Federal Fault Lines Deepen: Non-BJP States Unite Against Centre on Fiscal Devolution

New Delhi, Delhi — A palpable tension grips India's federal structure as several non-Bharatiya Janata Party (BJP) ruled states escalate their protests against the Union government, alleging a systematic undermining of fiscal federalism and an unfair distribution of financial resources.

The burgeoning dissent, articulated most vocally by southern states but gaining traction across the political spectrum, threatens to transform into a defining battleground ahead of the general elections, placing Centre-state financial autonomy at the forefront of national discourse.

Key points

* Non-BJP states accuse the Centre of encroaching on state fiscal autonomy through reduced tax devolution, conditional grants, and rigid borrowing limits.

* Southern states, particularly, protest against adverse impacts of population-based criteria in Finance Commission recommendations, penalising their success in population control.

* The Centre defends its policies, citing national development priorities, increased grants-in-aid, and the necessity for national fiscal stability.

* The contentious issue is sparking a broader debate on India's federal architecture, inter-governmental financial relations, and the spirit of cooperative federalism.

* Political observers warn of potential constitutional challenges and heightened federal friction, with significant electoral implications.

Chief Ministers from states like Kerala, Karnataka, Tamil Nadu, Telangana, and West Bengal have been particularly vocal, orchestrating public statements, leading delegations to Delhi, and even staging symbolic protests to highlight their grievances.

Their collective outcry points to a perception of an increasingly centralised fiscal regime that curtails their ability to manage state-specific developmental needs.

Kerala Chief Minister Pinarayi Vijayan, addressing a recent press conference, minced no words: "Our state is being systematically starved of funds.

The Union government's unilateral imposition of borrowing limits, coupled with a diminished share in central tax revenues, is throttling our developmental initiatives and pushing us towards a severe financial crisis.

This is not cooperative federalism; this is coercive centralism, an assault on our constitutional rights and the very essence of our federal structure."

Similarly, Karnataka Chief Minister Siddaramaiah has repeatedly flagged the alleged injustice in the 15th Finance Commission’s recommendations, particularly concerning the use of the 2011 population census data as a primary criterion for devolution. "States like Karnataka, which have successfully implemented population control measures, are being penalised for our achievements in social development," he stated. "We demand a review of the criteria to ensure equitable distribution that rewards fiscal prudence and social progress, not just population growth or demographic indicators alone.

This amounts to a tax on development and efficiency."

Their specific grievances include the reduction in states' share of the divisible pool of central taxes (from 42% recommended by the 14th Finance Commission to 41% by the 15th FC, partly due to the creation of Union Territories), the cessation of Goods and Services Tax (GST) compensation in June 2022, the imposition of Centrally Sponsored Schemes (CSS) with stringent conditionalities and inadequate state flexibility, and increasingly restrictive borrowing limits tied to Union-mandated reforms.

Union Finance Minister Nirmala Sitharaman and other central government officials have consistently countered these claims, asserting that the Centre remains committed to robust fiscal devolution and has, in fact, increased financial support to states.

A senior official in the Union Ministry of Finance, speaking on background, stated, "The Centre's transfers to states, comprising tax devolution, grants, and loans, have significantly increased over the past decade.

The 15th Finance Commission recommendations, which guide our transfers, are based on a balanced approach, considering both the needs and fiscal capacity of states.

Furthermore, the borrowing limits are essential to maintain national fiscal stability and prevent unchecked debt accumulation, which would ultimately harm the entire economy."

The Centre points to various steps, including increased grants-in-aid, additional funds for disaster relief, and special assistance for capital expenditure, as evidence of its commitment.

It also highlights that the 15th Finance Commission recommended grants of ₹1.92 lakh crore (approx.

US$23 billion) for states specifically for sectors like health, education, and rural development.

According to data from the Reserve Bank of India, the Gross Fiscal Deficit (GFD) of states touched 4.1% of GSDP in 2020-21, exacerbated by the pandemic, before moderating.

However, states argue that rigid borrowing caps, currently capped at 3% of GSDP with conditionalities for an additional 0.5%, hinder their ability to manage these deficits and invest in crucial infrastructure and social welfare schemes, especially when their own revenue-raising capacity is constrained.

The cessation of Goods and Services Tax (GST) compensation in June 2022 has been a major point of contention.

While the Centre has maintained that the five-year guarantee period has ended as per the GST (Compensation to States) Act, states assert that the shortfall in GST revenue growth, initially projected at 14%, has not been adequately addressed, leaving a significant fiscal gap for many, particularly revenue-deficit states.

