Centre-State Relations: The New Architecture

N K Singh

Parliament has just approved the vote on account and remitted the Budget proposal to the Parliamentary Standing Committee on Finance. The expenditure proposals will be considered by the individual ministries to whom the Demands for Grants pertain. The taxation and other tax related proposals will be examined by the Standing Committee on Finance. Both these would now be considered for final approval with such modification as the Finance Minister considers appropriate post the Parliamentary Recess period. These both would be approved and concluded in the first half of May. This will conclude the Budget Session. The Budget is essentially divided in three parts- first, which deals with the overall macroeconomic policies and behavioral pattern of key macroeconomic indicators; second, which deals with the proposed expenditure outlay of the central government and the third, which deals with the tax proposals.

On the first issue, this year it has generally been accepted that the Budget represents a credible balancing act and has given a decisive momentum to the new economic upturn which has commenced. What were the key policy options before the Finance Minister? How have these choices been exercised?

One, the classic choice: Growth versus Inflation. How much of fiscal flexibility was acceptable to enhance public outlays in infrastructure – railways and highways? The budget has adhered to the path of fiscal rectitude by meeting the fiscal deficit target of 4.1% this year. It has stretched out by a year the terminal fiscal path to reach the 3% target with somewhat higher intermediate targets. The rating agencies prefer a closer adherence to the fiscal roadmap. As compared to his predecessor, however, the Finance Minister has not pushed any Pause Button even after accepting what the analysts perceived to be the unrealistic target of 4.1% this year. Of course, the new fiscal time path must now be adhered. I have for long argued that parliamentary approvals on changes in the Fiscal Roadmap must be ex-ante than ex-post. Besides, the recommendation for the constitution of a Fiscal Council contained in the Finance Commission’s recommendations is sensible and should be considered in future. This along with the new Monetary Policy Framework Agreement between the Finance Ministry and the Reserve Bank of India would act in congruent ways. It will ensure harmony between monetary and fiscal policy.

Second, has enough been done to rationalise subsidies? There are significant gains in rationalising petroleum and fertilizer subsidies by de-regulating petrol and diesel and moving over to the Aadhar based LPG subsidy. Further action is needed on fertilizers, particularly Urea. There must be pari-passu progress as JAM (Jan Dhan-Aadhar-Mobile) gathers momentum.

Third, exogenously, oil prices have declined from $82 to $59, commodity prices have also softened and the current account deficit moderated. This opportunity could have been used to create greater fiscal space by retiring public debt or creating a Consolidated Sinking Fund for debt amortisation. The Finance Commission suggests this can “tide over, roll over risks and the weak cash management practices”.

However, a middle path has been preferred. Substantial benefit passed on to the consumers enhancing their purchasing power, oil companies allowed to recoup some losses and the Centre enabled to raise revenues to meet fiscal targets. Given the opportunity, some of the options mentioned above must be pursued.

On the second broad theme of the Expenditure Budget, the overarching considerations were the recommendations of the Fourteenth Finance Commission (FFC). The FFC has made far reaching changes in the model of Fiscal Federalism. The key features of the FFC were the enhanced devolution from the divisible pool of taxes and the change in formula which decided the sharing of taxes and grants among the states. Let us examine some overarching points associated with the FFC’s recommendations.

One, there is overwhelming precedence that on devolutions they have been treated as awards than recommendatory.The rise in tax devolution to States and the Non Plan grants to local bodies together represent a sharp cut of Rs. 214442 crore from the Centre’s resource block. In the shrunken resources for the Central government, the funding pattern of schemes has undergone a structural shift. Having accepted the recommendations, the Government had limited options. It could either significantly relax the fiscal consolidation programme to finance all central and centrally sponsored projects as before or could find a different mix. Relaxing the Fiscal Roadmap further would have serious consequences.

