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Growth and Diseconomies

The parts of India are not greater than the whole. But unless the parts survive and prosper, there could be no whole either. No better means exist for sustaining our political structure than to release the impulses which generate fast and equitable growth. In our pursuit of rigid centralisation, we have however achieved precisely the opposite of what we intended to achieve.

TWO facts dominate the current economic scene. First is the quasistagnation in the nation's economic growth. In the decade since 196566, the national per capita income has risen little, if at all If you listen to official apologists, the adverse turn in the rate of growth is a consequence of natural calamities marking the decade. One would however have thought that the whole purpose of a planned development effort is to make economic progress independent of vicissitudes such as are caused by natural factors, The other proffered explanation for slow growth, namely, the nation's involvement in hostilities with external powers, sounds equally unconvincing. In this imperfect world, India is not sui generis: other nations have fought more extensive wars during the decade and yet succeeded in performing better economically. If economic growth has been disappointing, it is not simply on account of the wars fought or the failure of rains, but because of — as I would argue later — more basic factors, such as, for example, (a) savings having either shrunk or not grown in a satisfactory' manner, and (b) the deployment of savings for capital formation being less than optimal.

The other major emerging fact is the aggravation of income inequalities. Not only has the rate of income growth not been satisfactory, whatever growth has taken place has been most unevenly distributed between different income groups, and between different regions. One may suspend one's judgment on the issue of absolute impoverishment, but that some sections and regions have grown particularly poorer in relation to some other sections and regions and that overall income distribution has become perceptibly more inegalitarian over the period is beyond dispute.
To sum up, there is not enough growth, and whatever growth does take place is unjustly distributed. The consequence is a rising turbulence at different points of the polity. A certain disenchantment is in the air, a disenchantment which feeds upon itself.

Once we come to analyse the factors underlying the quasistagnation, we cannot altogether avoid ideological questions. There is, for instance, a substantial body of opinion which maintains that a lesser concentration of economic power in the hands of the State would have yielded a higher rate of growth. The complexities which afflict the application of fiscal, monetary, administrative and physical controls, it is argued, has led to a lowering of economic efficiency. Cumbrous regulatory instruments have fouled up market signals and rendered comparative advantages infructuous; it has also given rise to a number of market rigidities which in turn have led to the emergence of oligopolies in industry and agriculture, and who does not know that oligopolists insist upon maximising profits through restraints in output.

All this is of course a onesided recounting of facts, Without massive State intervention, few of the major social and economic infrastructures would have been built, or at least built on their present scale. Whether the culpability for the spread of oligopolies can be laid exclusively at the door of controls is debatable: the depredations by oligopolists have not been markedly less in the neighbouring country of Pakistan, where the economic role of I he State over the quarter of a century has been significantly more passive. It is also an open question whether income distribution would not have been even worse in the absence of State regidation.

Efficiency has to be defined in terms of objectives. While I will soon have occasion to refer to a specific aspect of efficiency, given the multiple calls upon the nation's instruments, it would be difficult to maintain that the emphasis on the public sector per se has affected the efficiency of investments, and thus affected growth, A more important contributory factor for slow economic progress has been the general dearth of savings. Private savings have by and large played truant; given their mercantile bias, even those sections of the private sector who have profited enormously from the stylised pattern of economic planning adopted since the; early 1950s have not ploughed back enough resources to highgrowth productive activities. In fact, the expansion of the private corporate sector is these days itself largely dependent on transfer of resources from public institutions. A shrinkage in public savings too is now discernible, which compounds the problem. The extensive outlays on public undertakings are generally yielding a poor rate of return. While the burden of taxation on the nonagricultural sector is as much as 25 to 30 per cent of income, this is neutralised by the fact that, for agriculture, it is hardly 7 per cent, and that too rather regressively distributed. Finally, a major fraction of the State's resources is being preempted by the requirements of the current budget. The public sector's image as a progenitor of growth is therefore fading; there is a corresponding diminution of the resolve of the State towards regulating income distribution.

