The Marxist
XXXX, 1–2
January-June 2024
Federalism Undermined Under Modi’s Rule
B.V. RAGHAVULU
Since coming to power in 2014, the BJP-led central government under Prime Minister Narendra Modi has increasingly undermined India’s federal structure. Although past administrations have also sought to centralize authority and encroach on the rights of the states, the Modi government’s actions represent an unprecedented shift. The government has significantly curtailed state autonomy by frequently reducing states to mere implementers of central policies. This shift is fueled by the combined interests of both international and Indian corporations alongside the Hindutva communal agenda, further accelerating the erosion of foundational constitutional principles. If the Modi government’s systematic dismantling of federalism continues unchecked, it could pose a grave threat to the unity and integrity of India.
For a proper understanding of the dangerous implications of the Modi government’s onslaught on the federal structure, it is useful to have some constitutional and historical background on the evolution of its framework.
I. THE CONSTITUTIONAL FRAMEWORK:
A CENTRALIZED FEDERAL SYSTEM
According to Article I of the Indian Constitution, ‘India, also known as Bharat, is a Union of States’. Dr. B.R. Ambedkar, speaking to the Constituent Assembly in 1948, envisioned a system in which India would consist of a ‘Union at the center and the states at the periphery’, each vested with sovereign powers in their respective domains as assigned by the Constitution. He emphasized that India is a union of states, not a federation, highlighting that the Constitution could function as both unitary and federal, depending on situational demands.
Dr. Ambedkar elaborated that, in ordinary circumstances, the Indian system is designed to operate as a federal one. However, in times of war or national crisis, it was structured to shift toward a unitary framework, allowing the centre to assume more concentrated control.
The framers of the Indian Constitution opted for a ‘strong center’ model of federalism. This choice was influenced by the country’s historical context, particularly the Partition, which underscored the need for a powerful central authority to maintain unity and stability. The founders feared that a weak centre could encourage divisive regional movements, jeopardizing the newly independent nation’s integrity.
The Indian bourgeoisie also supported a strong centre, viewing it as essential for creating a unified market for capital and goods. This preference for centralization led to initial resistance from the Indian National Congress against the formation of linguistic states, as they feared such demands could lead to the Balkanization of India, threatening national unity.
Although the Constitution of India has an inherent bias towards centralization, it also incorporated important federal principles, considering the country’s continental scale and its profound economic, political, cultural, and social diversity.
Federalism forms the spirit of unity amidst diversity, allowing India to balance shared national identity with regional autonomy. Federalism serves as a vital institutional framework for sustaining India’s integrity, playing a critical role in conflict resolution, democratic stabilization, and accommodating various regional demands. It is essential for meeting the aspirations of the people and preserving the country’s unity through equitable power distribution.
The 1994 Supreme Court ruling in the S.R. Bommai case underscored that states are not mere extensions of the Union; rather, they possess supremacy within their constitutionally defined domains. This decision reinforced the notion that federalism and democracy are intertwined and that undermining one would threaten the other.
In a country as vast and diverse as India, any push towards centralized or homogenized structures — be they fiscal, political, or cultural — would hinder economic progress. To thrive, India requires more federalism not less. Federalism, as a foundational principle, is the only feasible path for success in a nation as diverse as ours.
II. EFFORTS TO STRENGTHEN FEDERALISM:
POST-INDEPENDENCE EXPERIENCE
Despite the noble intentions of India’s constitutional framers, post-independence governments often concentrated power at the expense of states’ autonomy. Uniformity is frequently prioritized over diversity, with state-specific interests often seen as obstacles to national unity. This centralization extends beyond political control to fiscal and economic decision-making, limiting the policy space for state governments.
However, the drive towards centralization in India’s governance has not gone unchallenged. Since independence, there has been persistent tension between forces advocating for increased centralization and those striving to enhance the autonomy of states. This ongoing contest has shaped the political landscape and influenced the functioning of federalism in the country.
Early Struggles for State Autonomy
Immediately following independence, this tug-of-war became evident in the controversies surrounding the formation of linguistic states. Sub-national identity and linguistic aspirations led to demands for state boundaries to be drawn along linguistic lines, eventually culminating in the States Reorganisation Act of 1956. This landmark legislation marked a significant milestone in Indian federalism, as it formalized state reorganization based on language, setting a precedent for respecting regional identity within a federal structure.
