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Home , Amarinder Singh, Mamata Banerjee

December 2014 29 June 2017

Indian Federalism under Modi: States No Longer Mute Foreign Policy Spectators

Tridivesh Singh Maini FDI Associate

Key Points

 Prime Minister ’s approach towards Centre-State relations

is driven by his personal experience and convictions.

 State government participation in foreign policy can no longer be restricted merely to the economic sphere.

 The State governments will need to have a clearer vision of the roles that they could (and should) play in economic and foreign policy.

Summary

In his three years in office, Indian Prime Minister Narendra Modi has repeatedly urged the states to emerge as drivers of the country’s growth story, and to play their part in strengthening ties with the outside world. The PM has often repeatedly invoked the concepts of “Co-operative Federalism” and “Competitive Federalism”. Co-operative Federalism is understood to be a purposeful relationship between the Central and State governments on issues pertaining to key economic and external policies. As Modi noted in a speech made to members of the Indian diaspora in the Netherlands: ‘ is about co- operative federalism. The Centre and States working together for the development of India, this is our effort.’

Competitive Federalism, on the other hand, is perceived to be the “competitive spirit” between states whereby they compete with each other for Foreign Direct Investment. Modi’s emphasis on a more significant role for the States is largely driven by his personal experiences as the of Gujarat state when, in that office, he reached out to

investors outside India, especially in East and South-East Asia. Modi found that, on economic issues, the States did not have enough of a say and that the relationship between the Centre and the States needed to adapt to the changing economic and political situation of the country.

Analysis

Changes in the Economic Sphere

One of the first steps that the Prime Minister took was to dismantle the Planning Commission, which he saw as a relic from the time when India imitated the Soviet model of planning, and replaced it with the Niti Aayog, which was designated a think-tank tasked with advising states on key issues. Among the key functions of the Niti Aayog are:

1. To evolve a shared vision of national development priorities, sectors and strategies with the active involvement of States in the light of national objectives.

2. To foster co-operative federalism through structured support initiatives and mechanisms with the States on a continuous basis, recognising that strong states make a strong nation.

There have been suggestions in the past to reform the Planning Commission, so that the organisation is in sync with the current political and economic situation. Ex-Prime Minister and former Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia had pitched for the reform of the organisation in order that it retained its relevance.

At the first meeting of the Niti Aayog, the PM stated that:

State [Chief] Ministers gave many insightful views during the meeting. This spirit of co-operative federalism will enhance India’s progress and prosperity. It emphasised the need to expedite growth, investment, job creation, elimination of poverty and moving away from a “one size fits all” approach.

There have been some positive results from this initiative. The Goods and Services Tax, which the Prime Minister’s political party, the BJP, and he, as the Gujarat Chief Minister, opposed, will come into force (as of midnight on 30 June 2017), despite that powerful opposition. In April 2017, Parliament assented to four important pieces of legislation that outline key issues and provisions pertaining to the single tax regime. The GST will replace a myriad of state and central taxes and help in creating one national market.

The Prime Minister praised the Chief Ministers for putting ‘aside ideological and political differences’ to arrive at a common ground. He added that the consensus on Goods and Services Tax (GST) would ‘go down in history as a great illustration of co-operative federalism.’

Interestingly, the meeting of the Goods and Services Tax (GST) Council, chaired by Union Finance Minister with representatives from the States and the Union Territories,

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was held at Srinagar, at a time when tensions there were high, in order to send the message that New Delhi looked at key states as stakeholders and also to demonstrate that New Delhi wanted to change the current narrative in Kashmir.

Apart from establishing the Niti Aayog and securing the successful passage of the Goods and Service Tax, an important step towards promoting greater co-operation between States is the “Ease of Doing Business” ranking jointly published by the World Bank and the Department of Industrial Policy and Promotion. The department, which is a part of the Indian Ministry of Commerce, has also helped in enhancing a competitive spirit among State governments.

The main criterion on which these rankings are based is a 340-point business reform action plan, and the degree of its implementation by the States. The rankings for 2016, (from 1 July 2015 to 30 June 2016), demonstrate that a number of low-income states have improved their standing in the index. Some of those states were ranked among the top ten: Chhattisgarh (which had 97.32 per cent – fourth rank), Madhya Pradesh (97.01 per cent – fifth place), Jharkhand (96.57 per cent and seventh), Rajasthan (96.43 per cent and eighth). Some other states ranked fairly well, notably Odisha (92.73% in eleventh place), Uttar Pradesh (84.52 per cent and fourteenth position), and Bihar (75.82 per cent and sixteenth place).

Even functions related to the Prime Minister’s “Make in India” policy, one of his flagship schemes, are held jointly with State governments.

The Prime Minister has also tried to build cordial relationships with Chief Ministers, especially with the Chief Minister of Bihar, (of the JDU party), and the Chief Minister of Punjab, Captain , of the Congress Party. Relationships with some Chief Ministers in eastern India, especially with (who is also supremo of the Trinamool Congress) of and Naveen Pattanaik (of Orissa) who also leads the Biju Janata Dal (BJD), were strained but seem to be back on track. Before the general elections in 2019, there are a number of state elections in 2017 and 2018. The support from regional parties, including the BJD, for the BJP’s choice for President – Dr Ram Nath Kovind – would certainly have come in as a shot in the arm for the party, as well as Modi.

States and Foreign Policy

In keeping with Mr Modi’s idea that States assist the Centre in conducting foreign policy, the Ministry of External Affairs in New Delhi has established a States Division and a provincial dialogue was initiated with China in 2015. Indeed, a very similar initiative was launched by Modi during his term as Chief Minister of Gujarat.