It is in this connection that I have one or two propositions to suggest. The economic process reflects developments in the sphere of the polity. One crucial political issue, namely that concerning Centrestate relations, is, I feel, of major relevance to the problems of growth and redistribution. And it is while dealing with these issues that our generation of social scientists, in my view, has exhibited an excess of conformism. The structure of our Constitution is federal, with a seemingly even division of responsibility between the Centre and the states. In practice, however, the Centre is very much the active agent in the socalled federal entity. This is largely the outcome of the manner in which political affairs have developed in the country. In the programmes of most political parties, the theme of centralised power and unified administration is given the pride of place. Historical facts apart, the relatively more recent circumstances which led to the partition of the country have been instrumental in strengthtiling the urge for a strong Centre. The integration of the princely States, and the towering personality of Jawaharlal Nehru as Prime Minister, initiated a process which has gradually given rise to a situation where the overriding role of the Union Government is taken for granted in all economic, social and administrative matters. Because the command over resources is a pivotal element in governance, the process is enormously strengthened by the financial provisions of the Constitution,

The devolution of financial powers, as laid down in Part XIII of the Constitution, could not be more unambiguous. A Finance Commission, appointed by the President on the advice of the Union Cabinet, has as its prime task to decide how the proceeds of the income tax are to be distributed between the Centre and the states. The corporation tax is preempted for the Centre. The proceeds of import and export duties again belong to the Centre, despite some special clauses pertaining to distribution of the proceeds of the export duty leviable on jute. Countervailing duties, as well as excises on major items, are also the prerogative of the Centre. What is vastly more significant, the control over monetary resources is the exclusive preserve of the Union Government which exercises total suzerainty over the nation's central bank, over its currency, coinage and legal tender, as well as over its foreign exchange. The farreaching implications of this dominance tan be gauged from the fact that outstanding bank advances during any time of the year at present outstrip the Centre's annual budgetary operations.
The contrast between the nominal and the real could not be more acute. One can set up an abstract schematics with a roughly equal distribution of executive and legislative powers between the Centre and the states, and can also indicate the area of concurrent jurisdiction. It is however the mode of distribution of the state's power to command goods and .services which is the most crucial. Between the form and the content, the shadow was thus bound to fall. If one leaves out the power to levy taxes on agricultural income and property, the rest of the major sources of income, including credit creation, belong solely to the Union Government, True, the states, if they so want, may impose levies on the purchase and sale of a number of commodities and services. Still, apart from the fact that there are limits beyond which indirect taxes turn out to be either excessively inflationary or excessively regressive, what come within the orbit of the states add up to an altogether minor package.


He who pays the piper calls the tune. Inevitably, the Centre soon took over the commanding heights of executive and legislative decisions in the spheres of concurrent jurisdiction too. That tenuous body, the Finance Commission, has only a marginal role, and it has been overshadowed by the Planning Commission. No constitutional provision lays down the setup for the latter Commission, Established by a resolution passed by Parliament, it is entirely a creature of the Union Government, which appoints and dissolves it. Because of developments during the past twentyfive years, the resources disbursed to the states on the advice of the Planning Commission far exceed those disbursed in terms of the awards of the Finance Commission. Loans and grants for developmental purposes out of the consolidated funds of the Union Government are now an almost exclusive prerogative of the Planning Commission. It is thus the key body for determining the pace and pattern of growth in different parts of the country.

The nature of the Planning Commission being what it is, the situation that has emerged is one of the Centre being the dispenser of monetary and fiscal bounty and the states queueing up for benediction. The states, of course, are not precluded from mobilising resources on their own. It is up to them to levy direct taxes on agricultural income and property, at the moment one of the least taxed areas. Because of historical circumstances, the control over many state governments has however concentrated in the hands of landowning interests; the latter are naturally chary to tax themselves. Where restrictive output helps to maximise returns, landowning interests have even discovered that lack of development need not encroach upon their profitability from land. A reluctance on their part to raise resources, they may therefore conclude, would not be altogether costly to their longterm class interests either. The distribution of financial and monetary powers between the Centre and the states indicated in the Constitution and the class interests of those in power may thus combine to ensure' that the states will either be short of fiscal and monetary resources, or obtain these resources only provided they swear to conform to the Centre's wishes and guidelines.

Development plans and (policies have accordingly been shaped much in the image of what the Union Government has in mind. Eminent men such as the late D R Gadgil have, from time to time, dwelled on the bliss attendant upon a decentralised framework of planning, but they have been unable to reverse the trend of increasing centralisation of economic decisions.

