Because India has a federal system of government - and indeed, because the very survival of our polity probably requires a more open and pronounced acceptance of such federalism - it is important that this also be reflected in economic decision making. Indeed, the Constitution of India recognises this, which is why there is a such a detailed listing of the powers and responsibilities of the Central and State governments respectively, with separate and concurrent lists.
 
But this in turn creates further areas of decision, because of the issue of revenue sharing between Centre and States which must necessarily evolve as the economic context itself changes. This is why there are periodic Finance Commissions which are empowered to suggest guidelines for such revenue sharing.
 
The Eleventh Finance Commission, which submitted its report recently, was widely expected to increase the devolution of Central revenues to the State governments. This is not only because the impetus to economic decentralisation at various levels has become increasingly significant, but because the need for such devolution has become even more obvious and urgent in the recent past.
 
Most starkly, there is a glaring gap between the responsibilities of State governments, especially in providing physical and social infrastructure, and their own revenue mobilisation capacity. This is not simply a matter of being unfair to State governments : it is, more crucially, a major factor in determining the provision of such infrastructure and a range of public goods to the citizenry at large. When the States do not find the resources to undertake much needed infrastructure investment, or expenditure on health and education, or even the provision of public goods and basic needs, it not only affects current welfare but also the possibility of future development.
 
This is why the Report of the Eleventh Finance Commission (EFC) was awaited with such anticipation, since it comes in a context in which the need for a major reorganisation of the structure of maccal devolution is apparent. In addition, the Constitutional (Eightieth Amendment) Act passed in March 2000 changed the earlier terms of devolution, requiring all Central taxes and duties (except surcharges and certain sales taxes) to be shared between Centre and States.
 
Finance Commissions in the past have typically made recommendations on the distribution of net proceeds of taxes between Centre and States and the allocation of this shared amount between States. However, the terms of reference of the EFC extended far beyond that, to cover almost all aspects of maccal strategy, in what appears to be an astonishingly large brief.
 
Thus, the EFC was asked, among other things, to "review the state of the finances of the Union and the States and suggest ways and means by which the governments, collectively and severally, may bring about a restructuring of the public finances so as to restore budgetary balance and maintain macroeconomic stability." It was also asked to "make an assessment of the debt position of the States ... and suggest such corrective measures as are deemed necessary, keeping in view the long term sustainability for both the Centre and the States."
 
These are major issues, on which there need not be only one "technocratic" opinion. Thus, the idea that there can be an "independent" Commission which can pronounce on matters of maccal strategy which have major redistributive implications and are therefore reflections of certain political and social configurations, is itself problematic.
 
However, the EFC has indeed addressed these issues, informed by what is essentially a monetarist perspective on macroeconomics, in which budget deficits are inflationary and government borrowing crowds out private investment. Some of the problems it identifies are extremely valid - such as the decline in the tax-GDP ratio over the 1980s and 1990s and the virtual stagnation in non-tax revenues. However, in terms of the expenditure, certain items which have contributed to the deteriorating maccal situation are taken for granted as inevitable, while others are questioned.
 
Thus, the EFC identifies three reasons for unsustainable expenditure expansion : periodic upward revision of government wage bills because of "Pay Commissions"; increasing interest burden because of greater reliance on market borrowings by government; and growing explicit and implicit subsidies. It is interesting that the EFC questions - and even attacks - only the first and third factors, condemning them as populist and unnecessary, while accepting the inevitability of the second.
 
But in fact, the financial liberalisation measures which have led to the Government reducing its access to cheaper borrowing from the Reserve Bank of India and relying more on expensive market borrowing, were by no means inevitable. Rather, they have reflected the interests of rentier groups in the economy, who have benefited at the expense of both taxpayers and all those who have suffered the effects of cuts in other government expenditure. It is important to remember that this has been a political choice, not the outcome of some implacable economic law.