India needs a new federal compact: Haseeb Drabu
Chennai, Jan 28: Economist and former Finance Minister of Jammu and Kashmir, Dr Haseeb Drabu, delivered the Raja Chelliah Memorial Lecture for 2026 at the Madras School of Economics on Tuesday, calling for a fundamental rethinking of India’s fiscal federalism to align it with the country’s transformed political economy.
Speaking on the theme “Federalism in India: Sub-national Architecture for a Regulated Open Economy,” Dr Drabu examined the growing mismatch between India’s evolving economic and governance structures and its largely unchanged framework of fiscal federalism, arguing that the situation necessitates a new federal compact.
The lecture, organised by the Madras School of Economics, was chaired by eminent economist and former Governor of the Reserve Bank of India, C Rangarajan.
Dr Drabu observed that India’s political economy has undergone a profound structural transformation over the past three decades. The economic regime, he said, has shifted from state-led socialism to business liberalism; governance has evolved from a two-tier Centre–State arrangement to a three-tier system with constitutionally empowered local governments; and policymaking has been reshaped by the emergence of a regulatory state characterised by independent regulators and rule-based oversight. He noted that the introduction of the Goods and Services Tax has been particularly transformative, fundamentally altering India’s tax architecture through the pooling of indirect tax sovereignty.
Outlining the broad contours of reform in fiscal federalism, Dr Drabu stressed the need to redefine the relationship between the state and markets at the sub-national level. He called for a move away from a purely transfer-centric framework towards a dynamic federal compact that recognises states as economic actors, regulators, and development strategists, rather than passive recipients of central allocations.
Commenting on the lecture, C Rangarajan—Chairman of the Madras School of Economics and former Governor of the Reserve Bank of India, former Chairman of the Prime Minister’s Economic Advisory Council, and former Chairman of the Finance Commission—said the ideas presented by Dr Drabu “merit deeper discussion and deliberation within both academic and policy circles,” adding that “a solution must be found.”
In a lighter moment, Dr Rangarajan remarked, “Haseeb calls me his guru and now he, the shishya, is rebelling,” drawing laughter from the audience while underscoring the intellectual seriousness of the issues raised.
The lecture was attended by faculty members, students, bureaucrats, and scholars, and is expected to stimulate further debate on reimagining India’s federal architecture in the context of a rapidly changing economic landscape.
