A series of strains test the nation today. Some strains bring protests on the streets, like the farmers agitations earlier and underway now. But never before have elected chief ministers of States taken the route of street protests to make their point. The extreme actions point to a weakening of the internal fibre that makes the country, and is at odds with the narrative of a resurgent India playing out on the world stage. How can internal imbalance lead to external resilience? In this frame, of particular significance are the strains between the Central government and the opposition-ruled State governments.
Kerala has taken its demand for funds to the Supreme Court and to New Delhi’s doorstep for a protest
In February, apart from the farmers, two State chief ministers with their cabinets and MPs have staged demonstrations in Delhi to protest what they see as discrimination in the distribution of federal funds. Kerala has taken its demand for funds to the Supreme Court and to New Delhi’s doorstep for a protest. The Kerala chief minister Pinarayi Vijayan, who says he has been forced to take this unprecedented step, led cabinet ministers, legislators and MPs from his Left Democratic Front government to protest at Jantar Mantar in Delhi against “financial injustice by the Centre and a breakdown in the federal structure of the country”. He called February 08, the day of the LDF protest, a “red letter” day in the history of India. On the same day, the Supreme Court asked the Central government to file its response to Kerala’s interim application seeking an urgent release of funds. The Centre has argued that it cannot be blamed for Kerala’s “financial mismanagement”.
Karnataka and Kerala, supported by Tamil Nadu, have said that their protest is also to safeguard the constitutional rights of all the States and secure their dues
A day before Vijayan and his cabinet did so, Karnataka Chief Minister Siddaramaiah staged a protest surrounded by his State cabinet and MLAs to draw attention to an unfair allocation of funds and injustice in tax devolution. Karnataka has argued that while it ranks second in GST collections, it has lost nearly Rs 60,000 crore due to GST implementation and a little less than Rs. 63,000 crore on tax devolution. Karnataka and Kerala, supported by Tamil Nadu, have said that their protest is also to safeguard the constitutional rights of all the States and secure their dues.
How can internal imbalance lead to external resilience?
Centre-State relations and the complex issue of tax devolution have thus been turned into an ugly tug-of-war rather than a give-and-take that pushes the agenda for the betterment of the State and the nation. But for the present, whatever the state of the discourse, the States cannot be allowed to flounder to the extent that their elected heads have to stage protest marches in Delhi. This is a situation that is close to breakdown and serves no good.
Consider the case of Kerala which the Reserve Bank of India has categorised among the top five financially stressed States. A study of fiscal parameters of States by the RBI identified Bihar, Kerala, West Bengal, Punjab and Rajasthan as highly stressed due to their high debt levels and levels of fiscal deficit. High debt implies that the State spends a significant share of its revenues servicing debt. For instance, many States spend about 10 per cent or more of revenue receipts on interest payments. West Bengal and Punjab spend more than 20 per cent on interest payments. Why is this so and how can this be addressed in the medium and long term is a matter of debate and dialogue and should not be reduced to a slanging match.
Whatever the state of the discourse, the States cannot be allowed to flounder to the extent that their elected heads have to stage protest marches in Delhi. This is a situation that is close to breakdown and serves no good
Kerala, for example, has run up a mountain of IOUs. The LDF government has blamed the Centre for the situation and alleges that it is being pushed into the worst financial crisis in the State’s history. Flagging steps like the Central government reduction of the Kerala’s borrowing limit with retrospective effect from 2021-22, the LDF government has said the State suffered a cumulative loss of Rs. 107513.09 cr for the period between 2016 and 2023. Comparing allocations, for example, it has been pointed out that Kerala was getting 3.8 per cent of the divisible pool at the time of the 10th Finance Commission which has now been reduced to 1.9 per cent. Some revenue deficit grants have also been stopped. While presenting the State budget earlier this month, Kerala finance minister K.N.Balagopal held the Centre’s “hostile approach” responsible for the present financial crisis.
High debt implies that the State spends a significant share of its revenues servicing debt
India works with the principles of cooperative federalism under which expenditure made and taxes raised are both responsibilities shared between the States and the Centre. Ideally, these responsibilities are supposed to be shared in a fine balance between the Centre and the States. However, in reality, while the Centre has a larger share of the revenue, the States have a bigger share of the responsibility, which include social service, economic and welfare schemes and projects. In India, the States incur over 60 per cent of the total general government expenditure. This ‘Vertical Imbalance’ as it is termed is corrected through the transfer of funds from the Centre to the States. It is this that the States, especially the opposition ruled Southern States, are irate about – the transfer and distribution of funds which they see as skewed.
While the Centre has a larger share of the revenue, the States have a bigger share of the responsibility, which include social service, economic and welfare schemes and projects. In India, the States incur over 60 per cent of the total general government expenditure
At the time of the pandemic, former Kerala Finance Minister Dr. Thomas Isaac had said that the synchronisation of the responses of the Centre, the States and local governments was necessary and inevitable if the pandemic was to be contained. “However, never have the fiscal relations between the Centre and States been so strained as is the case today. The rhetoric of co-operative federalism is being transformed into coercive federalism hampering the national response to Covid-19….,” he had said then. He referred, among other instances, to the imposition of conditions on the additional borrowing permitted to the States as part of the Central stimulus package, which under the guise of the pandemic, was undermining the fiscal autonomy of the States. He also warned that any squeeze on the States’ development expenditure, which accounts for 60 per cent of the combined government expenditure, in a period of slump, would have a disastrous socio-economic impact.
There is a lot that the nation can learn from Kerala and its superior development indicators, and indeed from all the Southern States
This is exactly what the former Tamil Nadu Chief Minister K.Palaniswami, an ally of the BJP, accused the Central government of doing. He said in an open letter to the Prime Minister in 2020 that the Centre “……aggressively pushing a reform agenda on which consensus is yet to be developed at a time when States have approached the Centre for additional borrowing out of sheer desperation, is not in keeping with the spirit of co-operative federalism”.
Important issues of budgetary allocations, fiscal prudence, debt management and revenue expenditure must be discussed and debated, and guided by pre-agreed frameworks. This is how India has worked. A non-hostile and accommodative approach can help nudge the Centre and States to a more balanced and sustainable way of running their finances. There is a lot that the nation can learn from Kerala and its superior development indicators, and indeed from all the Southern States. Similarly, there is a lot that the States need to help fix in terms of reducing deficits. In the end, balancing budgets is important but a precondition to overall national development is managing federal relations.