The Budget at a Glance highlights the middle path. It classifies Public Expenditure in three categories– schemes to be supported by the Union, schemes to be continued with change in sharing pattern and those fully de-linked from Central support. The major flagship programmes of the government remain in the Union list like the Sarva Shiksha Abhiyan, MGNREGA and National Health Mission. There are others which fall in the second category. Schemes de-linked from Central support are rather small, the most contentious being the Backward Region Grant Fund.

Two, in concluding the reduction of outlay on key social areas, some methodological errors have crept in. Perhaps, the Budget Expenditure (BE) of 2015-16 is being compared with the BE of 2014-15. This is never done because we have to always compare Revised Expenditure (RE) of the previous year with BE of the current year. Such comparison would suggest that allocations have been kept more or less intact. In the case of Integrated Child Development Scheme (ICDS), the reduction is sharp, but the pattern of funding is yet to be decided.

Three, in deciding whether the states have gained or lost their share in devolution from the Centre, one shall take into consideration the absolute gains or losses in the transfers than being bothered about the percent share. The Economic Survey released on February 26, 2015 well explains how each state will benefit in absolute terms. Thus, withdrawal of any grants or reduction in percentage share is aimed to reduce inter-state fiscal inequalities. In the long run, a progressive re-allocation of resources could promote fair and equitable growth.

Four, the report represents a quantum shift from an earlier period when a lot of the devolution took place through centrally sponsored schemes and schemes which were settled to the prevalent predilections and the policy preferences of the Central Government. The amount of untied funds transferred to the states have increased from Rs.696951 crore i.e. 62 % of revenue receipts to Rs.865185 crore i.e. 75 % of revenue receipts. The Graphs (1 & 2) below indicate show a comparison of transfer of untied funds from Centre to States. The FFC assigns the States more important obligations of deciding the welfare of their people and the path for their development. Complete decentralisation is anyhow not envisaged by any management text. States gain not significantly from the additional resources but more so from the flexibility they now have in conception, design and implementation of projects best suited to their local needs.

Source: Union Budget 2015-16

Source: Union Budget 2015-16

Five, the enhanced power to the states implies greater accountability and answerability on the part of the States. The States can decide their priorities, choose their preferred model of development, exercise tradeoffs on policy options. More broadly, States can devise their Production Possibility Frontier and their ‘Development Possibility Frontier’ and become accountable directly to the people. Besides putting Fiscal Federalism in operation, this also tends to promote Competitive Federalism. However, competition while promoting innovation and efficiency also brings forth the non-viability of the inefficient players. Hence, a mechanism to enhance and support governance in such states beyond providing monetary resources is important to promote equitable growth across states.

Six, allocation of funds from the Centre to States in India is dictated by Five Year Plans. The FFC was constituted and its recommendations leading to change in the pattern of funding of Centrally Sponsored Schemes, accepted in the middle of the Twelfth Five Year Plan. There remains an uncertainty on devolution of funds from Centre to the States pertaining to certain schemes covered under the Twelfth Five Year Plan. A path addressing the issue that how would the transfers be transitioned from being in accordance to XIII FC’s formulae to be in parlance to XIV FC’s. Designing a satisfactory transition path like a mid-term review of the Twelfth Five Year Plan or any other would remain a challenge for North Block and the NITI Aayog. For a better alignment of the Five Year Plans (if they are to be continued) with the successive Finance Commissions, it would be essential to align the 5 year term of the FYPs and the approved recommendations of the Finance Commission.

On the third issue of tax proposals, the tax rates are by and large kept stable. On the indirect tax side the decisive change will come with the implementation of the GST hopefully from 2016. This will make India a large common economic market, eliminate cascading impact, enhance revenues and create growth multipliers. Given the enormous work involved, there is some scepticism on adherence to the time frame.

Second, on the Direct Taxes, India’s high corporate tax rates detracted new investments, domestic or foreign. Its reduction by 5% over the four years is positive, though the time path is opaque. Individual tax rates have remained unchanged and stable but some new cesses have been added for Higher Secondary Education and could be imposed to support Swachh Bharat initiative.

