It is necessary to look at these constraints within the setting provided by the emerging trends in the Indian polity and society. The most visible feature of the polity is the emergence of regional political and social forces and their urge for autonomy and empowerment. Over the last decade or so these urges have found a vehicle in regional political parties and they have played a key role in coalition governments at the Centre. The coalition governments have responded to the growing clout of regional parties by devolving more powers of decision-making from the Centre to the States. This trend cannot now be reversed as its roots go deep. Indeed, State governments are also under pressure to further decentralise power and resources to local bodies. Indian society is witnessing a process of great churning. The old order is dead. Sections at the lowest rung of society, the dalits ^[1] and the backward castes, minorities and women are now seeking social equality and their rightful place in the power structure. Alongside, there has been a surge in the activities of thousands of non-governmental organisations seeking to find decentralised solutions to developmental, cultural and social problems faced by the people. This social change, as well as the people’s urge to participate in the development agenda and seek localised solutions to their problems, is bringing to the fore the role of local bodies, called Gram (i.e., village) panchayats, Nagarpalikas and Zila parishads.

The initial phase of reforms under the Congress government (1991–96) was driven by compulsion, external pressure and a few committed individuals. By a quirk of fate, many parties that had long opposed structural reforms came to power in 1996 under the banner of the United Front government. The United Front government surprised its critics by not only reaffirming the reform process but vigorously pursuing reforms in new areas. For instance, it was the United Front government which reformed direct taxes, began dismantling the administered price mechanism for petroleum products, and won the approval of the Inter-State Council (a body comprising the Chief Ministers of all the States) to accept 29 recommendations on Centre-State financial relations.

That Government also introduced a slew of draft legislations ranging from Company Law to Income-Tax to Foreign Exchange to Insurance. The BJP-led Government which assumed office in March 1998 came in with a reputation of being a right-wing coalition, rooted, however, not in reform but in atavism. After farcical posturing with outdated ideas like Swadeshi (self-reliance, or, more accurately, autarchy) and outrageous suggestions like withdrawal from WTO, the government settled down to the business of governance and categorically reaffirmed both the content and direction of the economic reforms that had started in 1991. The positive fall out of this was a new policy on Information Technology and a major overhaul of excise duties. Thus, the 1990s has witnessed the forging of an unspoken consensus among all the parties which cover the entire political spectrum of India. The Congress and the BJP have emerged as the two poles. Regional parties which dominated the United Front have shown a tendency to gather around one or the other pole. Many observers discern a definite trend towards a two-party system. While there is some basis for this conclusion, I do not think political life in India would ever be so simple. As the two major parties move towards the centre, they are in danger of losing their USP, although, I must confess, in the case of the BJP it would be better off if it loses its Unwanted Selling Points more rapidly! I also believe that there is political space for the Communist parties; there is space for a Green party as well. The two-party system would eventually dominate India’s system with a peculiar Indian variation: the Congress and the BJP will be the two dominant parties at the Centre, but at the State level it is possible that the two party system may be dominated by two regional parties excluding either or both the Congress and the BJP.

Even if single-party governments replace coalitions at the Centre, they will have to accommodate regional and sub-regional aspirations and even nurture them. They will also have to provide representation to backward castes, the dalits , the minorities and women. Indeed, both the leading national political parties, the Congress and BJP, are now supporting demands by sub-regional forces for formation of new States. Both are wooing the dalits , backward castes and minorities and debating legislation to reserve seats for women in elected bodies. There is a realisation across the political spectrum that if the country were to be governed effectively, its diversity would have to be respected and nourished. The constraints to India’s growth which I noted earlier would have to be addressed within this changing political matrix.

Indeed, this framework is no different from the one visualised by the architects of India’s Constitution five decades ago. They clearly defined the division of responsibilities between the Centre and the States and enumerated them in the Union list, the States’ list and the Concurrent list. These lists entrust the State governments with substantial responsibilities for development. Thus, States play a determining role in development of agriculture, water resources, land relations, environment and forests, rural roads and state highways, minor ports, electricity and rural and urban services. They are also responsible for human development through investments in key areas as health and education. To enable them to fulfill their responsibilities, the Constitution also empowers them with rights to raise taxes, get a share in funds available with the Centre, and levy user charges on various economic and social services provided to the people. The Constitution also provides for rights and responsibilities of local bodies like panchayats and municipal bodies. The Indian Constitution envisages that the States are as much, if not more, responsible for development as the Centre.

One may ask that if the framework was already provided for in the Constitution, then what went wrong? The framework worked, but only for a few years after independence. Thereafter, India suffered a phase when the Centre encroached upon the powers and autonomy of the States. The States in turn usurped the powers of local bodies. This was a logical fall-out of the centralised model of planned development India chose in the mid-fifties, which ensured that all economic decisions were directed by the Centre. The result was that the Centre sought to assume a larger responsibility for development than assigned to it in the Constitution. It floated centrally-sponsored schemes and procrastinated on sharing all the tax revenues with State governments. States were required to seek clearances from the Centre for setting up projects for infrastructure and human development. Before the economic reforms of 1991, the States had little autonomy in attracting private domestic or foreign capital because investment, financial, industrial, sectoral and locational policies were controlled by the Centre. Local initiatives, especially initiatives that would have been possible through local bodies, perished under the Centre-directed and Centre-controlled economic model of development. In turn, States neglected their local bodies: in many States local bodies ceased to exist as elections to such bodies were not held for 10–20 years.

The coincidence of economic reforms and the emergence of regional political forces in the nineties have acted as a catalyst to trigger devolution of power to the States. The United Front government (1996–98) offered to abolish or transfer to the States centrally-sponsored schemes. It also liberalised policies to allow States to attract more private capital. The United Front government also accepted the recommendation of the Finance Commission that 29 per cent of all central tax revenues should be shared with the States. The change in the correlation of forces in favour of States is evident from the fact that the BJP-led coalition government that followed has continued with decentralising power to the States.