The Rise of Regional Parties and Federal Reform (1970s–1980s) The political landscape shifted dramatically in the 1970s and 1980s as the dominance of the Congress Party faced substantial challenges from regional and leftist political parties. This period saw intensified calls for restructuring the federal framework to promote equitable power-sharing between the central government and the states.
The DMK government in Tamil Nadu responded by establishing the Rajamannar Committee in 1969 to examine centre-state relations, proposing measures to reinforce state autonomy. Similarly, the Left Front government in West Bengal, which came to power in 1977, issued a memorandum advocating for a realignment of central-state relations. The memorandum exposed central interference, particularly in the use of the Governor’s office to influence state politics.
In response to the 1984 dismissal of the Telugu Desam Party (TDP) government in Andhra Pradesh, which many viewed as a misuse of gubernatorial power , opposition parties convened a series of conclaves across the country to discuss centre-state relations. At the landmark 1984 conclave in Srinagar, opposition parties — including the DMK, TDP, Akali Dal, RPI, Assam Jatiya Dal, National Conference, and Left Parties — crafted a framework advocating for a more balanced federal structure.
Sarkaria and Punchhi Commissions
These efforts created mounting pressure on the central government, ultimately leading to the establishment of the Sarkaria Commission in 1983. The commission presented its report in 1988. Tasked with examining central-state relations, the commission was a response to the increasingly vocal demand for a more equitable federal system. Although the commission’s recommendations did not yield immediate transformative changes, this period marked the end of Congress’s single-party dominance, ushering in an era where federalism was more actively defended and centralization was kept in check.
Later, under the Left-supported UPA-1 government, the Punchhi Commission was constituted in 2007 to revisit Centre-State relations and address issues previously examined in the Sarkaria Commission’s 1988 report. The Punchhi Commission reviewed the functioning of existing arrangements between the Union and the States, making 273 recommendations in its 7-volume report, some of which were significant and far-reaching. The report proposed amendments to Articles 355 and 356 to safeguard the interests of the States and prevent their misuse by the Centre. The Commission suggested that, before introducing bills on matters in the Concurrent List, the Centre should consult with States through the Inter-State Council. Additionally, there should be a provision to ensure that the President’s decision on bills reserved for consideration is communicated to the state within six months. The Chief Minister of the state should have a say in the appointment of the Governor. The Commission also recommended ending the practice of appointing governors as chancellors of universities.
Although the Punchhi Commission’s report offered valuable recommendations to ensure smooth coordination and cooperation between the Union and State governments, the UPA and later NDA governments shelved the report, as many of its recommendations were not to their liking.
III. EMERGING CHALLENGES TO FEDERALISM
The 1990s marked a turbulent period in Indian politics and economics, introducing significant challenges to the nation’s federal structure. During this time, both the ruling political classes and their parties eagerly embraced neoliberal policies, prioritizing the interests of Indian and international corporations. Alongside this economic shift, a powerful force of majoritarian Hindutva politics emerged, primarily represented by the Rashtriya Swayamsevak Sangh (RSS) and the Bharatiya Janata Party (BJP). The convergence of corporate economic interests and Hindutva-driven political agendas created a ‘corporate-communal nexus’, which adversely impacted India’s federal framework. This dual hegemony — political dominance through Hindutva fundamentalism and economic control via market fundamentalism, both of which aimed to centralize power — posed unprecedented challenges to the federal framework.
Neoliberal Policies and Federal Constraints
With the onset of economic liberalization, a paradigm shift occurred, placing market-driven economic development at the centre of policy. Under the guise of ‘fiscal consolidation’ and ‘macroeconomic stability’, these policies significantly restricted states’ ability to implement distinct economic and political plans. They provided a powerful platform for Indian and foreign capital to penetrate the country’s various regions. The central government, in its pursuit of promoting a select group of ‘crony capitalists’ aligned with the ruling party, saw powerful states and regional economies as obstacles to its economic vision.
The World Bank and other multilateral institutions also started to view strong states with diverse political forces in government as obstacles to swiftly implementing structural adjustment and austerity policies.