The problem in general with Direct Taxes is its narrow base. Leaving out agriculture sector as a whole shrinks the tax base significantly. While poor farmers must be spared, the use of agricultural income as tax shelters by rich agriculturalists needs fresh consideration.

Third, on retrospective taxation the budget has reiterated the commitment that it would be avoided in future. GAAR has been put in the cold storage since on many issues like base erosion, profit sharing, treaty shopping, tax arbitrage consensus on best international practice is yet to emerge.

Finally, the Budget and the FFC as Two Sides of the Same Coin.

In the current era of globalisation, a growing incongruity in terms of GSDP, per capita income, tax base, population etc. among the States, heterogeneity in patterns of governance, rise of regional parties and increased global interdependence represent contemporary challenges to the dynamics of Centre-State relations. Thus the need to restructure Centre-State relations has gained recognition over recent past. This concern was voiced by the successive State Governments. The centrepiece of the complaints was the inflexibility and the predetermined project design and conditions of the Centre. The FFC was generally welcomed as a solution but the Budget has left some States and stakeholders critical based on inadequacies of allocation in the social sector.

The FFC has designed a new financial architecture of Centre-State relations. The Government had little option given the shrunken envelope after accepting the Finance Commission’s recommendations. After all you cannot have the cake and also eat it. States cannot have both the cake of large untied resources and eat the Centrally Sponsored Schemes as originally conceived. One can argue of whether this was the best approach or could the recalibration have been somewhat different.

Will this new model of Fiscal Federalism work? There are inherent risks but also existing opportunities for Team India. The risks are well known if the State Governments act irresponsibly or promote fiscal profligacy. But in the end, the Government at the Centre and the States are judged by the improvement and development of life quality by the Electorate whose periodic mandate they seek.

The new fiscal architecture eliminates the form of neo-colonialism like what Rudyard Kipling described as the White Man’s Burden viz. the Centre knows what was good for the States. A new social compact between the Union and the states has been ushered.

In the end, as said by Francis Bacon- “Demonstratio longe optima est experientia. By far the best proof is experience.”

(The author is a noted economist, former top bureaucrat and Ex-MP)

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Published date: 31^st March 2015, Image source: http://www.livemint.com

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Vivekananda International Foundation)

India Budget 2014: An important Step in the Right Direction

Ravi Venkatesan

Prime Minister Narendra Modi was voted into power on the basis of some very clear ideas and promises of getting the economy back on track, creating lots of jobs and on making India an easier place to do business for both Indian and foreign companies. This first budget is therefore an important signal of his government’s commitment to following through on its promises. This was a complex budget and the longest ever budget speech by a Finance Minister. There is a confusing amount of detail and new proposals and it is easy to miss the forest for the trees. In assessing this budget, I believe it is important to step back and ask four critical questions.

The first is fiscal consolidation. How does the FM plan to reduce expenditure, attack subsidies, raise money through disinvestment.?

The FM has promised to rein in government expenditure and maintain the deficit to 4.1% of GDP and reduce that to 3.6% then 3% over the next two years. He has appointed a high level Expenditure Management Commission to focus on curbing spending; more details are awaited but the intent seems clear.

He has also set a target of raising $13B through disinvestment. There is a special focus on government-owned banks, which must raise $40 billion by 2018 to recapitalize themselves. A booming stock market should help the government achieve its target.

Subsidies are a different matter. There is disappointingly little detail in terms of reining in the US$43bn subsidy regime which accounts 14% of all expenditure. Saying that the government proposes to "overhaul the subsidy regime, including food and petroleum subsidies, and make it more targeted while providing full protection to the marginalized, poor" and linking programs like MNREGA to asset creation amounts to a motherhood statement. More specificity is necessary.

Overall, these are directionally correct measures but given the harsh economic situation, the weak execution capability and the absence of details, restraining the deficit to 4.1% may be aspirational.

The second big question is what is the progress towards shifting to a more open economy with less friction? Basically this is about two things taxation and FDI.