Economists have tended to take certain hypotheses for granted in this context. At one end, many of us, who were nurtured by ideas stemming from Allyn Young and Book V of Alfred Marshall's "Principles", have been fascinated by the role of indivisibilities in economic growth; sophisticated models on integer programming have added to the fascination. The economies which supposedly emerge from bigger and bigger operational sizes have been a fount of intellectual pleasure. A centralised economic structure ensures a whole array of indivisibilities, or so we have believed — for instance, in relation to the market, in the exploitation of natural endowments, in the raising of resources, including resources from abroad, in the application of technology, in the utilisation of infrastructure, and so on. Once you are in a euphoric mood, the existence of an integer connotes only economies of scale, the perils of diseconomies do not at all enter the mind. For some Indian social scientists, the case of indivisibilityexploiting growth was strengthened by the success of centralised economic planning in the Soviet Union and other East European countries. In these discussions, hardly any reference was ever made to the social bases of planning: modalities of economic growth, it was implicitly assumed, are neutral in relation to the character of the polity; experiences of different countries were considered to be freely interchangeable.

For their own reasons, the politicians, at least the dominant ones amongst them, have been in favour of centralised political power — and centralised economic decisionmaking, Economists have conformed only gladly; in this matter, thanks to their faith in the magic of the scale factor, their professional conscience has not lathered them. The exploitation of latent indivisibilities is crucial for sparking off growth; a politicaleconomic agglomeration helps to foster such indivisibilities, even as it facilitates effective coordination of resources and targets. Economists have therefore rushed headlong and embraced the concept of centralised policymaking. It has been a rapturous love affair.

This is precisely where most of our problems have arisen. Our political leadership has conceived of India as one administrative whole. Despite the outwardly federal nature of the Constitution, there has been a builtin suspicion of nonconformist trends developing in any part of the country. Each expression of political or economic dissidence has been treated as a nearuwpardonable heresy. The concentration of financial and monetary powers in the hands of the Centre has been used as a lever for enforcing a unitary discipline and for discouraging polycentric urges.


The resultant cost to economic growth has been enormous. An overconcentration of decisionmaking at the Centre has emerged as the dominant trend. Indivisibilities have been imagined to exist where in fact there have been none; excessive centralisation, for instance, in such matters as formulation of blueprints and implementation of projects, has led to grievous diseconomies of scale. Where the scale factor is at issue, and one is not sure of the exact boundary where economies turn into diseconomies, there is scope for picking and choosing. In our blind enthusiasm for coordination at a single point, the picking has been done without any thought to choosing. This has seriously affected initiative at the regional and the state levels, including initiative for raising resources for growth. Those state governments which have been, for sectarian reasons, reluctant to mobilise resources have learned to cash in on their political conformism; they have looked upon the Centre as a milch cow, available in all seasons to make up the gap between their income and expenditure accounts. Since the responsibility for both sanctioning of projects and their implementation has, in the final analysis, rested with the Centre, the states have felt free to treat lightly the task of harnessing surplus.

At the same time, the Union government has been inordinately anxious not to allow dissidence of any kind to rear its head in any corner of the country.
Tin's has given rise to a pattern of behaviour which has been enormously resource wasting, and this really brings me to the heart of the matter.

A few weeks ago, the incumbent Deputy Chairman of the Planning Commission was reported to have lamented over the fact that at least fifty per cent .of the nation's investible resources are currently being frittered away in the pursuit of (political objectives and thus not available for promoting economic growth. Is there much objectivity in this lament? Politics, after all, is for the seizure of power. The seizure of power, in its turn, has a definite economic objective, namely, to tilt the distribution of assets and incomes in favour of sections and groups who support, and are supported by, the political party which captures the power. Thus it is in the nature of a non sequitur to complain that resources are being used to further political purposes. What is more relevant is to enquire into the social opportunity cost for politically coloured economic decisions. It is only provided this cost is considered high, in terms of, say, loss of production and income or failure to attain some of the other socioeconomic goals that the question arises of working out tradeoffs between shortterm political ends and longrange economic objectives. In the present context, a nearzero rate of per capita national income growth and progressively aggravating income inequalities may indeed be regarded as too high a price to pay for certain political goals, such as the preservation of a unitary administrative structure.

