Fiscal federalism in dire straits?

The recent row over the Centre’s move to slash the open market borrowing limits for Kerala is the latest of a series of tussle between the CPI(M)-led government in the state and the BJP-led government in the Centre. The Government of Kerala has been accusing that the Centre was trying to impose financial regulations on the states violating the principles of fiscal federalism.

Not only Kerala, but the Centre has in the recent weeks slashed the borrowing limits of Himachal Pradesh and Punjab too.

The Centre slashed borrowing limit for Punjab from Rs 39,000 crore to Rs 21,000 crore. The Centre has also stopped grant of Rs 2,600 crore (Special Assistance Grant for Development of Capital Assets) and Rs 800 crore grant under the National Health Mission for Punjab. The AAP government of Punjab condemned the Centre’s “discrimination” against the state. Chief Minister Bhagwant Mann boycotted the recent Niti Ayog Governing Council meeting, chaired by Prime Minister Narendra Modi.

The Centre has cut Himachal Pradesh’s borrowing limit from Rs 14,000 crore to Rs 9,000 crore. The state’s Congress government has asked the Centre to release Rs 9,242.60 crore deposited under the New Pension System with the Pension Fund Regulatory and Development Authority. Himachal Pradesh is one of the states that reintroduced the Old Pension Scheme for its employees.

T Harish Rao, the finance minister of the BRS government, alleges that the Centre flouted principle of federalism by cutting Telangana’s loan limit by Rs 15,033 crore in 2022-23.

Over the years, Kerala has been witnessing many such tussles between the Centre and the state on fiscal issues, be it over the GST share, allocation of central aids, considering public funds in the state treasury as state's borrowings o raising objects to borrowings by the Kerala Infrastructure Investment Fund Board (KIIFB) - an agency under the state government that funds infrastructure projects.

The CPM is accusing the union government in the Centre of hatching a plot against the states having non-BJP governments. The BJP is countering by highlighting the 'extravaganza' and fiscal indiscipline of the state and even citing the fiscal crisis of neighbouring countries like Sri Lanka.

Kerala Chief Minister Pinarayi Vijayan termed the slashing of the state's borrowing limits as a 'vengeful attitude' of the BJP government in the centre. Former Kerala finance minister and known economist T M Thomas Isaac said that it was high time that the state should move court against the centre for making a mockery of the federal principles.

K N Balagopal, the finance minister of Kerala, even used his budget speech for the current fiscal as a charge sheet against the centre by listing out a series of fiscal regulations imposed by the centre on the state.

Not just Kerala, but many states have been lamenting over the centre's decision not to extend the GST compensation.

The present row is mainly not just over slashing the borrowing limits, but for keeping the state in the dark over the reasons for slashing the borrowing limits.

Kerala was expecting a borrowing limit of Rs. 33,442 crores for this fiscal, which is 3.5 % of the GSDP. But as per the centre's recent communication to the state, the state could borrow only Rs. 15,390 crores.

The centre is yet to formally clarify whether the ceiling now prescribed is for the first nine months of the fiscal till December. But the minister of state for external affairs V Muraleedharan, who is a BJP leader from Kerala, said that it was for the first nine months only.

Even then Kerala finds reason to lament. For, the first nine months of last fiscal the state's borrowing limit was Rs. 23,915 crore and the state was expecting at least Rs. 20,000 for the corresponding period of this fiscal, the finance minister said.

Adding more political colour to the centre's decision, the CPM government alleges that the fresh restrictions would affect the state's spending at a time when the Lok Sabha elections are hardly one year away. The centre on the other side is carrying out huge campaigns over the centrally sponsored schemes being implemented in states.

The KIIFB have played the spoilsport for the state's borrowing limit. Over the last few years the centre as well as the Comptroller and Auditor General had been pointing out that open borrowing being made by KIIFB needs to be considered as state's borrowings. Hence open borrowings by the agency are being deducted from the state's borrowing limits.

The CPM has been countering that The KIIFB is accelerating the infrastructure development of the state through off-budget borrowings and hence it shall not be considered as the state's borrowing. But repeated pleas in this regard have been rejected by the centre.

The Congress, which is the opposition party in Kerala, is also of the view that the KIIFB's borrowings need to be considered as the state's liabilities.

Kerala had earlier alleged of discrimination when it was not included among the state's entitled for calamity relief fund of Rs 5,900 crore that was allocated to seven other states in 2020.

Another charge raised by the state against the centre was a fall of Rs. 6700 crore in the revenue deficit grant from the centre during last fiscal, which was in accordance with recommendations of the 15th finance commission.

Even when the CPM government tries to pass on the buck to the centre for the financial crunches in Kerala, the huge revenue arrears is an embarrassment for the government.

A report of the Comptroller and Auditor General in February cited that revenue arrears of the state came to Rs. 21,798 crores as on March 2021. A major chunk of the arrears was a tax on sales and trade, Rs. 13,830 crore. The CAG also pointed out that there was no effective system to monitor and realise arrears.

Even when the Chief Minister advised the departments the other day to spend cautiously in view of the acute financial crunches, the ongoing foreign trip of the CM-led delegation itself is facing criticisms.

The Tamil Nadu government has been opposing the tax policies of the Union Government. The AIADMK and DMK were on the same page opposing the introduction of GST in 2016 arguing that as a manufacturing hub, the state would lose much in terms of tax.

Ever since the DMK came to power in 2021, the M K Stalin government has been pushing for an extension of the GST compensation period from five years to seven years. But the demand is yet to be considered after the five-year waiver period ended in June 2022. Also, the DMK, which harps much on federalism, has been opposing the late disbursal of the state share of GST saying the Centre should not act according to its whims and fancies. This is one of the reasons apart from losing more tax revenue the state government opposes bringing petrol under the ambit of GST.

Also, the DMK feels that the Centre’s “fears” on social welfare schemes drain the economy and affect growth are just political. It says there is a very clear Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and an equivalent act (FRA) at the state level that constraints the total debt. The party believes If the Union decides to violate the FRBM Act, there is no second authority to restrain it from doing so.

In West Bengal, the ruling Trinamool Congress alleges that the Centre owed West Bengal government over Rs 12,300 crore dues under various schemes – MGNREGA, PMGSY, PMAY (G) and NSAP.