Module Detail

Political Science
Subject Name

Indian Politics: II
Paper Name

Changing Federal Structure and State Politics

Module Name/Title

Module Id

Pre-requisites

 To describe the concept of Changing

Objectives
Federal Structure and State Politics in
context of India.
 To discuss the Nature of Indian
Federalism.
 To know about the Changing Federal
Structures: A Shift towards
Regionalisation in the Centre State
Relations.
 To Explain the Emergence of a ‘Federal
Market Economy’ in place of a
Centralized Economy

Economy, Federal Structure, Federal Market

Keywords
Economy, State Politics, Regionalisation, Centre
State Relations
Role Name Affiliation

Professor Ashutosh Kumar

Principal Investigator Panjab
University,
Chandigarh

Prof. Sanjay Lodha;

Paper Coordinator MLS,University,
Udaipur

Prof. Rekha Saxena Delhi

University,
Delhi

Anuradha Singh DU, Delhi

Content Writer/Author
(CW)

Prof. Asha Sarangi

Content Reviewer (CR) JNU, New Delhi

Language Editor (LE) Professor Ashutosh Kumar, Panjab

University,
Chandigarh

Module: Changing Federal Structures and State Politics

Federalism is a central principle of the Indian polity. Though there is no particular mention of
India as a federation in the Indian Constitution, it has nonetheless forever remained an important
tenet of the political picture. The Constitution defines India as a ‘Union of States.’ The
Government of India usually referred to as Union government or the Central government is the
governing authority of a federal union of twenty nine states and seven union territories.
Political Scientists have classified governments as unitary and federal on the basis of the nature
of relations between the national/ central government and the regional/state government.
Federalism as a form of government means a political system with at least two sets of
governments, one at the centre and the other at the level of states. It is a system based upon
democratic rules and institutions in which the power to govern is shared between the union and
state governments. This division of power is constitutional and both operate in their respective
jurisdictions independently.
A federal form of government i.e. two sets of democratic institutions, stands in contrast with a
unitary government, in which a central authority holds the power. There is no constitutional
division of power and center is the authority that controls all power. State governments – as and
where they exist - in a unitary form of government derive their power from the national
government. In case of any clash between the center and the state, it is generally the centre that
has its way. Britain, Belgium, China, France, Italy, Japan, Norway and soon have unitary
structure of government, while Australia, Argentina, Brazil, Canada, Russia, USA etc have
federal model of government.
The choice of a federal set up in India has been attributed to historical reasons where it was
considered important by both, the British during the transfer of power as well as by the Indian
leaders after the transfer of power. It is often argued that India suffered multiple foreign
invasions due to a weak central commanding power and because of this, a strong centre was
considered necessary. Where on one hand India needed a strong center, on the other extreme was
India’s immense diversity which demanded that the states be provided with considerable regional
autonomy. The need to balance this two extremes India possessed, resulted in India becoming a
federating union.

The Nature of Indian Federalism

Article 1 of the Indian Constitution defines India as a “Union of States” wherein India in a union
of twenty nine states and seven union territories. Unlike the United States of America where the
federal and the state governments function on dual constitution and citizens have dual
citizenship, Indian union and states on the other hand function under one constitution and Indians
 1
posses single citizenship, that of India. By and large both the Union and state governments
function under one constitution which pictures a representative and responsible government at
both levels.
The word federalism or a federal system of governance is nowhere specifically mentioned in the
Indian constitution but despite that India’s way of governance is federal in structure. Federalism
is the division of power between the central and state governments by the scheme of the
Constitution itself. Both governments are independent and autonomous in their sphere of powers.
The division of power between the centre and state in India can be studied under three heads:
legislative, administrative and financial relations.
1. Legislative Relations
The federal division of power is clearly stated in the three lists in the Seventh Schedule of the
Indian Constitution. They are Union list (99 subjects) State list (69 subjects) and Concurrent list
(52 subjects). Derived from the Australian constitution, these lists clearly divide the powers
vested on the Union and state. The Union List also referred to as List I, contains legislations, on
which the Union enjoys exclusive control. Of the total 99 subjects that are included in the Union
list the major ones are Defence, Banking, Taxes, Coinage, Insurance, Currency, Union Duties,
Foreign Affairs and policy etc. The State List or List II contains a total of 69 subjects all of
which are exclusive legislative powers of the State. Subjects like Public Order and Police, State
Taxes and Duties, Agriculture, Sanitation, Local governments, Forests, Fisheries, Public Health
form part of the state list. The third list called the Concurrent List contains 52 items, which are
powers vested both on the Union as well as state government. Matters such as Economic and
Social Planning, Criminal Law and Procedure, Civil Procedure, Torts, Trusts, Marriage,
Education, Welfare and Labor, Contracts fall within its preview. However in case of a conflict,
the union law prevails.

