Depending on your point of view, Narendra Modi's challenge, on Gujarat's financial relationship with the Central government, is either the first step in the making of a secessionist argument, or a policy stance that was long overdue. In Modi's case it was probably a bit of both: a legitimate point articulated in openly insurrectionary terms. There is a serious question about the Centre's financial relationship with the states, and all states need to get together to work out these issues. But his challenge that the Centre let Gujarat keep all the revenue it generates and simply leave it alone, should be a warning about what is now within the horizons of possibility.

The well-to-do states are beginning to feel that the less-well-off states and the Centre are a drag on their prospects and they are quite ready to demonstrate that they can do without them. The poor states feel cheated anyway, and the Centre has done precious little to demonstrate that its transfers to the states are not politicised. Chief ministers have also connived in this charade, triumphantly parading their ability to wrest discretionary favours from the Centre. Overlay on this the gnawing pull of identity questions, and Indian federalism can come under serious stress.

There are four broad senses in which Modi has a point. The share of the Centre's allocation to the states in general has varied over time. But given the responsibilities the states have been charged with, this level is not as high as should be and has been falling. Second, the proportion of Central grants now coming through channels like Centrally sponsored schemes and outlays of ministries has been growing. Occasional technical criticisms apart, Finance Commission allocations had, for the most part, depoliticised major issues in Central-state transfers. But the increasing trend of discretionary allocations is politicising the Centre-state relations.

Third, there is some evidence that the Centre uses this discretion politically. A recent paper by Bhaskar Dutta and his colleagues, for instance, suggests that states that are aligned with the party at the Centre, or are swing states in its electoral prospects, get, on average, sixteen per cent more discretionary grants than other states. Fourth and finally, Centrally sponsored schemes are increasingly coming with conditionalities that make IMF conditionalities more rational and dignified by comparison. Despite the presence of various mechanisms, the states have little say in the design of Centrally sponsored schemes which they are supposed to implement. In short, all states, not just Gujarat, are still being infantilised by the Centre.

All the arguments used to buttress greater discretionary power to the Centre are specious. The first argument was regional equality. The blunt truth is that the patterns of Central allocation have not produced regional equality; instead they have increased inequality. In the past, patently absurd schemes undertaken in the name of regional equality, like freight equalisation, left poor states irrevocably more impoverished. And before India's richer states get too self-assured that their prosperity rests on self-sufficient foundations, it is worth reminding them how it was based on all kinds of impoverishments inflicted on poor states.

All the arguments used to buttress greater discretionary power to the Centre are specious.

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The second argument for greater Central role is the capacity of the states. There is a standard image: the states are inefficient, corrupt, unimaginative and lack the technical expertise of the Centre. Some states indeed have had periods of breakdown. But we should bear this in mind. First, in any case, states have to do most of the implementation, so their alleged lack of capacity cannot be an argument for more Central discretion. Second, it is always amazing how the same IAS officers who are allegedly bereft of capacity when they serve in states, become exemplars of technical expertise when they come to the Centre. It is something of a myth perpetuated by Delhi's elites that the states have no capacity; in many areas crucial to the states, like education and urbanisation, the Centre's capacity is being overestimated. States will develop the capacity if they have the incentive to do so.

The third argument is greater accountability. The Centre will hold the states accountable. But under present circumstances, we have the worst of both worlds. On the one hand, the Centre consistently overestimates its power to hold the states accountable. On the other hand, greater centralisation impedes the creation of horizontal accountability within states. In the final analysis, state governments can be held accountable only by their electorates, not by some vertical oversight imposed from the top.

It is time allocations to states were made more in the form of block grants than Centrally sponsored schemes. This will allow greater experimentation, and states will be held more responsible for their own conditions. But the temptation to centralise is great. The Planning Commission has long overstepped its constitutional mandate by being the channel through which development funds are funnelled to the states. Leaders at the Centre feel that Centrally sponsored schemes are the best way of engaging in the politics of noblesse oblige, to project themselves as the knights in shining armour, rolling scheme after scheme, to help the aam admi. But the track record of Centrally sponsored schemes is poor enough to warrant more confidence being reposed in the states. And finally, coalition politics has had a paradoxical effect. While it has empowered states in some respects, it has not led to mechanisms for strengthening the collective dialogue amongst states.

What applies to the Centre applies to the states as well. There is a larger conversation to be had about the appropriate level at which different taxation and financing functions should be carried out. Various state governments and local bodies have not been able to use the legislative powers that allow them to raise revenue. The states, for their part, have been very reluctant to empower local government, the point at which all implementation takes place. Each level of government is a centraliser in its own way, projecting the levels below as incapable and corrupt. The states feel threatened that the Centre will now directly allocate funds to the third tier of government, while they themselves have, with a few exceptions, done precious little to empower local government.

Modi has raised a serious issue. But he has also let loose the argument that Gujarat's economic prosperity and its increasing revenue collection are entirely its own doing: Gujarat does not now need the Centre or other states. In doing so, he has become a harbinger of the shape of conflicts that will haunt the Indian Republic in the years to come.