Oxygen for fiscal federalism

Relevance: This article focuses upon the aspects of Fiscal federalism in India.

Synopsis:

A special GST rate could be levied by using the power under Article 279A. This would enable the States to raise more resources during the pandemic.

Background:

• India has a federation with a strong centralizing policy. Nonetheless, India maintained its limited federal characteristics for a fairly long time.
• However, many experts now feel that federal characteristics are being threatened and undermined in recent times.

Undermining Federalism:

• First, the Goods and Services Tax (GST) law assured States a 14% increase in their annual revenue for five years (up to July 1, 2020). However, the Union government has deviated from the statutory promise and has been insisting that States avail themselves of loans. Kerala is entitled to a GST compensation of Rs. 4,041 crore for the financial year 2020-21. But the Union government has been disregarding this obligation. 
• Second, last year, the Union government increased the borrowing ceiling of the States from 3% to 5% for FY 2020-21. But the conditions are attached to 1.5% out of this 2% increase of ceiling. States will have to bear the burden of welfare and relief measures during the pandemic. These conditions go against the principle of cooperative federalism.
• Third, the 15th Finance Commission had recommended Rs. 2,412 crore as a sector-specific grant and Rs. 1,100 crore as a State-specific grant for Kerala. But this amount has not been released. 
• Fourth, the expenditure rules attached to the Disaster Management Fund are unviable. This inhibits the state’s discretion in doing disaster-related expenditures. 

Suggestions:

• The present GST compensation period will end in 2021-22. Beyond this period, it is going to be very difficult to convince the Union government to provide compensation, as there is no constitutional obligation to do so to the States.
  • The Union government can consider using its powers under Section 4(f) of Article 279A to raise additional resources during the pandemic.
  • Section 4(f): It enables the Goods and Services Tax Council to make recommendations on any special rate or rates for a specified period. In order to raise additional resources during any natural calamity or disaster.
• The future interest liability of loans should not be placed on the shoulders of the States. Moreover, the borrowing limit of States, as per the Fiscal Responsibility and Budget Management Act, should not be built into these loans.
• The Corporate Social Responsibility Fund could be remitted to the Chief Minister’s Relief Fund in order to augment disaster management resources.

These are some urgent necessary measures that are to be taken for pumping oxygen to fiscal federalism in India.