More money to states – Will the gambit work?

Prime Minister Modi has continued his reform process with the decision today of accepting the recommendations of the 14th Finance Commission to increase the share of States by 10%. The 13th Commission had fixed 32% as allotment to States and this has now been increased to 42% by the 14th Commission.

This will substantially increase the finance available to the States, so that they can plan how to fund their projects based on their priorities. This is another box checked, per PM Modi’s electoral promise of co-operative federalism. This is also at the core of conservatism and I am delighted that the Prime Minister has made this decision. This, along with the coal auction revenues going to states and the upcoming GST implementation, will lead to substantial changes in the nature of relationship between the Center and the States.

What may be a superb decision from a governance perspective, need not be politically beneficial. This, according to me, is a classic case for that.

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According to me, there are three types of governments currently administering Indian states – ideologically:

Conservative BJP ruled states – Maharashtra, Gujarat, MP, Chattisgarh, Jharkhand, Rajasthan, Haryana, Punjab (Category 1)

Center or unclear ideology states – Orissa, Andhra Pradesh (Category 2)

Socialist or communist states – All the remaining states (Category 3)

Category 1 states will hopefully use the funds constructively and start competing with each other. In other words, PM Modi can continue his development agenda, by proxy. He will have to take absolute ownership of programs and monitor them to completion.

In Category 2 states usage of funds will differ. Andhra, being a newly created State, may use it for the creation of new capital city. CM Naidu can make the best decision on how to use this largesse. On the other hand, CM Patnaik has been getting funds from the Modi government and he can start a completely new type of governance. However, his inertia or lack of more funds or his misplaced priorities are preventing him from taking that leap of faith.

Regarding the socialist and communist CMs in Category 3 states, I have great misgivings. By nature, they are against competition and hence I do not see them invest substantially by increasing investments in infrastructure or developmental projects. So, my guess is that we will see an entitlement extravaganza in these states. With Bihar and West Bengal going to polls next, I expect Nitish Kumar and Mamata Banerjee to go bonkers with their sops. Siddaramaiah has already been busy giving many sops to minorities in Karnataka. Moreover, Karnataka being the only large state remaining with Congress, expecting anything else will be foolish. All other states have substantial time to plan and allocate for their next social programs.

Politically, this decision may draw curtains to BJP’s hopes in Bihar and West Bengal. The regional leaders viz., Mamata Banerjee and Nitish Kumar, will go all out in their campaign with new programs. If PM Modi tries to intervene, he will be branded as someone who interferes in State’s running. He will have to bring his A-game to have his programs registered in the minds of the voting populace. With the opposition parties united against BJP, the job of getting a majority in the Rajya Sabha has just gone tougher. Will Modi be able to win the short term game, so that he can continue his long term agenda?


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