Context: Recently Kerala has filed a suit in the Supreme Court accusing the Centre of violating the federal structure of governance and causing “severe damage to the economy of a small State with meagre resources” by interfering with its finances. This has again raised debate over fiscal federal issues that are existing in India.
Fiscal federal issues:
- Shrinking devolution: Though the Finance Commission enhanced states’ share in the divisible pool of taxes, it didn’t result in concomitant increase in the actual devolution. This is because, over the few years, central government has reduced the tax rates and increased the cess and surcharges which are not mandated to be shared with the states. Cess and surcharges are part of central taxes but not part of the divisible tax pool and do not have to be shared with States.
In fact, cess and surcharge has grown at a faster pace than gross tax revenues.
- Ceiling on the states’ borrowing: The Union Budget has kept 3.5% of GSDP as their borrowing limit for FY24 and it restricted borrowing power of the states.
(As per article 293, states cannot raise loans without the consent of the union if there is any outstanding loan made by the state government with a guarantee given by the centre.)
- Loss of taxation rights under GST mechanism: with the advent of GST, The states lost their rights to increase tax revenues by changing the tax rates on sale of many goods and services. (GST rates and slabs are decided by GST council with 3/4th majority vote).
- Restrictions on off-budget borrowings: The Centra had noticed in FY22 that such off-budget borrowings would be considered as borrowings made by the state. This reduced the capacity of states to increase their borrowings without violating fiscal deficit targets.
However, Union budget 2023-24 has proposed to continue with the 50-year interest-free loan to state governments that aid infrastructure investment.