Political Economy

In a Post-COVID-19 World, the Only Way Ahead for India Is Economic Federalism

To deal with the uncertainties of a new global era, from pandemics to crises of mass hunger, India needs to adopt universal social welfare and re-assembling its macro economy into a federal cluster of self-sustaining state economies. One way is to learn from the EU.

A couple of years ago, I had expressed strong reservations about the government’s flagship project for transforming India with industrial corridors and clusters of smart cities. Animated by as passionate a concern for the future of our country that those promoting the flagship project claimed to be driven by, I had opposed it on the grounds that there was no surplus water in the country for it.

A lot has changed since then. Post-COVID, India will have to deal with a situation where the global umpires sound real – and false – alarms about catastrophes around the corner. For instance,  the UN World Food Programme executive director, David Beasley, has stated that he fears “multiple famines of biblical proportions” after the pandemic.

As we approach the limits to growth in a new global era, we are clearly not sure of what’s coming. This was demonstrated recently in the wake of the COVID-19 pandemic. Witness how we have responded to the COVID-19 pandemic. Millions of us, scared, not knowing what we are up against, locked up in our personal coops, eyes closed and our heads in the sand, waiting for the danger to go away, our gaze averted from the unprecedented crisis being faced by migrant workers during the lockdown.

As things stand, we have no way of dealing with the uncertainties of the new global era that is upon us – be it pandemics, epidemics, global drought, crop failures, storm floods and civil strife caused by crises of mass hunger. Further, being on the perimeter of the global order, without a seat at the high table, India needs to be prepared for any such eventuality – in a scenario where dozens of countries are in distress, not much help can be expected from international quarters.

So far we have been busy scooping up the past and shovelling it in front of us as our future while, out there, the global system is reconfiguring itself into a world where we face the risk of becoming increasingly irrelevant. If we want to pull ourselves back from the edge, we will have to radically alter our socio-economic geography during the next decade.

The government is familiar with this concept since its grand project for industrial corridors also intended to transform that geography. What I am proposing, however, is radically different from the grandiose plan shown by international consultants for industrial corridors and smart cities, which they based on the mantra of debt funding and industrialisation, peopled by massive population migrations.

We have not changed our socio-economic geography since the British left; the predatory settlement pattern still drains resources from the hinterland for the elite in and around the metro cities going back to the colonial era. India’s rural base continues to be ignored.

Also read: Centre, State Govts and Pvt Sector Owe Over Rs 5 Lakh Crore in Unpaid Dues to MSME Sector: Gadkari

Our macro-economy needs to be reassembled into a federal cluster of 28 independent and steady state economies. The continuing stranglehold of almost two centuries of colonial governance, which is incapable of addressing the issues of a veritable continent of 28 densely populated states, has to be prised open to make way for income redistribution,  universal social welfare and local self- governance.

Post-pandemic, universal welfare is a must

The first big change has to be initiated by the government of India. It has to redefine its responsibilities towards its citizens, extending its role to include universal social welfare for all citizens.

This means reconstituting ourselves into a mandatory welfare state by amending Article 37 concerning the Directive Principles of State Policy contained in Part IV of the Indian constitution, to state that the provisions contained in this part shall be enforceable by the courts.

A worker cleans a platform at the Howrah Junction railway station after India announced a limited re-opening of its giant rail network beginning on Tuesday, after a nearly seven-week lockdown to slow the spreading of the coronavirus disease (COVID-19), on the outskirts of Kolkata India, May 11, 2020. Photo: Reuters/Rupak De Chowdhuri

The callousness shown by the state towards its poor since the time of independence, right down to its indifference to the plight of migrant labour in the wake of the COVID-19 lockdown, runs contrary to the aspirations of our constitution, which is the widest possible social instrument to overcome deeply embedded inequalities.

Going by current statistics, the number of potential beneficiaries for universal social welfare services would begin with  400 million Indians, the very poor, and be completed when universal welfare coverage has been extended to 1350 million.

Moving towards economic federalism: learning from the EU model

The second big change will come when the current Centre-state relationship gets redefined in a way that enables the 28 states to become federal in the true sense – as self-sustaining economic territories in matters of energy, water, food production and waste recycling. Our economic geography of production, transport and communication has to change – it has to become distributive rather than being focused towards the Centre.

What is needed is not a diffused national labour market, but state-level labour markets based on district data that register the unemployed. Such data will not only enable an understanding of the hidden force of migration but also help put in place curative measures.

The changes with regard to re-assembling our macroeconomy can be operationalised in many ways. One way is to learn from the European Union (EU). The EU, like India, has component regions with varying levels of governance capabilities, social equity and resource availability.

This task requires issuing new federal instruments that would direct each state to adhere to common standards of decentralised governance and fiscal discipline at much higher levels than is being done now.  These proposed instruments would be similar to the ones issued by the EU to candidate states for equal access to facilities, sharing inter-country objectives including migration, transport, energy supply and micro-enterprises, and a commitment to the goal of making state economies into steady-state territories.

Also read: Life After COVID-19: Decommodify Work, Democratise the Workplace

The investments made by Brussels to enable the process of re-federalisation and pre-accession to be put in place during the period of 2007–2013  amounted to 11.5 billion euros. This was in the form of financial and technical help to build the capacities of the countries throughout the accession period in areas such as public administration reform, rule of law and agriculture.

Similarly, in India, the Centre would have to invest in the process of enabling decentralisation and raising standards of governance and fiscal discipline and preparing the necessary instruments.