The single biggest expectation of the world was that FM would repeal the retrospective amendment of tax laws on indirect transfers- the infamous Vodafone case. The FM emphasized the importance of a stable and predictable tax regime and set up a high level committee to deal with future issues but left the Vodafone matter to the legal system. This may have been pragmatic but failed to send the unambiguous signal foreign businesses are looking for, However, there are also changes proposed to make transfer pricing laws more consistent with international practices; this will greatly alleviate the concerns of MNCs.

While there are promises about action on the much awaited taxation reforms—Goods and Services Tax (GST) and Direct Tax Code—there is nothing concrete on either front. On GST, the FM said the government is ready to approve a legislative scheme to enable the introduction of a GST, but didn’t really deal with the revenue loss concerns of the states which have to approve this nor did he set a deadline for the implementation of GST.

On foreign direct investment, the FM has opened up FDI in ecommerce, and upped the cap on FDI in defence & insurance to 49 per cent, from 26 per cent previously. This is good but perhaps doesn’t go far enough. Defence contractors may be reluctant to part with technology unless they control 51%

Question # 3 is what is government intending to do to improve India’s dreadful infrastructure?

The FM did well here. He has committed large allocations to infrastructure- over Rs.37,000 crore for 8500 km of new roads, fuel guarantees for thermal power plans, a focus on developing new airports in tier 2 & 3 cities and 16 new ports and an additional 15000km gas grid and so on.

But more importantly, he has proposed several ideas to facilitate better policy framework for execution of projects as he looks to tap private sector investment . For instance, an eBiz platform that will bring in transparency and accountability into the process of getting statutory clearances such as land acquisition, environment and forest clearances which are major hurdles for project implementation.

To help fund infrastructure projects, the FM has encouraged banks to extend long-term loans to infrastructure sector. Banks will be permitted to raise long-term funds for lending to infrastructure sector with minimum regulatory pre-emption. In another move that could mobilize large investments, the FM announced infrastructure investment trusts similar to those for real estate. These are all practical and positive steps.

The fourth and final question is How does the government intend to create a vibrant manufacturing sector that creates lots of jobs?

Here the biggest impact will be indirect and felt over time through the implementation of GST and through improvements in infrastructure. Infrastructure projects in particular will trigger demand for construction machinery to cement and steel. Besides these, the increase in defence production, increased Custom duties on some electronics products and the expansion of an existing Tax incentive for large investments will all help.

There are many who are disappointed with the incrementalism of this budget. They expected bigger reforms and more details on the How’s. I am not one of them. I believe this budget is pragmatic and directionally sound. There is nothing retrograde and that in itself is a big deal after the experience of the last few years. A journey of a thousand miles begins with a single step and that’s what this budget really represents; in seven months, the government will present another budget for the full year and have an opportunity to be clearer and bolder. In any case, much of what is needed to be done to revive the economy lies beyond the budget- in legislative reforms and in administration. So, while there is great appetite for grand vision and big pronouncements, what we really need is better execution. If the government is able to avoid bruising confrontations and can actually deliver on what it has set out, it would represent substantial progress in an economy crippled by empty rhetoric, bad ideas, red-tape, and corruption.

(Ravi Venkatesan is the former Chairman of Microsoft India and Cummins India. He is a Director on the Boards of Infosys Ltd and Rockefeller Foundation and author of the book, “Conquering the Chaos: Win in India, Win Everywhere” published by Harvard Business Review.)

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Published Date: 15^th July 2014, Image source: http://st1.bgr.in

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Vivekananda International Foundation)

Is Federalism in Danger Through Central Activism?

Dr. M.N. Buch

Visiting Fellow, VIF

Article One of the Constitution makes India a Union of States. The words of the Article are “India, that is, Bharat, shall be a Union of States”, The key words are, ‘India’, ‘Bharat’, ‘Union’ and ‘States’. 