Allow me to pursue the point. The anxiety to maintain the unitary structure of the polity has, in more recent years, manifested itself in a nearobsession to have the rule of the same political party — or its close allies — in the Centre as well as in each of the states. Considering the disparate social processes at work in different parts of the country, it would be quite astonishing were the course of political thought to be identical everywhere. In economics, interregional variations in resource endowment are taken as axiomatic; such variations should be regarded as natural with respect to political thoughts and attitudes too. If a uniform pattern of political behaviour is nonetheless set as a national goal, two courses are then available to the authorities. First, the Centre can allocate available resources, in a blatantly discriminatory manner, favouring recalcitrant areas in the hope of winning back their loyalty. In case this is done, the allocation ceases to follow the law of comparative advantage, whichever way you define it, but is guided by a mundane system of subjective weightages which cuts across technicaleconomic considerations. The pattern is repeated with respect to current expenditure too of the Union Government, and an excessive deployment of resources takes place with the object of shoring up politically unstable areas. At the other end, since a premium is in effect obtainable for political recalcitrance, state governments do not waste any time in applying the principle of 'compensatory finance', and begin to translate their asset of nonrecalcitrance into economic advantage; they could, they discover, behave as irresponsibly as they wanted to in economic matters, yet the Centre would not dare discipline them for fear of creating another pocket of political dissidence.

The second modus operandi for curbing political noneonformism assumes an authoritarian garb, but is no let; economically wasteful. The Union Government tries to stamp out dissidence by mobilising the forces of law and order. The resulting increase in expenditure on the police and the army — on defence personnel as well as on equipment and armaments —, can assume a runaway form; a continuous diversion of resources takes place from the development to the current budgets; where fresh revenuegathering fails to keep pace with the expanding needs of the army and the police, the inevitable monetary expansion induces inflation. As far as priorities are concerned, at the national level, the enforcement oi political conformism receives precedence over economic growth; as between different states, recapturing the political loyalty of a wayward state is regarded as more important than looking after the genuine economic needs of a 'gentle' state. Often the two methods of containing dissidence operate side by side: not only is there a major deployment of resources on account of the police and the military in politically volatile areas; in addition, the authorities offer lollypops of projects to quieten them down.


The economic cost of this preoccupation with political conformism manifests itself in several directions. It is instrumental in malallocating the available resources as between development and maintenance; the interregional malallocatinn of the available developmental outlay can be laid at its door; it is equally instrumental in slowing down efforts at mobilising additional resources. In other words, the emerging diseconomies affect both the supply of savings as well as the allocation of savings.

Other, subsidiary consequences may also be listed. One major merit claimed for centralised planning is the opportunity it offers to eliminate waste and duplications, enabling the best possible allocation of resources among socially indicated priorities. The history of our playacting with planning during the past quarter of a century — with the stress more on conformityfetishism than on growth — suggests the reverse. Not only have resources been continually diverted to nundevelopmental, nonpriority uses: the allocation of the leftover investible funds lias also been heavily influenced by extraeconomic considerations. And it has been an autoregressive process. Because not enough of the potential resources can be made available for growth and because the best possible economic use cannot be made of even those that are available, the rate of growth declines. In individual areas and states, the rate of income growth fails to keep pace with the rate of population increase; as a result, economic discontent is intensified. The manifestations of such discontent are taken as a further threat to the nation's (political integrity, and it is decided to channel an even greater fraction of the given resources either into political 'pork barrel' or for strengthening the police and the army. A progressive shrinkage of resources available for growth is combined with a progressive malallocation of the latter; the trend towards stagnation is in consequence further confirmed.


The other major stated aim of planning, namely, shifting the pattern of interpersonal distribution of incomes and assets, also falls victim of the same process. A meaningful programme for narrowing social inequalities should consist, among other things, of public works aimed at creating additional income and employment for the hitherto neglected groups, a network of public distribution covering food and other essential commodities, and sweeping administrative measures, including land reforms. To carry out all this, those in power must be prepared to make themselves unpopular, at least for a while, with privileged groups. But other considerations may crowd in here. A government, even if it were not swayed by narrow class interests, can still be greatly concerned over the shortrun consequences of particular policies. Implementing the measures referred to above may mean alienation, of elements and sections currently entrenched in many state governments. The Centre may decide that such an act would be contrary to its immediate purpose; it may be apprehensive of the instability which could rear its head in the wake of the suggested reforms. Whatever the radical slogans in vogue, the Centre may hence deliberately seek the alliance of precisely those privileged groups against whom the slogans are nominally directed. With each deterioration in the economic situation, the urge to take 'risks' may be further enfeebled.

Thus we enter a phase of little growth and less of income redistribution. While the stress in policy is on stability, the slowing down of development accompanied by the growth of social inequalities increases economic discontent and generates greater turbulence, to counter which recourse in taken to more and more ad hoc shortterm measures. The latter further eat into the investible surplus and further erode its allocational efficiency.

