The shock and awe of demonetisation has left no one in India untouched. Equally no one has been left with any doubt as to the fact that the policy originates with the Prime Minister, and that they are being asked to bear with short-term inconvenience in order to advance the longer-term national interest.
Reams of newsprint have been devoted to the economics of demonetisation. Here I take stock of the questions raised by demonetisation for the direction of Centre-State relations.
Unmediated by the States
As a policy initiative of the Central government, demonetisation is unique in recent times for reaching everyone in the country directly, unmediated by the filter of State governments. State governments do not appear to have been consulted ahead of the announcement, and in many cases demonetisation has directly undermined the routine administration of policies under their purview. Many have expressed frustration that they are powerless to address hardships faced by people unable to pay for treatment in private hospitals or of farmers unable to access loans from, or make repayments at, cooperative banks.
Unsurprisingly, a number of States have complained that the way in which the policy was enacted violates the spirit of cooperative federalism about which Prime Minister Narendra Modi has spoken so often.
Furthermore, the design of the new Rs.500 and Rs.2,000 banknotes issued by the Reserve Bank of India include new national symbols that challenge regional sensibilities. For the first time, the new banknotes include Devanagari numerals, threatening to reignite old settled compromises over the national language within India’s federal union. The use of Devanagari numerals is already the subject of a PIL in the Madras High Court.
The back-side of the new banknotes also carry the logo of the Union government policy, Swachh Bharat.
All of this is in line with broader attempts to refocus political debates around national questions since 2014. Mr. Modi has consistently called for the strengthening of cooperative federalism, recognising that he is reliant on the cooperation of State governments to achieve national policy goals.
A matter of identification
For decades as India’s polity and economy became more decentralised and the States became the centre-ground of political life, they have been the primary level of political identity for most voters.
In a situation where voters found it difficult to correctly identify which level of government was responsible for any given policy and chains of electoral accountability became quite opaque, State governments became adept at claiming the credit for Central government initiatives. Voters frequently give the credit for programmes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) or the National Rural Health Mission to their State governments rather than to the Central government.
In the post-poll National Election Study conducted by Lokniti, Centre for the Study of Developing Societies (CSDS) during the 2014 Lok Sabha election, 42 per cent of voters who had benefited from MGNREGA gave the credit for the programme to their State government and only 27 per cent to the Central government. This looks vastly different to the situation in Brazil’s federal setting, for instance, where over 80 per cent of voters in 2010 attributed the country’s flagship social programme, Bolsa Familia, to the President.
Mr. Modi’s election victory in 2014 challenged, although it has not displaced, the idea that the States serve as the primary unit of political affiliation. It was an election campaign that had a more national character and Mr. Modi’s candidacy and populist leadership style extended the reach of the Bharatiya Janata Party (BJP) to farther-flung parts of the country.
Once in office, ‘Brand Modi’ has involved the projection of the Prime Minister’s presence and authority across areas of government activity. Programmes have been carefully rebranded in an effort to better enable the Central government to claim credit for them and to limit the ability of the States to do so.
Mamata Banerjee’s challenge
States have had different reactions to this. The most outspoken critic of Mr. Modi’s style of government at a regional level has been West Bengal Chief Minister Mamata Banerjee , who was complaining of the violation of cooperative federalism even before demonetisation. Just a day earlier she had raised objections to the fact that the Central government now makes MGNREGA payments directly into workers’ bank accounts. She has also railed against the naming of Central programmes after the Prime Minister, for which State governments are required to provide matched funding.
In August, her counterpart in Bihar, Nitish Kumar, explained that his State was right to drag its heels over the implementation of the Pradhan Mantri Fasal Bima Yojna (Prime Minister’s Crop Insurance Scheme). He called for the scheme to be renamed the “PM-CM farmer insurance scheme”, or “ Kendra-Rajya Fasal Bima Yojana ( Centre-State Crop Insurance Scheme)” if the States were expected to bear half the financial burden.
Last month, Uttar Pradesh Chief Minister Akhilesh Yadav distributed ration cards along with bags of wheat and rice — under the National Food Security Act — that carried pictures of him. The BJP’s State spokesperson complained bitterly that the State government was playing politics by trying to claim credit for a policy of the Central government.
There has not, however, so far been a resounding critique of the Modi government’s version of cooperative federalism from most States. Demonetisation itself has been welcomed by Chief Ministers of both BJP and non-BJP ruled States alike, including Chhattisgarh, Gujarat, Haryana, Rajasthan, Odisha and Telangana, although some have criticised elements of its execution and potential to hit State revenues.
For those critical of the centralising instincts of the Modi government, demonetisation presents an opportunity to refocus debates on Centre-State relations. Yet at the moment, many regional parties seem more intent on continuing a pattern of Centre-region bargaining rather than building new cross-State alliances that would act as a counterweight to the Central government.
Even in the absence of a coordinated inter-State opposition alliance, for the Central government there is the risk that the centralisation of credit claiming for government policies could start to reduce the political incentives of opposition-ruled States to cooperate with the Central government in achieving national goals or implementing Centrally designed policies. This matters since State governments remain crucial for policy implementation. It is even more significant after the enhanced fiscal devolution to States following the Fourteenth Finance Commission recommendations which gives States greater flexibility to decide priorities for government expenditure.
A deeper debate needed
The time is right to engage in a deeper debate about Centre-State relations and the operation of federalism. There are major constitutional innovations in the offing such as the GST Council, designed to realise a more cooperative model of federalism in which the Central government and the States pool their sovereignty in order to pursue national economic goals. The counterpart to this platform of cooperation should be a deeper discussion about Centre-State relations and a focus on enhancing the incentives for States to cooperate with the Centre while preserving their autonomy.
Louise Tillin is Senior Lecturer in Politics at the King’s India Institute, King’s College, London.