2. Administrative Relations
Article 256 of the Constitution provides that the executive power of every state shall be so
exercised so as to ensure compliance with the laws made by the Parliament. Both Union and
state governments function separately in their administrative sphere without any interference in

1
Except in case of Jammu and Kashmir, Nagaland, Mizoram and some other states in the hilly regions and the
North East, which though have special status, they still confirm to the single Indian Constitution and single
citizenship.
each other’s domain. However over a period of time there has been some contentious issues that
had a significant bearing on the centre state relationship. The major issues are, the treaty making
power of the Union (Article 253), Presidents’ Rule (Article 356) and the role of the Governor
and use of paramilitary forces. All the three issues have had a considerable impact on the centre
state relationship because these are ‘tools’ in the hands of the union government, which have
been used and misused time and again to tilt the balance of power towards the centre. 2

3. Financial Relations
Financial relation between the Union and the state government is another soar point in the centre
state relationship. Sharing of revenues between the two sets of government has been a matter of
conflict since long. The Seventh Schedule vests taxing powers both in the Union list and the state
list. The exclusive right to raise the most supple sources of revenue like the general income tax,
corporate tax, excise duties (except on liquor and narcotics) custom duties are vested in the
Union government. The items listed in the state list include, to name a few, land revenue, tax on
agricultural income, excise duties on alcoholic drinks and narcotic drugs, general sales tax, tax
on motor vehicles, stamps, registration, entertainment and electricity. The point of tension
between the two governments is the sharing of proceeds from the collected taxes i.e. the states
claim that the resources at their disposal are not commensurate with the huge expenditure that
they are expected to incur in terms of developmental activities, while on the other hand the union
has access to extensive sources of revenue.3

Changing Federal Structures: A Shift towards Regionalisation in the Centre State

Relations
The federal division of power as enshrined in the constitution had a ‘strong bias towards the
centre.’ India’s vast size, difference in various spoken languages and dialects, religions, races,
castes etc called for a strong centre in order to maintain unity and integrity of the country. Again,
a strong centre was thought to be necessary to perform the huge responsibility of a modern
welfare state and for the economic development of a newly independent country. A strong centre

2
For a detailed reading on the issues between the union and state government see Rekha Saxena (2006) Situating
Federalism: Mechanisms of Inter Governmental Relations In Canada and India. New, Delhi, Manohar Publications.
3
ibid
with sufficient resources and authority, both political and economic was therefore thought to be
important. Due to all such reasons India’s polity was built with a stronger centre. This order has
however changed over the last two decades beginning from the 1990s. Various developments
took place which transformed the existing centralized system towards a more regionalized one.

Though there has not been any change in the Constitutional provisions regarding federalism and
centre state relationship, various federative processes and practices have stirred India from a
strong central model towards a more federated polity and economy. In this section we chart out
the various changes that took place leading to a more regionalized polity and the ways in which
the party system and electoral processes have impacted Indian federalism. It is here that we
notice the surfacing of new actors and institutional innovations where states became the main
theatres of politics and also of a decentralized economy. States have become the principal arena
for private investment in the post liberalization era. We study this in details under two heads;
emergence of states as principal political actors and secondly a shift from centralization to as
Rudolphs (2002) call it towards ‘federal market economy’.

Emergence of states as important political actors

India was electorally dominated mainly by the Congress party after Independence. Congress was
the undisputed leader winning both national and assembly elections, till the Janta party
challenged it’s over arching authority. The one party dominant system was replaced after the
Ninth parliamentary election in 1989, by a regionalized multiparty system and coalition
governments. The 1989 elections resulted in India’s first hung parliament. Each of the four
national elections since that watershed has led to a coalition government in which state based
parties have held the key to power at New Delhi.

This has been one of the major shifts in Indian politics i.e. the shift from one party dominance to
two party system to a multi party configuration, where regional parties or state parties have come
to play a major role. This led to a greater level of recognition of state as the primary unit of study
and to the emergence of state politics as an autonomous discipline, whose study is now being
considered essential for understanding of Indian politics.