Diseconomies thus outrun economies. The anxiety to preserve the unitary political form works havoc with its economic content: the advantages supposed to stem from economies of scale largely fail to come off. Considerations of interregional equity suggest a policy of restraint in the economic expansion of areas which have the benefits of resource endowment, early start and entrepreneurial skills; resources from these areas are occasionally sought to be transferred to areas which have hitherto remained neglected. In reality, however, the backward regions gain little from such attempts at forced equalisation, for many of the other preconditions of development remain absent. Resources wither away, without fostering growth along desired directions. Consequent on officially declared policy, some resources go underground, but they do not move too far from their original bases of operation, and all that happens is a distortion of social priorities.
The integration of targets as well as instruments of economic policy, which a centralised unitary administration is supposed to facilitate, is also frustrated.
Whether it is the planning of the power grids or the distribution of river waters or the allocation of basic raw materials, coordination at the national level tends to be weak, and the Centre fails to assert itself as much as one expected it to. The reason for this failure again lies in the obsession over political dissidents. Apprehensive of creating too many pockets of alienation, the Centre often gives in to local recalcitrants; once you concede to the wham of the recalcitrants in one particular state, the virus spreads, and elements in other states queue up for extracting similar concessions from the Centre.

The story is repeated in such matters as, for example, food procurement and distribution. Even after more than fifteen years of sustained effort to evolve an integrated policy for food procurement, prices and distribution based on the principle of equalisation of inter se gains and sacrifice, things have remained pretty much where they were. There have been phases of aggressiveness on the part of the Union Government in trying to evolve an integrated food policy, but such phases have soon given ground to other moods, and 'hard' decisions have been kept in abeyance. The reluctance to enforce such 'hard' decisions has been particularly noticeable in instances where the interests of entrenched groups and classes are directly involved.

Are we not now fast reaching the end of our tether? On the one hand, it has not been possible to channel private impulses along socially approved directions; on the other, overt considerations of interregional equity have stood in the way of optimum utilisation of given resources. The anxiety to maintain the immaculateriess of the unitary political form has had an adverse impact on the Government's economic management, apart from draining dry its capacity to harness resources for growth. The intent of centralisation is to ensure political cohesion, but its economic consequence has been a menagerie of discontent which itself has emerged as the biggest threat: tothe nation's integrity.

The parts of India are not greater than the whole. But, unless the parts survive and prosper, there could be no whole either. No better means exist for sustaining our political structure than to release the impulses which generate fast and equitable growth. In our pursuit of the willo'thewisp of rigid centralisation, we have however achieved, if I may repeat, precisely the reverse of what we intended to achieve.

Has not the season arrived to plead: let our states go? Could we not admit that the frame we have tried out for a quarter of a century deserves to he overhauled? Is the opportunity cost of turning our polity and our economy into a true mirror of federalism so severe that we have to continue to flinch from the task?
These questions have to he asked by social scientists. It is also their particular obligation to formulate some tentative answers to the issues raised. The Centre has held, but just about, and certainly our other socioeconomic dreams have failed to come true; there is, consequently, a dangerous corrosion of faith which might well lead to a meandering nihilism, Centralisation has not helped; on the contrary, it has hindered the objectives of growth and redistribution.


Learning from the experience, could we not endeavour to have a controlled decentralisation of administration, and decide to transfer the primary responsibly for economic management to the federating states themselves, with a corresponding strengthening of their financial and monetary powers? Once this is done, the Centre will revert to the classical role assigned to it in a federal entity, and act largely as mediator between the states and as builder of the nation's economic infrastructure. It will continue to be responsible for defence, external affairs, certain strategic industries, the major networks of transport and communications and general economic coordination, and hence retain considerable powers of suasion visavis the states. But it will no longer be directly responsible for economic management and growth. That prerogative will be transferred to the states, who will be on their own. If the economy of a state fails to take off, the responsibility for that failure will belong to the state government; it will not be able to run to the Centre either for filling the gap in resources, or for saddling it with the blame for lack of development. There will be other changes. Those in authority in the states will have to think deep and hard before they take recourse to strongarm methods to suppress discontent that might be causally related to their failure to manage efficiently their economic affairs. For even in the matter of applying punitive instruments, they will be ordinarily on their own, and the Centre will not be expected to bail them out of situations which they might have brought upon themselves. Once this realisation spreads, the state governments will, for sheer survival if for nothing else, eschew frivolity and concentrate on the essential tasks which facilitate better economic management and faster growth. At the same time, the Centre, now dethroned from its sovereign position in financial and monetary matters, will also have to adjust itself to its reduced role: even were it still enamoured of the concept of an overly centralised polity, it will lack the vital command over resources to try to make it operational.