Background

India's federal financial architecture, enshrined in the Constitution, envisages a delicate balance between the Union and states, with clearly delineated powers for taxation and expenditure.

The Finance Commission, constituted every five years under Article 280, plays a pivotal role in recommending the distribution of taxes and grants between the Centre and states (vertical devolution) and among states (horizontal devolution).

The introduction of GST in 2017, while unifying the national market and streamlining indirect taxation, significantly curtailed states' independent revenue-raising powers by subsuming various state levies.

This move inherently made states more reliant on central transfers and decisions made within the GST Council, where decisions require a three-fourths majority, with the Centre holding one-third of the voting share.

Over time, the political landscape, with the BJP's strong majority at the Centre and a diverse array of opposition parties governing states, has further politicised these fiscal discussions, transforming technical economic debates into sharp political confrontations.

Historical examples of Centre-state fiscal tensions are not new in India, but the current period is marked by an increased intensity, partly fuelled by the perception of an erosion of states' autonomy and the BJP's dominance in national politics leading to alleged one-sided policy implementation.

What it means

The deepening fiscal fault lines carry profound implications for India’s unique brand of federalism.

Should states perceive a sustained, inequitable distribution of resources, it could lead to an erosion of trust, hampering cooperative governance and joint policy implementation.

This lack of trust could impede national initiatives requiring state cooperation, such as infrastructure projects, disaster management, and public health campaigns.

Economically, states that are fiscally constrained may struggle to fund critical public services such as healthcare, education, and physical infrastructure.

This could potentially impact human development indices, exacerbate regional disparities, and slow down overall economic growth in those regions, leading to a fragmented national development trajectory.

For instance, a state unable to invest adequately in human capital due to financial shortages could face long-term developmental challenges.

Politically, this dispute could galvanise regional parties and opposition alliances, turning fiscal federalism into a potent electoral issue that resonates deeply with regional pride and aspirations for greater autonomy.

It could reshape political narratives and electoral strategies, especially in states where regional identities are strong, potentially leading to increased regionalism and a more fractured political landscape at the national level.

Reactions

Beyond the state Chief Ministers, the growing fiscal friction has drawn reactions from across the political spectrum and expert circles.

Dr.

Arvind Subramanian, former Chief Economic Advisor to the Government of India, recently remarked, "The core challenge lies in balancing national priorities with sub-national autonomy.

The current framework needs a relook to ensure states have adequate fiscal space for effective governance, especially given the diverse developmental needs across India and the increasing burden of expenditure on states for public goods and services." He advocated for greater flexibility for states in managing their finances and borrowing.

Legal experts have also weighed in, highlighting the constitutional basis of India's federal structure.

Dr.

Rohini Devi, a constitutional law expert based in Bengaluru, observed, "The Centre's powers are certainly broad, but they are not limitless.

Any systematic attempt to undermine the fiscal autonomy of states could be challenged on constitutional grounds, potentially leading to landmark judgments that redefine the delicate balance of power between the Union and the states."

Opposition parties, even those not directly involved in the recent protests, have largely expressed solidarity with the aggrieved states.

Congress leader and Rajya Sabha MP, Shashi Tharoor, opined, "The Centre's approach risks transforming India into a quasi-unitary state, undermining the very spirit of our federal Constitution.

This isn't just about money; it's about the fundamental distribution of power and the preservation of India's diverse political identity."

What happens next

The immediate future is likely to see continued political posturing and intensified pressure from opposition-ruled states.

While avenues like the GST Council and the Inter-State Council exist for dialogue and negotiation, their effectiveness in resolving deep-seated fiscal disagreements remains a subject of debate.

The GST Council, despite its cooperative framework, has seen increasing instances of states feeling marginalised on critical fiscal decisions.

Some legal experts suggest that the matter could even culminate in constitutional challenges if states decide to petition the Supreme Court regarding perceived overreach or infringement of their fiscal powers, particularly concerning borrowing limits or the criteria for tax devolution.

Such a move could open a new chapter in Centre-state relations, potentially leading to judicial interventions that clarify the constitutional boundaries of fiscal federalism.

With general elections looming, the Centre might face increasing pressure to address these concerns, perhaps through additional grants, a more flexible approach to borrowing limits, or a review of some conditionalities attached to central schemes, to avoid alienating a significant section of the electorate.

The recommendations of the next Finance Commission, expected to be constituted soon, will be keenly watched, as they will play a crucial role in shaping Centre-state financial relations for the next five years, potentially offering a new framework to mitigate the current tensions and foster a more equitable and cooperative federal fiscal system.