As already mentioned Congress was the over arching party in the years after India’s
independence. 1990s was an era marked by an overriding bi polar contest between Congress and
the Bhartiya Janta Party (BJP) and its corresponding alliances i.e. The United Progressive
Alliance (UPA) and National Democratic Alliance (NDA). However post this period, and
especially after the Mandal era, India has witnessed a more multi polar contest essentially with
the rise of number of regional parties. A simple count of the number of regional parties suggests
an increase from 39 in 1952 to 362 in 2009 (Kumar 2013:148).4
With its strong and entrenched support base, regional parties or state based parties have an
important say in the formation of not only its respective state governments but also as imperative
partners in the national coalition. Their undisputable significance in the formation of the national
coalition is reflected in the way regional parties dictate terms during government formation,
allocation of ministries and formulation of policies. Regional parties have been ruling many
South Indian states. Even “the Hindi heartland states that used to swing together is now a
political mosaic,” say Yadav and Palshikar (Yadav and Palshikar 2008: 14).
The diversified multi party era of politics has given rise to the phenomenon of ‘divided
government’ such that the two Houses of the Parliament and state legislatures are controlled by
different sets of coalition governments. As a result, inter-governmental negotiations and policy
harmonization have acquired critical importance. The traditional forums for these negotiations
are the National Development Council, the Inter-State Council whose importance has been
increasing in the last few years.
The importance of regional parties is evident in the fact that no political party has been able to
win majority of the seats in Lok Sabha during the last five national elections since 1989, as a
result the country has witnessed coalition governments in which dependence on regional parties
is very high5 (Suri, Kumar 2013). Sanjay Kumar (2013) tells us that regional parties over the last
several elections have polled nearly one third of the votes. On the other hand the vote share of
the national parties has gone low correspondingly. Congress has suffered the steepest decline
from 48% votes during the 1984 Lok Sabha Elections to 28.6% during the 2009 Lok Sabha
elections. In the same essay Kumar also tells us that during the 2009 Lok Sabha elections, 40%
of the voters mentioned that they get influenced by the performance of the state governments

4
Kumar Sanjay. 2013. “A shift Towards Regionalisation of Indian Politics”. In Handbook of Politics in Indian
States, Regions, Parties and Economic Reforms edited by Sudha Pai, 146-165. Delhi: Oxford University Press.

5
Balveer Arora et.al (2013) Indian Federalism in Volume on Democracy, Edited by K. C. Suri and Achin Vanaik,
New Delhi, Oxford University Press.
while only 24% said that they were more concerned with the performance of the central
government. This sends out a clear signal that states have been gaining importance as the centre
of politics in the present era.
Yogendra Yadav and Suhas Palshikar (2008) mentions that if we compare the voter turnout of
the Lok Sabha elections of the last two decades with the assembly elections held in the same
period, we can clearly see that bigger numbers come out o vote in the assembly elections as
compared to the national elections. This trend is visible in all states, with Bihar being the only
exception.
Susanne Hoeber Rudolph, Lloyd I. Rudolph in an article6 published in January 2002, argues that
that with the rise in the coalition governments, the growing importance of regional parties and
the shift towards multi party system has undone the centralizing thrust of the 1950 federal
Constitution. They cite the reduced use of Article 356 by the majority party government at the
centre to remove irksome state government, as an example. With state-based parties now holding
the balance of power in New Delhi, unrestrictive invocation of Article 356 time and again has
become a thing of past, no doubt aided by the judicial ruling and judgments. . They also draw a
comparison between Indian politics and Italian or Israeli politics, where smaller political parties
can and do hold national governments hostage in order to advance their own narrow partisan
agendas. We are aware of the way Jayalalitha hijacked the coalition with the threat to bring down
the Vajpayee government.
Doughlas Verney and Balveer Arora use the term ‘federalization’ to denote the end of one-party
dominance, the abundance of political parties, and the consequent reconfiguration of the party
system (Verney 2002; Arora 2003a). A distinct territorialization of political parties with regions
of strength and weakness is a significant feature of the new party system. They also refer to this
as regionalization or decentring. The emergence of a competitive multiparty system has ensured
that no one party controls the monopoly over power, and this, in turn, has considerably
transformed the federal relationships in India.
Apart from the mounting importance of the regional parties, the Seventy Third and Seventy
Fourth Constitutional Amendments have also furthered the decentralizing process. Though the

6
Susanne Hoeber Rudolph, Lloyd I. Rudolph (2002) New Dimensions in Indian Democracy, Journal of Democracy,
Volume 13, Number 1, January 2002, pp. 52-66
local self government continue to be under the jurisdiction of the state list, with the Seventy
Third and Seventy Fourth Constitutional Amendments they have acquired a constitutional status.
With the gaining of constitutional status, local self governments have seen more regularity in
terms of elections, financial allocations from both the Union and state governments. This has
also granted them relatively greater autonomy in effective functioning7
Post 1989 regional parties have changed the face of the national politics. Since 1989 the
centralizing tendency of the Indian federation is being undermined thereby leading to the
emergence of a changed federal structure. Within a changed federal structure, states have
become an important stage for all kinds of political dramas to unfold and politics and electoral
scenario has become more regionalised.