By using such instruments, the central government would assist in the overdue reforms of governance through financial and technical help. The funds dispersed under these instruments would build up the capacities of each state throughout the re-federalising process. The instruments are the means by which the central government will support reforms that will enable districts to essay a larger contributory role in the macro national economy.

Centrally distributed funds will need to be directed specifically to build the capacities of each state. The instruments will enable them to embark on a sustainable economic recovery whose base is widely distributed across the various panchayats and districts of each state. Driving distributive recovery will be energy, transport, supply chains, public administration, rule of law, agriculture and rural development.

These instruments will define new shared rules for financial, productive and administrative engagements with the Centre by reversing the centralisation trend and disbursing initiatives and resources deep into the corners of each district.

Looking at the territorial expanse of India and comparing it to various countries through the population lens, it becomes clear that however heroic our rulers imagine themselves to be, they cannot govern the country as if it were their private fiefdom. They may be able to fill stadiums with cheering ‘fans’ , but they certainly cannot govern it democratically. Hence the significance of re-federalisation.

Informal sector and agriculture hold the key to recovery  

Our economy is powered by the 65 million enterprises that employ over 90% of the labour force. Only four million among them are registered and include the so-called organised sector. In the aftermath of the current crisis, it would be a mistake to assume that the organised sector will be able to pull us out. There is ample evidence to state that India has been de-industrialising for some years.

In the post-COVID 19 era that is beginning, our economic recovery will primarily come from the micro, small and medium enterprises (MSMEs) that are situated across the country. So every state needs to register each and every farm and enterprise first and then ensure that they begin to receive funds to re-start their farms and the businesses that virtually shut down after the lockdown was imposed.

Also read: Centre Opts for Long-Term Agricultural Reforms, Leaving Farmers ‘Atmanirbhar’ in Crisis

The recovery will come from the farms registered at the panchayat level and the clusters of MSMEs which are located around district and mandi towns across the states. Collectively, these clusters of local-level enterprises would form a network of distributive hubs of the state-level, self-sufficient economy.

The infusion of funds at the district, municipal and panchayat levels in agriculture and micro and small-scale enterprises would not only enable this network of farms and enterprises to grow; it would also engage diverse ethnic and religious communities as productive communities and help them move away from relying on the dwindling sectors of the economy to generate cash incomes.

The distribution of central resources would fan out to agricultural and production enterprises through the third level of local self-governance. The fledgeling micro-level local economies of mandi and district towns are potential hubs for a new distributive network interlinked through customised digital platforms which can service micro-enterprises and farms at the panchayat level.

New tehsil and panchayat-level markets would have to be set up with public funding to enable local producers to market and exchange their produce. Currently, small-scale farmers are not able to sell their marginal surplus produce for cash since buying agents are interested in bulk quantities of grain, vegetables and fruit which they take directly to the district mandis and metro mandis.

People wait in queue to collect food from volunteers during the nationwide lockdown in Kolkata, April 30, 2020. Photo: PTI/Swapan Mahapatra

The role of the Reserve Bank of India (RBI) would be to take the fiscal deficit to the level necessary to stimulate grassroots demand by pumping liquidity into the small farmer and micro, small and medium enterprise units.

In the beginning, small sector units would be identified as those already paying tax as a way to verify their credentials. The next step would be to initiate liquidity distribution through a cluster of financing institutions to reach out to the small district, tehsil and panchayat-based units by involving insurance companies,  banks such as SIDBI and even the corporate sector.

This entire initiative to re-vitalise over 730 districts in the country would need to be co-ordinated by as many new state project offices, each located in the district and holding the list of newly registered farm and productive enterprises in need of funds and technical support.

For instance, the corporate sector can invest in its own supply chains micro and medium-sized who are tied to them for component supply.

The responsibilities of corporations would then change owing to a more direct financial involvement between the corporates sector and their supply chain enterprises that are upstream and downstream of their manufacturing activity.

Apart from the enterprises, over 60% of the workforce remains in the agriculture sector, contributing just 17% to the GDP. Over 90% of our workforce works in the informal sector, in agricultural and product processing activities whose output value is not all included in GDP calculations. Thus the growth data that is computed from personal spending, business investment, government spending and exports, leaves out the substantial contributions made by the unorganised sector.

The image illustrates the differences between a centralised colonial economy and a distributive one. The coloured image represents a typical cluster of district-centred economies interacting with each other on shared platforms.

Activating local self-governance 

It is essential to activate the local self-government framework if this architecture of reassembling economic federalism is to work. As part of the new federal instruments issued to the states, the Centre would require all states to activate the 73rd and 74th constitutional amendments that were passed in 1992, providing a constitutional framework of local self-government, namely gram panchayats in villages and municipalities in urban areas.

By activating these amendments in a real sense, through funds, the operational base for the new redistributive economy will be established. The third and lowest level of local governance which has been written into the constitution would no longer remain stillborn.

The structure of local self-governance is already in place, but it has been hollowed out. It needs to be activated to ensure that funds are routed to them and the Centre’s instruments for decentralisation, fiscal discipline and governance come into force in each district. That will, in turn,  regulate the municipal and panchayat targets for fund disbursement through the existing banking system.

There can be no better time to embark on this project of decentralised economic governance than the present juncture, considering that in this dire period of tackling the crisis unleashed by the COVID-19 pandemic, it is essentially the states which are at the frontline.

Romi Khosla was a principal consultant for pre-accession measures to the EU and UNDP in the former Soviet bloc Balkan countries and Cyprus and for urban revitalisation and tourism planning in Central Asia and Tibet.