It is the redistribution of financial and monetary powers which is the key to the alternative frame I have in nrnd, and which has to be brought about through a series of constitutional amendments. A reoriented Planning Commission, in my view, should Constitute the fulcrum of the new arrangements. In addition to absorbing the present functions of the Finance Commission, it could be assigned wider responsibilities connected with the devolution of fiscal and monetary powers. It will be the final authority to decide how the revenues flowing to the exchequer are to be distributed between the Centre and the states, and under what terms and conditions, with perhaps only this proviso, namely, that a proportion of the total revenues — say, a quarter should be minimally set aside to cover the requirements of the Union (Government. There should be no other preempted sources of revenue either for the Centre or the states, and the distribution of all other revenues flowing to the exchequer should be as determined by the Planning Commission, Even the allocation of ioreism exchange should no Ionizer be, the preserve of the Centre, but be added to the responsibilities of the Commission. And since the allocation of national resources can hardly be complete without the allocation of credit, the guidelines for credit planning too should cease to be the exclusive prerogative of the Reserve Bank of India and the Union Government, and be drawn up in consultation with the Commission.

In all this, of course, there is a basic presupposition. The Planning Commission is at present very much an arm of the Union Government. Its philosophy and operational principles are echoes of those of the Centre. The moment it is called upon to be the final arbiter for the distribution of resources between the
Union Government and the states, its role will be altered; it will then cease to be a part of the Union Government, and will have to develop a psyche and a personality of its own, 

I may be accused of a certain casuainess in the manner tin which I am recommending the dismantling of the present centralised arrangements for credit and foreign exchange allocation. It is however furthest from my intention that the Planning Commission should itself do the detailed allocation of either the fiscal or the monetary resources or of the available foreign exchange. It will lay down the broad guidelines; subsidiary bodies — such as regional banks — will take over the task of working out the details. These guidelines could be within the framework of a rolling fiveyear plan, and the Commission could annually readjust its broad allocations and roll them forward by another year. Within the ambit of this rolling plan, it will be the task of a subsidiary agency to undertake the detailed allocation of credit, and for a specially established foreign exchange authority to work out the detailed disbursal of foreign exchange. Within their respective areas of operation, the federating states will nonetheless he sovereign. Even in areas of concurrent jurisdiction, the Centre now shorn of financial and monetary powers, will then need to move with circumspection: each Union ministry will have to work out with the corresponding wing of state governments the details of individual projects and arrange for resources, domestic as well as foreign, to implement such projects. Measures needed to be adopted to augment resources over time will also be a matter for exploration between the Centre and the states. The Union government, in addition, will fill the role of amicus curiae where issues of interstate jurisdiction or division of responsibility are involved. In all such matters, there will be points of agreement — and of disagreement. The results of the discussions will be forwarded to the Planning Commission, which will have the responsibility of settling disputes and announcing awards that will be binding on all parties.


In such a milieu, the Centre will be, within limits, the coordinator but not the arbiter, the counsellor "but not the administrator, a major instrumentality but not the final decisionmaker. The states will come to enjoy equal rights with the Centre. They will no longer be imposed upon, but neither will they be able to impose upon the Centre. Once the Planning Commission has given its awards on jurisdictional questions, the states will have to raise resources, on their own, for growth, as well as lor current maintenance; they will have to arrange for food for their population; they will have to see to it that adequate employment opportunities are opened up within their boundaries and that social inequalities do get reduced. The states will he as near to full sovereignty as is possible in a federal structure, if they fail to provide able administration or to ensure rapid growth, it is they, and they only, who will face the consequences.