Emergence of a ‘Federal Market Economy’ in place of a Centralized Economy

In the heydays of Nehru and Congress, India was primarily a centralized economy and any kind
of industrialization was guided by the “permit-license raj.” An elaborate regulatory arrangement
concentrated power into the hands of central agencies such as Director General of Foreign Trade,
Import and Export Control Board, and the various licensing committees of the Ministry of
Industry.
The star of the ‘command economy’ and the “permit-license raj” were the bureaucrats,
administrators, economists, and other experts who were helping Prime Minister Nehru build a
modern industrial economy (Rudolph 2002). Industry and industrialization were completely
under the center’s custody and through a meticulous licensing structure it regulated any
investment by private firms. Nehru as the chairman of the Planning Commission imagined, that
with big dams, heavy industries and modern industrialization Indian state would occupy the
commanding heights of the economy.
Aseema Sinha in an article8 The Changing Political Economy of Federalism in India: A
Historical Institutionalist Approach published in 2004 mentioned that the Indian economy in
1978 was dominated by the public sector which controlled 80% of the total investment, while
foreign investment as a share of total investment was extremely low at around 0.6%. In contrast,

7
Balveer Arora et.al (2013) Indian Federalism in Volume on Democracy, Edited by K. C. Suri and Achin Vanaik,
New Delhi, Oxford University Press.
8
Aseema Sinha (2004) The Changing Political Economy of Federalism in India: A Historical Institutionalist
Approach, India Review, 3:1, 25-63,
in 1998 the public sector constituted approximately 40% of the total investment, with foreign
investment stood at approximately 16%. The economic structure was so centralized that the
vertical dependence of the states on the center to meet the gap between revenues and
expenditures led to almost complete reliance of the states on central monetary transfers. Central
institutions like Finance Commission and Planning Commission were allocating revenue and
budgetary support to the various states.
This centralized command in fiscal matters however changed hands around the year 1991 with
the advent and acceptance of liberal reforms in our economy. The Post 1991 era is marked by
changes in terms of centre – state economic relations. Economic liberalization coupled with the
dismantling of the permit-license raj, and an increasing dependence on markets have encouraged
the emergence of the “federal market economy.” India’s economic liberalization and
globalization has transformed centre– state along with state–market relations in a very big way
(Rudolph and Rudolph 2001; Rao and Singh 2005; Singh and Srinivasan 2006).
Rudolphs (2001, 2002) however argues that economic liberalization is only one part of the story.
An equally important reason has been the clear decline in centrally sponsored public investment.
This has not only abridged the central government’s financial control but also opened up new
fields of enterprise for innovative state governments. Private investment became the new engine
of growth and states obtained a new degree of ‘economic sovereignty’9 as now they were in a
position to look towards the market to meet the resource demand.
Sinha (2004) seems to agree with what The Rudolphs (2001, 2002) stated that with the newly
gained ‘economic sovereignty’ the states could now look towards the market – both international
and domestic – to meet the demand of capital. She states that, with the abolition of the centrally
controlled license raj, the Foreign Direct Investment (FDI) and Foreign Technology Agreement
were radically changed. These reforms not only freed industrialists but also the states to
approach the private sector—both foreign and domestic—directly in search of investment. These
amendments in the regulatory framework added to unintended decentralization in power and
authority in fiscal matters.10

9
Rudolph, Lloyd I. and Susanne Hoeber Rudolph (2001a), ‘The Iconization of Chandrababu: Sharing Sovereignty
in India’s Federal Market Economy’, Economic and Political Weekly , vol. 36, no. 18, pp. 1541–52.