The foundations for state participation were laid because of economic reforms in 1991 and the rise of strong regional leaders as a consequence of coalition politics. Ex-Prime Minister Manmohan Singh understood the need for State participation in foreign policy, especially in the context of ties with neighbouring countries. A notable example of that point was New Delhi’s positive approach towards the outreach from Tripura (administered by a Communist government) to . Similarly, a non-Congress government in Punjab, led by the

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Shiromani (an ally of the BJP), was not stopped from reaching out to Pakistan between 2011 and 2014 and promoting economic and people-to-people ties.

State Participation in Foreign Policy under Modi

Like his predecessor, PM Modi understands the relevance of state participation in ties with neighbours like Bangladesh. In the land boundary agreement signed with Dhaka, for instance, he thanked the Chief Ministers of the concerned north-eastern states for their support.

The state of Tripura has played a key role in furthering energy ties and enhancing connectivity with Bangladesh. Power is supplied from Palatana (Tripura) to Bangladesh and Bangladesh supplies 10 GBPS of communications bandwidth from Cox’s Bazar to Agartala, the capital of the Indian state of Tripura. Both projects were inaugurated by teleconference by Modi and his Bangladeshi counterpart, Sheikh Hasina, in March 2016.

In the context of the India-China relationship, there has been an emphasis on enhancing sub-regional interactions. One good example of the same is the State/Provincial Leaders’ Forum, which Modi inaugurated during his China visit in 2015. There has also been an increasing emphasis on sister city and sister province agreements. Among the agreements signed, sister city connections were established between three cities: Chennai-Chongqing, Hyderabad-Qingdao and Aurangabad-Dunhuang. Sister province agreements were also signed between Karnataka and Sichuan. During the PM’s Japan visit, a sister city agreement was signed between Kyoto and Varanasi. Sister City and Sister Province connections, if harnessed effectively, can help not just in enhancing people-to-people and cultural linkages, but even economic ties. Such links have benefited the US-China relationship, for instance.

Modi has also sought to make the seven north-eastern Indian states key stakeholders in India’s outreach towards Bangladesh and South-East Asia, particularly Myanmar. Key infrastructural projects aimed at enhancing connectivity with Bangladesh and Myanmar have been expedited, including the Bangladesh-Bhutan-India- Corridor and the three- nation India-Myanmar-Thailand trilateral highway. Regular consultations are held between the Central and State governments to address obstacles pertaining to the same.

While speaking at the inauguration of the Dhola-Sadiya Bridge, the longest bridge across the Brahmaputra River, Modi again iterated the importance that he attaches to India’s north- eastern states in developing India’s ties with South-East Asia, saying that: ‘North-east India will be a hub of economic activity of our engagement with south-east Asian countries. We have this vision.’

A number of important symbolic steps have also been taken to give greater importance to state governments. Foreign dignitaries are encouraged to visit cities outside New Delhi. The trend began two decades ago, with overseas leaders visiting IT hubs like Bangalore and Hyderabad, and later engaging with strong regional leaders. During her visit to India in 2011, for instance, former US Secretary of State Hillary Clinton visited Chennai and met with the late Chief Minister, J. Jayalalithaa. In 2012, Clinton met West Bengal Chief Minister Mamata Banerjee in .

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During Modi’s Prime Ministership, President Xi of China, similarly, during his visit to India travelled to Ahmedabad in Gujarat, while Japanese Prime Minister Shinzo Abe visited Modi’s parliamentary constituency, Varanasi.

Recently, during his visit to Russia, the PM also met with the Governors of sixteen Russian provinces. He was the first Indian Prime Minister to do so.

While all the efforts being made are laudable, there are a number of issues that need to be addressed. First, FDI is skewed towards India’s coastal states or those close to New Delhi, enabling those to increase their share of Foreign Direct Investment. Between April 2016 and March 2017, according to figures from the Department of Industrial Policy and Promotion (DIPP), the top four states in terms of Foreign Direct Investment were:

 Maharashtra (US$19,654 million)  National Capital Region (US$5,884 million)  Tamil Nadu (US$2,218 million)  Karnataka (US$2,132 million)

The above were followed by Gujarat and Andhra Pradesh. The eastern and north-eastern states still fare poorly in this regard. New Delhi needs to work closely with state governments to remedy this situation and it should ensure that politics does not come in the way of important development projects. India should also seek to learn from the China model, where it is not just the coastal states like Guangzhou, but others too which have been able to draw in FDI. Of late, ties between New Delhi and some of the non-BJP led states have deteriorated. Those ties need to be strengthened. During her 25 May 2017 meeting with Modi, Mamata Banerjee was quick to tell the media that the meeting with the PM focussed on development, not politics.

Second, the States themselves need to have a clearer understanding of their role in key economic and foreign policies rather than being obstructionist and simply opposing what New Delhi recommends. It is important to have a constructive forum, wherein States attempt to learn from each other’s successful economic and social policies. While there is no doubt that a number of social and welfare policies are replicated by States, it is not done in an efficient manner. Some have recommended empowering the Inter-State Council, which has been ignored for too long. This matter was discussed during the GST Council meeting.

The next two years are crucial for the Modi Government. It needs to work closely with State governments to successfully conduct and implement economic and foreign policy. Smooth implementation of the GST and attracting greater FDI will require better co-ordination between the Centre and the States. That co-ordination is all the more important for States in eastern India, such as Bihar, West Bengal and Orissa, that are endowed with natural resources and are in an economic take-off stage. The Centre and the States will both benefit from prioritising development over politics. While that is not an easy task, it is imperative given the numerous challenges ahead.

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About the Author: Tridivesh Singh Maini is a New Delhi-based Policy Analyst associated with the Jindal School of International Affairs, O.P. Jindal Global University, Sonipat.

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Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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