Adi Sankara brought us the philosophy of ‘advaitya’, or indivisible, in contrast with ‘dvaitya’ or dual, duality. The Constitution by calling India that is Bharat perhaps recognises duality in all thing. Of course this is dabbling in the field of the metaphysical, but the fact is that in our polity there are almost always two facets, that which is stated and that which is real.

To return to Article One, in the Union that is India if there are no States there is no Union. In the United States of America thirteen separate British American Colonies came together to jointly fight the war of Independence. For this purpose they formed an Union, a federation in which the Colonies voluntarily surrendered some of their powers to the Union while jealously guarding what they did not surrender. Under the U.S. Constitution that which is not surrendered to the Union belongs to the States. Residuary powers in the U.S. vest in the States. In India the Seventh Schedule of the Constitution has three Lists of legislative competency. List One is the Union List in which Parliament has exclusive legislative jurisdiction; List Two is the State List in which the State Legislature has, exclusive jurisdiction; List Three is the Concurrent List in which both Parliament and the State Legislatures have jurisdiction, with the laws of Parliament taking precedence . Under Article 248 all residuary powers vest in the Union. 

The India Union really consists of the Provinces of British India, not quite colonies but also not quite States as understood in the present federal context. Their origin lies in British rule as ultimately codified by the Government of India Act 1935. Many of the features of that Act are carried over to our Constitution --- in fact the Act is the basic frame around which the Constitution is woven. It is not as if the Provinces came together to form a Union, for which purpose they surrendered some of their powers to the federation. The division of powers was already done by the Government of India Act, 1935, in section 95 of which one finds an echo of Article 356. Or is it the other way round, with Article 356 echoing section 95 of the Act? Prior to 1935 India was an Unitary State with several federal features, not because federalism was the ruling philosophy but because India was too large to be governed without a high degree of decentralisation of powers and local autonomy. It is in 1935 that this autonomy was enshrined in the Act which was then our Constitution or Basic Law. This has been carried forward, fine tuned and enshrined in our Constitution which has also accommodated the princely states which merged into the Union.

The word federalism does not find any mention at all in the Constitution, except in the Article containing definitions, Article 366, sub-clause (11) of which refers to the Federal Court as constituted under the Government of India. Act 1935 and Article 374, which provides for judges of the Federal Court to be judges of the Supreme Court and for all cases before that court to stand transferred to the Supreme Court. Everywhere the word used is ‘Union’. Is it, therefore, a question of semantics only and we really are a federation. Or is it that we are a Union with federal features without being a true federation?

The Seventh Schedule of the Constitution provides in the Union, State and Concurrent Lists the exclusive jurisdiction of Parliament, the exclusive jurisdiction of State Legislatures and the concurrent jurisdiction of both. List Two of the Seventh Schedule gives autonomy, one can argue sovereignty to the States in the subjects enumerated in the list. Under Article 162 the executive power of the State extends to all matters for which the State Legislature is competent to make laws. Exclusive jurisdiction mandated by the Constitution does give India a strong federal character and, therefore, India can be deemed to be a federation. But it is a federation with very strong centripetal force in which the Centre has a larger role than the States. All federations have this to a greater or lesser degree and even in the United States the exigencies of war, the demands of national security, economic considerations, especially at a time of crisis and the striving for equal opportunity and civil rights have led to increasing federal intervention and enlargement of the role of the federal government. As the world becomes more complex, as modern transport and communications, information technology shrink distances the demand for centralised decision making increases. It is here that in a federation collective decision making through consultation and knowledge sharing has to coexist within decentralised implementation of decisions and an increasing partnership between the Centre, the States, Local Government and the people all become virtually important. A successful federation is one where this is achieved.

As already stated India is a highly centripetal federation. Under Article 312 we have All India Services constituted by the Centre, whose officers hold all the senior posts in the Centre and the States. Our judiciary is not divided into State Judges trying cases under State laws and Federal Judges trying cases under federal laws. Right from the court of first instance, civil or criminal, right upto the Supreme Court, all magistrates and judges have jurisdiction to try cases under any law in force in India, State or Federal. The judiciary is a unified hierarchy with the Supreme Court at the Apex. The control over and audit of the funds and accounts of the Central, State and Local Government vest in a single Comptroller and Auditor General, just as conduct of Parliamentary and State Legislature elections is the responsibility of the Election Commission.