10
These developments in the monetary sector were being accompanied by changes in the political realm, where
regional parties had begun to gain importance, national parties and its vote share were declining and state based
The loosening of central control towards a more decentralized system, however had its own
problems, explains Sinha. On one hand devolution of authority led to decentralization of
expenditures but on the other hand this was not accompanied with a corresponding
decentralization in revenue sharing mechanisms. The result of such an imbalance was a much
more precarious fiscal health of most states.
There was a soaring desire for continued regional investment and this, compounded with
declining central transfers created an environment of apparent regional disparities across states.
India saw an increasing trend of growth rate disparities across states. For example, on one
extreme was Bihar, whose domestic product growth rate in the 1990s was as low as 2.7% per
year, and on the other extreme was Gujarat whose growth rate was 9.6% annually—more than
3.5 times greater than Bihar. Such an imbalance in growth rates gave rise to extreme regional
disparities.
Renowned scholars of federalism have noted that the decentralized fiscal structure post
liberalization, led to an era of ‘competitive federalism.’11 Competitive Federalism is
characterized, among other things, by a discord amongst the states for international investors and
mobile sources of capital.
According to Aseema Sinha (2004) (Suri and Vanaik 2013), this competition among states were
competing even in the pre reform era. However, what has changed from the pre liberalization
era, in the recent times is the nature of this competition. In the pre liberalization phase, this
competition was more ‘vertical’ i.e. most competitive policies were planned with a view to get
crucial resources (economic or political) from the center, whether in the form of location of
private sector factories or public sector resources. States were also competing with each other for
securing centrally sponsored public sector projects (West Bengal and Tamil Nadu for example),
while others tried to redirect the central licensing system for locating private sector projects in
their regions (Gujarat and Maharashtra, for example). In the post-1991 era, the form of this
competition changed i.e. it was now characterized more by ‘horizontal competition’, wherein
states compete amongst themselves. This horizontal competition is more symmetric as it affects a

parties had begun to play a major role in the formation of government at New Delhi. All these changes put together
was slowly changing India’s federal structures towards a more decentralized, state based and more localized politics
and economy.
11
Balveer Arora et.al (2013) Indian Federalism in Volume on Democracy, Edited by K. C. Suri and Achin Vanaik,
New Delhi, Oxford University Press.
wider set of states than before and encourages policy diffusion across many states. In order to
attract investors, the game of numbers and statistics is played by most states by way of which it
wants to portray to have attracted the highest share of investment.
Intense competition has even led to direct agreements between international agencies or investors
and the state governments, bypassing the central government. From 1998 onwards the World
Bank made direct agreement for structural adjustment packages with Andhra Pradesh,
Karnataka, and Uttar Pradesh. For the restructuring of its power sector, Orissa received a loan of
US$350 million directly from The World Bank (Sinha 2004: 49 – 50). Similarly private
companies sign separate contracts with states and even confirm to specific regional context and
political dynamics in different states. Gujarat represents a state led model of development. It
focuses on aggressive attraction of Non Resident Indians (NRI) Gujaratis and mobilization of
investment from other agencies/ organizations, through steady and continuous institutional
reform and government action on a range of industrial policy fronts.
The fiscal relationship between the centre and the state thus changed, with the balance shifting
towards states. The centralizing tendencies of the pre 1991 economy were slowly loosening up
and the states were gaining prominence in fiscal matters. Competition among states in search of
resources, capital and investment increased, undermining the centralizing features of the central
government.
This however does not mean that the central government had no control over the states’ fiscal
policies. With the fading of Nehruvian centralized command economy, the role of the central
government has changed from an interventionist to regulatory. Rudolphs (2001, 2002) mention
that far from losing control over the states’ investment policies, direct intervention of the centre
affecting both the polity and the economy is being replaced by regulation. The 1991 economic
liberalization has led to the abandonment of the permit-license raj and central planning, but
federal regulatory agencies remain active in monitoring markets for goods, services, and capital
to ensure that they perform competitively and effectively. It shows us the transformation of the
fiscal federal structure from a highly centralized economy to a more federal economic
decentralized structure.
Conclusion
To sum up, the Indian federation has steadily progressed from the feudal and colonial phases of
history to a parliamentary federal political system under the 1950 Constitution. The working of
the structure has slowly become more federal under the impact of a series of factors. The states
are making themselves heard and felt politically and economically more than they ever have in
the half-century since India gained its independence from Britain (Rudolphs 2002). Growing
politicization of society, regionalisation of the party system, changes in the economic sector in
unleashing new liberal economic policies, the long overdue judicial activism favouring
independence and autonomy of state governments, the President and Governors have all led to a
new federalized Indian politics. While on one hand the system was getting more and more
federalized and decentralized, yet on the other hand the old regulatory establishment continued to
outline the path and process of liberalization in important ways. Sinha (2004) mentions that,
state-guided routes to liberalization rather than market fundamentalism are operational in most
states. Arora (2013) et.al believes that though there has been an increase in the effective exercise
of power by state and local governments, India still remains a centralized federation. The earlier
mode of governance based on strict license and permit has been replaced by new regulatory
bodies They are the new pillars on which the federal governance of growth now rests.