It is generally believed that federalism suffers in a system of centralized planning. Do you agree with this point of view? Would you advocate ‘decentralized governance’ for India in the context of liberalization since 1991. (2002)
For K. C. Wheare, federalism means two levels of government, each “coordinate and independent” within its own sphere. Central planning needs one set of priorities and one allocator. I largely agree that Indian federalism suffered under planning, but the harm came from how planning was organised, not from planning as such. After 1991, decentralised governance is the right course, with safeguards.
(a) Does federalism suffer under centralised planning?
Why the belief holds
- The information argument. F. A. Hayek held that the knowledge planning needs is dispersed and local. Wallace Oates‘s decentralisation theorem adds that public goods are best supplied by the lowest government that covers their benefits. A national plan overrides both.
- The Indian record. States became claimants on a national pool. State plans needed central approval, and the NDC ratified rather than deliberated. Grants tied to Union-designed schemes pre-empted state budgets.
Why the belief needs qualification
- Centralisation depended on the party system. Between 1950 and 1967, conflicts were settled inside the Congress. W. H. Morris-Jones called the result “bargaining federalism”. M. P. Singh‘s two axes capture this: a dominant party strengthens the parliamentary axis, and that axis, not the plan, subordinates the states.
- Planning could be made more federal. The Gadgil formula (1969) made part of plan assistance rule-based and redistributive.
- Implementation stayed with the states. Identical schemes gave very different results in Kerala and Bihar.
Position: Federalism suffers when planning combines a discretionary allocator with no federal forum that binds. It need not suffer from planning as such.
(b) The case for decentralised governance after 1991
- The decisive decisions moved to the states. When licensing ended, firms rather than Delhi chose where to invest. Land, power, labour administration and clearances became the levers that mattered, and states now compete through investor summits and single-window systems. Aseema Sinha (The Regional Roots of Developmental Politics in India, 2005) shows that regional states shaped industrial outcomes even under the licence raj.
- Reform travelled through the states. Rob Jenkins (Democratic Politics and Economic Reform in India, 1999) describes “reform by stealth”. Federal institutions split the opposition and absorbed shocks, and states tested policies such as Odisha’s power-sector restructuring before the Centre adopted them.
- Subsidiarity. The 73rd and 74th Amendments (1992–93) came alongside liberalisation. They created elected local governments able to plan for local needs.
- Fiscal devolution now supports this. The 14th Finance Commission’s 42% share was untied money. The 16th Commission awarded ₹7.91 lakh crore to local bodies for 2026–31, conditional on elections and published accounts.
Caveats
- A race to the bottom. States may compete by cutting taxes, labour protection or environmental safeguards. Balveer Arora warned that competition among unequal states produces unbalanced development.
- Uneven capacity. Panchayats raise about 1% of their revenue themselves, and State Finance Commissions are often late.
- Elite capture. Pranab Bardhan and Dilip Mookherjee (2000) show that local government is prone to capture where power is unequal.
- Macroeconomic stability and inter-state equalisation still need a strong Centre.
Conclusion
Planning damaged federalism because it was centralised and discretionary, not because it was planning. In a market economy, decentralised governance is both necessary and possible. What must accompany it is an equalising Centre, rules against a race to the bottom, and real funds and staff at the third tier.