The Centre has other levers to asset its superiority over the State, of which finance is a very important one. Under the Constitution, List 1 of the Seventh Schedule enumerates the taxation powers of the Centre. Entries 82 to 92B give the taxation powers of the Centre and these include income tax, custom duties, excise duties on tobacco and goods manufactured or produced in India, corporation tax, taxes on capital value on assets, estate duty on property, terminal tax on goods and passengers carried by rail, sea or air, taxes on stock exchange transactions, taxes on advertisements in newspapers, taxes on sale and purchase of goods in the course of interstate trade, etc. By contrast the States have the power to impose land revenue, taxes on agricultural income, taxes and duties relating to agricultural land, property tax, excise duties on alcoholic liquors, opium and narcotic drugs, electricity tax and duties, taxes on entry of goods, taxes on vehicles subject to concurrent powers vested in Parliament under Entry 35 of List 3, entertainment tax, capitation tax and rates and stamp duty. With a new VAT and GST regime in the offing the discretion to levy taxes will be further reduced. No doubt Part XII of the Constitution in Articles 268, 269,270, 271 and 272 does provide for distribution of tax revenue between the Union and the States and under Article 280 it is mandatory to constitute a quinquennial Finance Commission. But how much of central taxes will form part of the divisible pool is limited by Article 271 and, therefore, if income tax rates are not increased and instead surcharges are imposed, the State will get no share of this revenue. In other words, if the Centre decides that some revenue should be withheld from the States it can do so and the Finance Commission notwithstanding, the States can do nothing about it. 

Another financial lever available to the Centre is the Five-Year Plan and the Annual Plan. The size of the State Plan is very largely dependent on what the State can raise by way of resources, but by withholding central grants or downplaying sectoral requirements the Planning Commission can definitely influence the size of the State Plan. When we add to this the huge sums of money available from the Centre under schemes such as the National Rural Employment Guarantee Scheme (NREGS) and the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) one would get some idea of how the Centre can manipulate things in favour of a State whose government is friendly to the Centre and how it can harass a State whose government is unfriendly. Clearly the financial equations are heavily weighted in favour of the Centre. In a federation of equality the financial arrangement would be such that the Centre can neither discriminate against, nor in favour of any State. This is not the position in India, which is a major complaint of the non UPA ruled States in the country at present.

There are large numbers of irritants which now seem to be plaguing Centre-State relations. During Nehru’s time there was homogeneity because the same party ruled both the States and the Centre. In Indira Gandhi’s time, thanks to her basically imperious nature and centralisation of powers in the Prime Minister the Centre was totally supreme, State Governors were changed at will and state governments superseded whenever they were found to be inconvenient and the writ of the Centre was supreme and at no time more than during the Emergency. The States were virtually reduced to administrative units which had to obey the orders of the superior government, the Government of India. Federalism virtually died under Indira Gandhi, as did a number of other institutions which are vital for the working of a democracy. On the use of Article 356 the Supreme Court did put a number of restrictions in the S.R. Bommai case, but the real problem is that if the Centre does use Article 356 and destablises a State Government, by the time judicial remedy can begin to take effect the damage has already been done .Paradoxically it is only when the Centre is weak and the ruling coalition is unstable that the States are relatively safe from whimsical central intervention. A weak Centre is not good for the country because decision making at the national level virtually ceases. Therefore, safeguarding federalism through a weak Centre is far worse than the disease itself. Ideally the constitutional position of a strong Centre presiding over a centripetal policy, but with State Governments which are stable and powerful and act as a check on central whimsicality is the best constitutional and administrative arrangement for India. This is the goal towards which one must progress. 

