Instilling cooperation in turbulent times: some issues before the 16th Finance Commission

The geopolitical situation globally and in the immediate neighborhood, as well as the domestic fault lines that have been magnified by the recent Indian national elections, provide a context to the paper. As the 16th Finance Commission begins its deliberations, this paper underlines the crucial need, going forward, to instill co-operation between the three tiers of government in the Indian federation. We believe that a rules-based cooperative federalism, explicitly recognized and accepted by all players, will provide an appropriate institutional architecture for tackling many of the problems and challenges that India faces. Carrying out a few computational exercises, we propose that focusing on fiscal space available to state governments would be better than focusing on revenue deficits that has been the case so far, and suggest a few measures of fiscal space too. The instrument of incentives introduced by the various Finance Commissions to elicit co-operation from states and local bodies are critically discussed. We urge the 16th FC to strengthen this aspect. Empowering the third-tier of government, we believe, will give the much needed fillip to co-operative federalism. For this we recommend that the good work done by the earlier FCs be continued, using a quasi-formulaic approach in working out the magnitude of the fund flow. Finally, recognizing the importance of climate change in the future, we suggest a tweak in the treatment of Ecology while designing incentives for state and local governments.