The Hindutva Agenda and Federalism
The political philosophy of ‘Akhand Bharat’, espoused by the BJP, envisions a homogenous India aligned with Hindu majoritarian ideals, directly challenging the federalist principles of a multi-ethnic, multi-linguistic India. According to the BJP’s vision, federalism is seen not as a fundamental component of India’s democracy but as an administrative convenience. This approach advocates for reorganizing the country into smaller administrative units based on ancient ‘Janapadas’ from Sanskrit texts, favouring a centralized, unitary state structure over a federated one.
The BJP’s stance extends to opposing certain constitutional provisions that protect the distinct identity of regions like Jammu & Kashmir and the Northeast, as well as the linguistic reorganization of states and the three-language formula that recognizes linguistic diversity. Under the banner of ‘One Nation, One India’, the BJP’s policies favour cultural homogeneity, often employing economic and administrative justifications to mask an underlying intent to consolidate communal fascistic political power. Consequently, a concerted effort emerged to curtail the political and economic power of states, undermining the federal structure.
IV. FEDERALISM UNDER ATTACK:
THE MODI GOVERNMENT’S THRUST TOWARD CENTRALIZATION
The rise of Narendra Modi, a former RSS pracharak, to power in 2014 marked a significant shift in India’s federal structure, with centralization reaching unprecedented levels. Modi’s administration has launched a deliberate and unprecedented assault on the federal framework to dismantle and delegitimize federalism principles.
The Union government increasingly treats states as mere operational arms of central ministries and departments, restricting their political and financial independence. This approach has led to the perception that states are reduced to delivery agents for central policies rather than being allowed to pursue their unique regional goals.
The Modi government has advanced its centralized political and cultural agenda through a blend of soft and hard measures. Soft measures include administrative and economic strategies, while hard measures encompass legislative and constitutional amendments. Together, these tools diminish the federal balance, redefining the power dynamics between the central government and the states challenging the very foundations of India’s federalism.
POLITICAL SPHERE:
One Nation, One Election: A Challenge to India’s Federal
Structure and Democratic Diversity
The policy aligns with the BJP’s push for Hindutva slogans like ‘One Nation, One Culture, One Language’. The ‘One Nation, One Election’ (ONOE) proposal, championed by Prime Minister Modi, aims to synchronize elections at national, state, and local levels. This proposal, part of the BJP’s 2014 election manifesto, was endorsed by a 2015 parliamentary standing committee report, a 2017 NITI Aayog policy paper, and a draft report by the Law Commission in 2018. Recently, the Kovind Committee, constituted to lend credibility to the BJP’s proposal, submitted its recommendations supporting ONOE, which were promptly accepted by the Union Cabinet on 18 September, just before the 2024 elections. It argued that holding simultaneous elections would save costs, reduce administrative strain, and prevent policy implementation delays caused by the Model Code of Conduct.
However, these justifications appear flimsy. The expected cost savings are unlikely to materialize, as election expenses would remain comparable. Moreover, simultaneous elections would not necessarily solve the logistical and developmental concerns cited. Instead, the ONOE proposal undermines federalism, a core principle of India’s Constitution. By centralizing electoral processes, ONOE erodes state autonomy, limits regional representation, and promotes a homogenized political culture.
Under ONOE, national issues will eclipse state and local priorities, weakening regional representation. Parliamentary and state elections typically address unique issues specific to their constituencies, and ONOE centralizes political discourse, making it challenging for regional parties to compete effectively with national ones. This dynamic might favour the BJP and other well-resourced national parties, placing regional parties at a disadvantage. ONOE could skew electoral competition toward a presidential-style campaign, reducing diversity in political representation.
The ONOE proposal would require aligning state legislative terms with the Lok Sabha’s five-year tenure. Under the current system, a new election allows for a fresh five-year term if a state government falls mid-term. With ONOE, however, mid-term elections would elect representatives only for the remaining duration of the national term. This curtails the right of states and their constituents to a full five-year representation, as guaranteed by the Constitution.
Furthermore, ONOE could strip Chief Ministers of their power to dissolve assemblies under Article 174, transferring this authority to the Prime Minister. Such a move would severely infringe on state sovereignty, consolidating power at the centre and infringing upon the federal principles foundational to India’sConstitution.