Obviously, in this scenario, the Planning Commission will occupy a very large place. It has to be constituted in a manner as would enable it to serve its functions completely objectively and without being subject to pressures from different directions. Unlike under the present arrangements, whereby the President appoints the Planning and Finance Commissions exclusively at the pleasure of the Union cabinet, it is important that the reorganised Planning Commission enjoys a substantial measure of confidence and trust from all sections of opinion in the country. The composition of the Commission could be laid down specifically in the Constitution. For instance, its members could be elected by the members of the Lok Sabha and the state assemblies in accordance with the system of proportional representation by means of the single transferable vote. At the end of every four years, onethird of the Coinmission may he retired, and the Chairmanship of the Commission could be decided on the basis of seniority. It will be necessary to make these provisions explicit, for a federal arrangement can survive only if its underpinnings are respected by different sections and groups.


Once the basic fiscal responsibilities have been transferred to the states, it would be both pointless and wrong to reserve for the Centre other regulatory functions such as those pertaining to industrial licensing and controls. For reasons of national security, a number of industries will remain earmarked for the Centre; it may not be difficult to reach a consensus about which ones to include in this list. Beyond these, the responsibility for the pace and pattern of industrial development, along with that for general economic growth, should rest squarely on the states. After the Planning Commission has given its awards, within their respective spheres the states will have the sole prerogative for the allocation of resources, including foreign exchange, between competing projects and areas of operation; it will be up to them to choose their own priorities. The apprehension of there being a spate of lopsided, unbalanced programmes in case the states took control of development planning is likely to prove groundless. Each state will have to keep within the limit of the resources allotted to it, unless it on its own is prepared to raise more. There will be mistakes and misadventures, false starts and occasional wastes, but, once responsibility begins to belong to their own courts, the states will be compelled, by the pressure of circumstances, to strive for growth as well as equity. Each state will now be exposed to an inexorable competitive process. If a neighbouring state is making rapid progress, there will be little, if any, alibi left to a state which is not doing so well : it will be hard Put to shift the blame on Ihe Centre or even on the Planning Commission. It will have to prove itself or face the wrath of the people.

As each state gradually learns to make the best use of its resources, the Centre too will grow strong; the wellbeing of the states will contribute to the strength of the Centre. Since it will no longer be burdened with the responsibility to shore up the finances of the states, it too will be free to make the best possible use of its own resources. As the preoccupation over the preservation of the nation's political integrity will have ceased, the emphasis on law and order will decline, resulting in a general diminution of tension. Interstate disputes will not die down at one stroke, but they will be no more acute than they are present. And, once we break away from the quasistagnation, there could be at least u quietening of jealousies and bickerings.

Economics will begin to replace diseconomies. The vast market potential which India as a whole represents will not be at all impaired by decentralised economic activities, for the Constitutional provisions in regard to interstate commerce will bo very much there. On the contrary, individual states may soon discover that, in specific instances, for sustaining economic growth, incomes and assets need to be distributed more even ly than has been the case in the past. There could hence be a convergence between the goals of growth and redistribution.

Other blessings will follow. It will be open to the states to choose their own institutions, and try out their own social and economic experiments. One state may, within its ambit, adopt an overtly socialist economic programme; a neighbouring state may fall back on laissez faire modalities. The prerogative for these decisions will belong to the states, and by allowing them a free reign in economic matters, the Centre will in fact contribute to greater national harmony than would be the case otherwise. Once diversities begin to be respected, and no artificial homogeneity is sought to be thrust from above, people may in fact feel the urge to trace more intensely than hitherto the roots of unity.

In the final analysis, it is a matter of attitudes. I am not describing an Arcadia. The alternative economic system I am advocating will admittedly have its problems; there will be, in the initial phase, confusion over jurisdiction, difficulties over readjustments of roles, and other manifestations of cultural lag. For the Union government in particular, the abdication of powers and responsibilities to the Planning Commission and the states will be a matter of considerable concern and anguish: the perils involved in letting the states run more or less free will be greatly speculated upon. But, as that nonrevoutionary economist John Maynard Keynes was heard to remark some forty years ago, the difficulty lies not in the new ideas, but in escaping from the old ones,

[This article is based on the author's Kale Memorial Lecture delivered at the Gokhale Institute of Politics and Economics on"May 31, 1950.]
Bombay Burmah

BOMBAY BURMAH TRADING already holds 7,35,000 equity shares of Rs 10 each out of the total of 15,00,000 shares in the share capital of Formica India and is now purchasing from Formica International of the UK its entire shareholding in the Indian company comprising of 7,50,000 shares at Rs 7.50 per share, which is the amount paid up on each share. Two directors of BBT hold, as trustees, 15,000 equity shares in the company, BPT intends to expand the activities of this company in due course of time.

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