Fiscal Federalism: The sustained attack on federalism

News:  A Muslim league member from Kerala in the constituent assembly, highlighted that concentrating all powers in the centre will lead to totalitarianism.

What recent measures suggest a concentration of power by the Centre?

1. Increasing monitory share of states in centrally sponsored schemes, 2. The terms of reference of 15th finance commission, 3. Imposition of demonetization without adequate consultation with the states, 4. The institutionalization of goods and services tax and the subsequent delay in transfer of GST compensation, 5. one nation one ration etc.

Other policies or measures like the banking regulation act 2020, the government of national capital territory amendment act, 2021, draft electricity bill 2020, Dam safety Bill 2019 etc have also concentrated power in the hands of the Centre.

What is the impact of the fiscal situation of the state?

A large share of non-divisible pool taxes in form of cess in petrol tax and creating the Agriculture Infrastructure Development Cess has resulted in a situation where union government continues to get exclusive benefits of tax collection. This share has jumped from 12.67% in 2019- 2020 to 23.46% in 2020–2021.

When the union government proposed borrowing as an option, states had to accept the proposal, but now they are forced into a debt situation. CAG found that the union government in 2018-19 wrongly treated 47, 272 crores of GST compensation cess in the consolidated fund of India. As per 2021-22 budget estimates, the state’s share of unit tax has been reduced to 30% against the mandated 41% as prescribed by the 15th finance commission.

States were seeking non-tax avenues to generate funds. Union government issued a clarification that funding to chief ministers disaster relief funds will not be considered as CSR expenditure. This is in opposition to the case with PM – CARES. This was followed by the suspension of MPLAD funds. All these demands resulted in demands for increasing borrowing limits under FRBM from 3 to 5%.

What steps should be taken to resolve this situation?

-It is time for the constitution of a committee like the Rajamannar committee to study centre-state relations.

-As recommended by NCRCW, the state should demand the creation of an institutional framework to mandate and facilitate consultation between unions and the states in areas of legislation under concurrent lists.

-Chief ministers should try to create forums for regular engagement rather than just during times of crisis. For example, Finance Minister Thomas Isaac rallied finance ministers from different states during the initial stages of discussion on the terms of reference of the 15th finance commission. This would be crucial for a discussion on which demands like the extension of GST compensation to 2027 and the inclusion of cess in the divisible pool of taxes.

Federal flexibility will play a crucial role in shaping the future of democracy. Even come and needs to invest resources towards facilitating effective consultation with states in lawmaking and administration.

Source: This post is based on the article “The sustained attack on federalism” published in  The Hindu on 21st December 2021.