Extending ONOE to local bodies, such as panchayats and municipalities, would weaken decentralized governance. India’s regional diversity and the specific needs of local constituencies require that panchayat and municipal elections remain under state jurisdiction. Enforcing a uniform election timeline ignores regional variation and could lead to policies that fail to address the unique needs of local populations.
The BJP’s ‘double-engine government’ propaganda, which hails the necessity of alignment between state and central governments, is politically similar to the ONOE idea. This strategy pressures voters to elect BJP candidates in state elections, promising favouritism toward states aligned with the central government. In practice, this approach marginalizes regional political parties and pressures states to conform to national policies, compromising regional autonomy and self-governance.
Cooperative Federalism or Coercive Federalism?
PM Modi has aggressively promoted ‘cooperative and competitive federalism’ as beneficial for states’ development. However, in practice, states are often forced to compete for funding and resources on the central government’s terms. This form of federalism, dubbed ‘coercive’ by opposition leaders, threatens the collaborative spirit of true federalism. Rather than enhancing states as independent agencies, this system reduces them to dependent entities in a national hierarchy, undermining regional governments’ autonomy and imposing uniform policies that may not serve all regions effectively.
V. FISCAL SPHERE
Fiscal Crisis in States
Under Modi’s administration, policies promoted in the name of fiscal consolidation, efficiency, and stability have increasingly restricted the fiscal autonomy of states. Despite periodic recommendations by the Finance Commissions, states have found it challenging to mobilize sufficient revenue and fulfil their financial obligations. State governments now face a significant reduction in their financial decision-making authority, weakening their economies. As a result, many states are grappling with severe fiscal crises attributable primarily to the central government’s policies.
There has been a steady shift in the balance of resources in favour of the centre. In 2019, while the centre took 62.5 per cent of total tax revenue, the states collectively received only 37.5 per cent. However, out of the total expenditure of states and the centre combined, state expenditures stood at a whopping 62.4 per cent. This vertical fiscal imbalance has grown over the years.
This imbalance has been exacerbated by the decline in states’ share of central tax transfers under the Modi administration. Despite the Fourteenth Finance Commission’s recommendation to increase state tax devolution to 42 per cent, reductions in allocations to centrally sponsored schemes (CSS) and increased state cost-sharing burdens have offset any potential fiscal benefits. This is reflected in the reduction of allotment of funds for the states’ share of the divisible pool in central budgets over the years: while it stood at 41.1 per cent in 2017, it came down to 32.9 per cent in 2019 and to 35.1 per cent in 2023.
One reason for the relative reduction in revenue mobilization by the centre is due to tax cuts, concessions, and exemptions provided to both foreign and domestic corporations. These measures have significantly reduced the funds available for state devolution.
Furthermore, the centre’s increasing reliance on non-divisible cesses and surcharges — rising from 10.4 per cent in 2012 to 18.2 per cent in 2022 — has reduced the overall divisible pool of tax revenue shared with states. Consequently, the divisible pool as a percentage of gross tax revenue was 88.6 per cent in 2011 and fell by 10 points to 78.9 per cent in 2021. Windfall gains from spectrum auctions, proceeds from disinvestment and monetization of assets, and RBI profits are also not shared with states.This approach diminishes the share of central revenue available to states, shrinking their fiscal space and autonomy.
The central government’s restrictions on borrowing have intensified, with states now allowed only a small fraction of total market borrowing (approximately 15 per cent, with the centre taking 85 per cent), which leaves states with limited fiscal flexibility. After the 12th Finance Commission’s recommendations, states were pressured to enact Fiscal Responsibility and Budget Management Acts, self-imposing a borrowing limit of 3 per cent of Gross State Domestic Product (GSDP).
Even extraordinary situations are not spared from imposing conditions on borrowing. For example, in 2020, during the COVID-19 pandemic, states were allowed to borrow an additional 2 per cent of their GSDP on the condition that they implemented reforms such as the One Nation One Ration Card system, the Ease of Doing Business policy, public utility and urban reforms, and power sector reforms.
Additionally, the central government imposes high interest rates on loans to states, further straining state finances.
The centre also exerts undue influence on the expenditure side, distorting the states’ spending priorities. Over a period, especially in the last decade, the unconditional part of the grants to states has been decreasing. In 2009, it was 31.2 per cent, but by 2023, it had steeply fallen to 17.4 per cent.