In the United States any law which affects the interests of the States must have the support of the Senate, which is the guardian of the rights of the States in the federal set up. Regardless of the size of the State it sends two representatives to the Senate. In India the Council of States has 238 representatives of States and Union Territories but because the number of members from each State is dependent on the size of the State Assembly, the more populous States have more number of members and the less populous States are marginalised. The method of election being indirect and the total electorate for each State being the Legislature of the State, the decision of the Council of the States is a reflection of the political equation within each State Assembly. The members, therefore, are representatives of political parties rather than of the State from which they are elected. To that extent there is no difference in the working of the House of People and the Council of States because members of both Houses answer to a whip. That is certainly not true of the Congress of the United States of America. The Council of States has no veto powers in the matter of legislation even if it adversely affects the interests of a State. It is only under Article 249 that Parliament acquires the powers to legislate with respect to a matter in the State List in the national interest, provided that the Council of States so resolves. Because members of the Council of States answer a whip the members of that House will, even in a matter governed by Article 249, vote not in the interest of the State or States but as per the diktat of the ruling party. At the level of Parliament, therefore, the States have no guardians to safeguard their interests and, therefore, there is a growing distrust between State Governments, Central Government and legislation enacted by Parliament. The result is that many State Governments resolve not to enforce a law of Parliament. For example in the matter of the Food Safety and Standards Act both Madhya Pradesh and West Bengal have said that they would not strictly enforce this law. Only a weak Centre can tolerate this.

When it comes to matters of national security the situation becomes more serious. Every time when a break-down of law and order takes place State Governments do go running to the Centre for help. The Naxalite movement which has seriously affected the administration of about 160 districts in the country is one example where the affected States are clamouring for central assistance and central forces. When terrorists struck Bombay in 2008 the Maharashtra Government went running for help to the Centre. When natural calamities strike the States want central intervention. At that time no one cries about such intervention weakening federalism. However, when the Centre decides to set up a National Counter Terrorism Centre and tries to arm it with the authority to intervene immediately on receipt of credible information and to neutralise a terrorist attack which is building up, the States cry foul. It is a fact that police is entirely a State subject and police action is the responsibility of the State Governments. With the police throughout India at senior levels being manned by the very IPS officers who also serve the Central Government it is strange that the Centre obviously does not trust the State police and wants to retain powers of direct intervention. This is strongly resented by the States. By failing to take States into confidence and by trying to push through certain measures which have been initiated at central level the Centre has aggravated the situation and created a bogey of federalism in danger versus national integrity in danger. Under Article 355 it is the duty of the Union to protect the States against external aggression and internal disturbance and to ensure that the government of every State is carried on in accordance with the provisions of the Constitution. Surely the Centre must have the wherewithals to perform its duty under Article 355. We do need a serious dialogue between the Centre and the States on Article 355 versus Entries 1 and 2 of List 2 of the Seventh Schedule of the Constitution (Police) and to see to what extent the power to strike against terrorists on receipt of credible information is available to a Central authority without this being construed as an attack on the rights of the States. It is in this behalf that the Interstate Council must be activated so that all matters relating to Centre-State relationships can viewed through the prism of public interest and solutions arrived at which would enable the Centre to discharge its constitutional obligations without the States feeling that this is an encroachment on their rights. In other words, what this federation needs is a clear-cut understanding of what federalism means under Indian circumstances and how we can create that machinery which ensures smooth relations between the Centre and States without conflict.

Broadly speaking it is not federalism which is under attack but rather individual State Governments and the Centre itself which are under threat because the two opposing parties will not talk to each other, will not create an environment of trust and will insist on trying to score brownie points against each other. In case there is no consensus the Centre must use its authority to decide an issue and then ensure that all States fall in line. Here defiance by one or more States should not be tolerated and, if need be, coercive powers be used to call recalcitrant States to account. Right now federalism is not in danger through Central activism. The fact is that the Centre, by failing to assert itself is failing in its duty and this can be fatal because as satraps break away the Centre itself would wither away. What price then this Union of States?