
distribution in fair price shops according to a formula determined by it,
but it can exercise considerable discretion in distributing foodgrains for
regions affected by drought and flood. It can render substantial relief to
states ruled by the “friendly” parties and make token releases to those
ruled by “unfriendly”ones. These examples can be multiplied.
Another important policy instrument that can discriminate
between the states is through regional policies, particularly the policy
regarding the location of central public sector enterprises and their head
office and regional/zonal offices. In a planned economy, locational
decisions are not taken necessarily on the basis of economic
considerations. In Indian case, during the first few plans, major
investments in steel and coal industries were made on the basis of
backward and forward linkage considerations. However, in more recent
years, the issue of locating central industrial units has been a subject of
controversy. Similarly, the location of regional offices of railways has
also been a subject of much discussion. Surely, this can be an
important source of discrimination between the states.
V. Political Elements in Asymmetric Practices.

A major source of asymmetric treatment of different states has

to be found in the nature of Indian polity and the way in which political

28
institutions have functioned over years. In the initial years of
independence the issue did not come to the fore because, the Indian
National Congress, which was in the forefront of independence
movement had little opposition and had a virtual monopoly in forming
the government at the centre as well as states. Since at both central
and state levels a single party ruled, and as the party itself was
centralised, there was little scope for disharmony between the centre
and individual states and for discrimination between the states.
However, four important developments in Indian federalism have
impacted to create asymmetric treatment of states in Indian federation.
These are discussed in the following.

The first important development is the increasing economic

centralization of Indian federalism. To begin with, as mentioned earlier,
the constitution adopted in 1951 had a strong centripetal bias to be
considered ‘quasi-federal’. The centralisation bias became stronger with
the adoption of planned development strategy that required the
concentration of economic powers and centralised allocation of
resources. The concentration of economic power reached the pinnacle
with the nationalisation of insurance and important commercial banks in
1969. The concentration of fiscal and financial resources with the centre
opened up vast scope for inter-state discrimination in the allocation of
resources.

The second important development is the end of single party

rule at the centre and states. The continuation of a single party rule for
relatively long period left two notable implications for intergovernmental
relations. First, strong authority of the party, more particularly the Prime
Minister had to be accepted and when there was a feeling of
discrimination, it was ignored in the larger euphoria of planning for
economic progress. Second, the concentration of power in the party and
resolution of centre-state and inter-state issues through informal means
through the party forum with the Prime Minister wielding paramount
authority meant that sufficient scope for development of formal and rule
based intergovernmental systems did not exist.

The third important development was the emergence of parties

with regional identity as ruling parties in some important states. In many
states, from time to time, the electorate perceived that the regional
interests and their distinct identity will be preserved better if they voted
the regional parties to power. The emergence of two Drawidian parties

29
alternating as ruling parties in Tamil Nadu, Telugu Desam reigning
power in Andhra Pradesh, and other parties such as Haryana Vikas
Party in Haryana, Biju Janata Dal with a distinct regional identity in
Orissa are cases in point. This has shifted the perspective of parties on
power at the state level towards strongly safeguarding regional interests
even if that beat the cost of the rest of the country.15

Fourth, is formation of coalition governments at the centre. As

none of the national parties emerging victorious during the last two
general elections, they had to forge alliances with other parties including
regional parties to form governments. The regional parties could force
their agenda and attempt to extract the maximum for the arrangements.
This is particularly true when the parties had a pivotal standing in the
coalition.

Finally, in general, the time horizon of the politicians and parties

has become more myopic in recent years. As the electorate have
become more cynical and their trust and faith in the politicians have
shown a nosedive, the probability of representatives getting re-elected
has declined sharply. In the last two general elections, only 33 and 38
percent of the members of parliament got re-elected. Given that the
probability of getting re-elected is low, the elected representatives find it
worthwhile maximising their personal gains when in office rather than
working for the welfare of their electorate.

Thus, on the one hand, the central government continues to

have enormous financial strength to dispense favours to state
governments and on the other, has lost enormous power to prevent the
strong states from bargaining and securing the allocation of resources in
their favour. The states ruled by regional parties with significant
strength in the parliament have become pivotal and have been able to
secure substantially higher resources relative to other states. This has
been achieved by the fact that significant proportion of explicit and
implicit transfers in Indian federation is discretionary. This dynamics of
Indian federalism summarises the recent developments in fiscal
asymmetry in Indian federalism.16

15
For the analysis of regional parties in India’s federal system, see Manor (1995); and Rao and
Singh (2001).
16
The above development has been a subject of consternation and concern. Referring to the
tactics adopted by the Chief Minister of Andhra Pradesh, an editorial in a leading daily stated,

30
 VI. Concluding Remarks

This paper has attempted to bring out asymmetric arrangements

in Indian federalism. Asymmetry in administrative, political and
economic spheres in federal systems is unavoidable and in fact, may be
necessary not only to ‘come together’ but also to ‘hold together’.
However, while transparent asymmetric arrangements that can be
justified on grounds of overall gains to the federation contribute to nation
building, the discriminatory policies followed purely on short term
political gains can be inimical to the long term interests and stability of
federalism.
The rationale for asymmetry arises from the premise that inter
alia, federalism is a rational bargain of various units. Thus, the terms of
joining the federation depend on the bargaining strength. Further, even
in a federation with no provision for exit, political alignments determine
the bargaining strength of governments at different units in their
interaction with centre and this may result in discriminatory treatment of
various units. The potential for discrimination is higher in more
centralised federations and is inversely related to the political strength of
the central government vis-à-vis the various regional governments.

It is important to make a clear distinction between asymmetric

arrangements which are rule based and transparent and those caused
by political and administrative expediency. The asymmetric
arrangements built in the constitutional framework itself and those that
have been evolved to ensure smooth functioning of the federation
belong to the first category. These are rule based and transparent and
contribute to nation building. Over time, with changing situation, there

“...Armed with several spiral folders listing myriad demands, Mr. Naidu will characteristically
show the folders around, and in all likelihood, have his way too. Like he easily managed to get
10 lakh tons of rice from the food for work program, a new international airport, a drought relief
assistance and Rs. 1300.17 crores for countering extremism. . Already, there are charges that
a “weak” centre is being routinely “blackmailed” by Mr. Naidu. He has very cleverly used his
political leverage to the maximum, and much to the discomfiture of his detractors, he has also
got key Andhra politicians and bureaucrats into decision-making positions in Delhi” (Editorial in
Asian Age, June 11, 2003).

31
may be changes in the arrangement depending on factors such as the
extent to which various units assimilate themselves in the federation and
their relative bargaining strength. In contrast, the asymmetric
arrangements arising from political and administrative expediency are
opaque and discretionary. They can lead to degradation of
intergovernmental institutions and can be inimical to the stability of the
federation in the long term.

The paper has analysed both types of asymmetries in Indian

federalism in respect of administrative, political and fiscal spheres, with
greater emphasis on the last. It chronicles the growth of asymmetries
over the years. It argues that the rule based and transparent asymmetry
— the special treatment to certain states accorded in the constitution
and special treatment accorded to some of the states in evolving
intergovernmental transfer system, have contributed to the health of the
federation. In contrast, the discretionary treatment of states arising from
changing configuration of political power structure, vagaries of coalition
and regional party politics, weaken the institutions of intergovernmental
finance and can be harmful to the stability of Indian federation in the
long term.

32
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