The recommendations by the Central Pay Commission for periodic pay hikes have placed further pressure on states, which must increase employee salaries without guaranteed compensation from the centre. Without financial support from the central government, many states cannot bear this added financial burden.
Finance Commissions also have routinely imposed conditions for states to access their rightful share of funds, often requiring states to implement center-directed reforms in exchange for financial support. Central schemes frequently carry conditions that limit the fiscal autonomy of states. The central government has introduced an increasing number of centrally-sponsored schemes (CSS) and central sector projects (CSP) with stringent conditions attached. The centre has been increasing the states’ proportion of the expenditure on these schemes continuously. Acceptance of these schemes often binds states into implementing central policies, limiting their freedom to pursue independent projects and developmental priorities. The centre’s often coercive approach has decreased meaningful consultation between states and the central government, infringing upon the principles of fiscal federalism.
The Goods and Services Tax (GST) system has disproportionately favoured the centre. GST compensation was stopped, even though the promised stabilization and 14 per cent growth in revenues had not been realized. Despite state objections, the centre holds greater voting rights on the GST Council, allowing it to override state concerns. Delays in payment of GST dues, especially to opposition-ruled states, have further exacerbated states’ fiscal dependency on the centre, leaving them at the mercy of central authorities.
Central policies like the sudden demonetization in 2016 and the nationwide lockdown during the COVID-19 pandemic were implemented without state consultation, causing economic disruptions that impacted state revenues. The National Disaster Management Act, enacted without state input, granted the central government expansive powers over the movement of goods and people, underscoring the erosion of cooperative federalism principles. The PM CARES Fund is steeped in secrecy for its lack of transparency and absence of public accountability.
The decline in states’ fiscal autonomy under the central government’s policies presents a serious challenge to India’s federal structure. While the central government has preached cooperative federalism, its actions — ranging from fiscal policy shifts to conditional financial support — have progressively reduced the capacity of states to address local needs independently. The fiscal and financial challenges facing Indian states highlight the urgent need for reform within the federal fiscal framework. Increasing states’ financial autonomy, improving transparency, and ensuring balanced resource distribution can promote cooperative federalism and empower states to address local developmental needs better. These steps are vital for achieving a more equitable and efficient fiscal structure in India’s federal system.
Federalism and the Receding Role of Institutional
Arrangements
The Constitution established various institutions to discuss and resolve issues related to center-state relations, safeguarding the federal spirit of our polity. Such institutional bodies include the Inter-State Council, National Integration Council, National Development Council (NDC), Planning Commission, Finance Commission, and the boards of the RBI and other financial institutions. These bodies mostly functioned as extensions of the central government, centralizing the power structure and imposing conditionalities through recommendations. In these bodies, state interests are not properly and sufficiently represented.
The Inter-State Council has become defunct under Modi’s rule, having met only once in 2016 to consider the recommendations of the Punchhi Commission on center-state relations.
National Development Council
The elimination of the NDC under Modi’s rule is a major blow to the power of the states. With the abolition of the NDC and its replacement by regional councils, the limited say that states had on policies and fund flow has been further eroded. This inevitably downgrades the voice of the states in matters concerning national economic development. The confidence that states had in sitting together with the Center and the pressure the Center felt when the states spoke with one voice on major issues will now be replaced by an atmosphere of supplication. A group of supplicant state governments from particular regions will be pleading for greater largesse from the Center at occasional regional meetings.
NITI Aayog
One of the first major reforms Prime Minister Narendra Modi announced during his Independence Day address on 15 August 2014 was the dismantling of the Planning Commission. Its successor, the National Institution for Transforming India (NITI) Aayog, was established on 1 January 2015.
NITI Aayog symbolizes a consolidation of power within the central government and taking over the role of international financial institutions like the World Bank in deepening neoliberal reforms. Its establishment underscores the intent to transfer public assets to private entities, reduce the state’s role in welfare activities, and focus governance primarily on the interests of the ruling class. This intent is evident in the institution’s key documents, such as the Three-Year Action Agenda and subsequent vision frameworks.
NITI Aayog has laid its developmental blueprint through three documents:
1. The Fifteen-Year Vision (2017-18 to 2031-32);
2. The Seven-Year Strategy (2017-18 to 2023-24);
3. The Three-Year Action Agenda (2017-18 to 2019-20).
These documents emphasize market-driven reforms to ‘unleash the animal spirits’ of capital. Unlike its predecessor, the Planning Commission, which facilitated fiscal federalism and provided grants to states to address developmental imbalances, NITI Aayog has focused on centralizing economic power. This shift has strengthened the Ministry of Finance, allowing the central government greater control over resource allocation.
The Planning Commission played a crucial role in promoting equality across regions and social groups by allocating resources through plan grants. Its consultative approach allowed states a degree of participation in decision-making. However, with its dissolution, states now rely heavily on the central government, which exercises tighter control over funding through the Ministry of Finance.
In contrast to the Planning Commission’s collaborative processes, NITI Aayog has introduced mechanisms like state ranking indices and an ‘ease of doing business’ framework. These tools promote debilitating competition among states, pressuring them to vie for attracting investments, and fostering private sector participation. However, this competitive model has increased constraints on state governments rather than offering them flexibility.
NITI Aayog functions align closely with the central government’s political agenda. It frequently supports government policies through tailored reports and reform recommendations that enhance corporate economic power. Since its inception, the institution has served as a key instrument for undermining federalism by consolidating economic centralization.
Financial Institutions
The Reserve Bank of India (RBI) and other financial bodies are made to function as tools for implementing central government policies. Although these institutions are responsible for monetary and financial stability, their boards and policies are guided by centrally appointed members, limiting states’ influence on national financial decisions impacting their economies.
Finance Commission
Since introducing liberalization policies, the Finance Commission has restricted states’ ability to pursue independent economic and political plans in the name of fiscal consolidation and efficiency. Although it is a constitutional body, the Finance Commission is always appointed by the central government, with terms of reference not set in consultation with states. Members are appointed by the Center, with no state representation. Recently, under Modi, it has become a tool to impose strict conditions on states to receive constitutionally mandated resources.
For instance, the 12th Finance Commission imposed the Financial Responsibility and Budget Management Act (FRBM), linking revenue deficit grants with deficit reduction. It also capped states’ fiscal deficits at 3 per cent of GSDP. While the 14th Finance Commission increased the percentage of taxes allocated to states
by 10 per cent, it curtailed grants under the central sector or sponsored schemes.
16th Finance Commission was constituted in December 2023, with Arvind Panagariya, former Vice Chairman of NITI Aayog and a well-known neoliberal free-market economist, as chair. This commission’s award will apply from 2026-2031. Given the chairman’s ideological inclinations and the central government’s neoliberal fiscal policies, a positive outcome for states is unlikely without public pressure.
Recently, a finance ministers conclave of opposition-ruled states in Trivandrum expressed its concern about the growing vertical imbalance in resource allocation and proposed reforms:
1. Increase Tax Devolution: Raising the tax devolution rate to at least 50 per cent would enable states to meet their expenditure responsibilities more effectively.
2. Reduction of Cesses and Surcharges: Limiting or abolishing cesses and surcharges, or including them in the divisible pool, would prevent the further shrinking of accessible funds for states.
3. Reform of Centrally Sponsored Schemes: Revising conditions for these schemes would grant states greater flexibility in addressing local needs, reducing financial dependency on the Center.
4. Improved Loan Terms: Offering more favourable interest rates on central loans to states would reduce financial stress, allowing them to allocate funds to priority areas.
If these proposals are positively considered, they will enhance state governance viability and strengthen the federal spirit.
CONCLUSION
Despite its reliance on some regional parties to form the government for its third term, the Modi government has not deviated from its policy trajectory seen in the previous two terms. It is advancing neoliberal economic reforms with renewed vigour while relentlessly pursuing its authoritarian Hindutva-communal agenda. Furthermore, it systematically targets state governments opposed to it — both financially and politically — and undermines institutions and processes that are central to the federal structure.
It would be naive to assume that coalition constraints will restrain the Modi government. Through a combination of coercion and manipulation, it manages to keep its coalition partners in check. Thus, the only viable path forward is to unite all democratic, secular, and progressive forces to resist the government’s destructive policies. The struggle to protect the federal structure is also an intrinsic and essential component of this broader fight.