Federal Fissures Deepen: States Unite Against Centre's 'Fiscal Centralisation' Ahead of Polls

New Delhi: A formidable political storm is brewing over the perceived centralisation of financial powers, with a growing number of opposition-ruled states uniting to vociferously challenge the Union government's approach to fiscal federalism.

Ahead of the crucial general elections, these states contend that their financial autonomy is being systematically eroded, leading to unprecedented friction in Centre-state relations and raising fundamental questions about India's federal structure.

Key points

* Several non-BJP ruled states allege a significant reduction in their share of central taxes and an increased reliance on conditional, centrally sponsored schemes.

* Concerns are mounting over the terms of reference and recommendations of the 15th Finance Commission, which states argue disadvantage fiscally prudent states and those with lower population growth.

* Opposition-led state governments have formed a united front, warning that the current fiscal policies threaten the foundational principles of cooperative federalism.

* The Union government defends its stance, asserting that resource allocation is equitable, based on objective criteria, and essential for national development goals.

* The deepening fiscal fault lines are set to become a major electoral issue, potentially reshaping political alliances and public discourse on state autonomy.

Sources within multiple state finance ministries indicate a palpable sense of grievance, particularly concerning the dwindling share of the divisible pool of central taxes.

While the Finance Commission recommendations stipulate a certain percentage of the Union's tax revenue to be devolved to states, a significant portion of the Centre's revenue is now being collected through cesses and surcharges.

These levies, unlike basic taxes, are not part of the divisible pool and thus do not need to be shared with states, a practice that has intensified in recent years.

“The very spirit of cooperative federalism is under threat.

States are being reduced to mere implementing agencies for Delhi's diktats, with their financial independence systematically eroded,” stated Dr.

P.

Raghavan, Finance Minister of Karnataka, during a recent press conference in Bengaluru.

He added, “In the last fiscal year alone, the proportion of revenue raised through cesses and surcharges surged to approximately 18% of the Union's gross tax revenue, up from around 10% a decade ago.

This translates to billions of rupees that bypass state treasuries.”

The implementation of the Goods and Services Tax (GST) was initially hailed as a landmark reform, promising to streamline indirect taxation and boost revenues for both the Centre and states.

However, many states now argue that it has significantly curtailed their fiscal autonomy.

While states were initially guaranteed compensation for revenue shortfalls for five years post-GST rollout, this period has now ended, leaving them to grapple with potential deficits without their previous taxation powers.

Chief Minister of Kerala, Shri M.

Vijayan, in a strongly worded letter to the Prime Minister, highlighted the state's concerns: “Our state, despite robust fiscal management, finds itself increasingly starved of funds.

The criteria used by the Finance Commission, particularly those linked to population control, unfairly penalise states like ours that have successfully managed demographic transition.” Similar sentiments have been echoed by leaders in Tamil Nadu, Telangana, and West Bengal, who point to specific grants and allocations being made conditional on adopting particular central government policies, further eroding state-level decision-making.

Professor Meera Sharma, a prominent political economist at the Indian Institute of Public Policy, commented, “We are witnessing a silent centralisation, where states are increasingly dependent on the Centre for funds, which often come with riders.

This shift could have long-term implications for diversity in policy-making and regional development tailored to local needs.”

In defence, a senior official from the Union Finance Ministry, speaking on condition of anonymity, stated, “The distribution formula is based on objective criteria, balancing population, area, and fiscal capacity, as recommended by the constitutional body, the Finance Commission.

The increase in cesses is for specific national development goals, such as infrastructure development, education, and health, benefiting all citizens uniformly.

These are not arbitrary decisions but are aimed at addressing critical national priorities efficiently.” The official further stressed that the Centre continues to support states through various mechanisms and schemes.

Background

India's fiscal federalism is governed by the constitutional provisions outlined in Articles 280 (Finance Commission) and 268-281 (distribution of revenues).

Since independence, various Finance Commissions have been constituted every five years to recommend the distribution of tax revenues between the Union and states, and among states themselves.

Historically, the Planning Commission also played a significant role in allocating grants for centrally sponsored schemes, though it was replaced by NITI Aayog in 2015.

The introduction of GST in 2017 marked a paradigm shift, subsuming multiple state and central indirect taxes under a single tax regime, thereby centralising significant tax collection powers and limiting states' independent revenue-raising capacities.

Over the past decade, political tensions between the Union government and several state governments have escalated, with fiscal matters frequently becoming a flashpoint.

What it means

The deepening fiscal fault lines carry profound implications for India's governance and development trajectory.

A significant reduction in states' fiscal autonomy could stifle innovation in policy-making at the sub-national level, potentially leading to a 'one-size-fits-all' approach that may not cater to India's vast regional diversity.

It could also exacerbate regional disparities, as states with unique developmental challenges might find themselves constrained by central dictates and limited resources.

Furthermore, a perception of unfair resource allocation could fuel regional sentiments and intensify political polarisation, undermining the spirit of cooperative federalism essential for a diverse nation like India.

This could also impact the quality and delivery of public services, as states are primarily responsible for key sectors like health, education, and law and order.

Reactions

Reactions have been sharp and varied.

The Finance Ministers of several opposition-ruled states have held joint press conferences, issuing memoranda to the President and the Prime Minister, and even staging protests. “This isn't merely an economic issue; it's a political battle for the soul of India's federal structure, where the voices of diverse states must be heard,” commented a senior leader from the Dravida Munnetra Kazhagam (DMK).

Conversely, leaders from the ruling Bharatiya Janata Party (BJP) have dismissed these allegations as 'political theatrics' aimed at diverting attention from state-level governance issues.

BJP spokesperson Ms.

Ritu Singh stated, “These are baseless accusations by states struggling with their own fiscal mismanagement.

The Union government remains committed to strengthening states and ensuring equitable development for all.” Experts from different think tanks are divided, with some advocating for a re-evaluation of the Finance Commission's terms of reference and others stressing the need for national cohesion in resource allocation.

What happens next

The immediate future will likely see continued political grandstanding and intensified debates on this issue.

With general elections approaching, opposition parties are expected to make 'fiscal centralisation' a key plank in their campaign, seeking to rally regional sentiments against the Union government.

There could be further convenings of opposition-ruled states to strategise collective action, potentially pushing for an Inter-State Council meeting or discussions within the GST Council to address their concerns.

While direct legal challenges to Finance Commission recommendations are rare, specific policy directives linked to central funding could face judicial scrutiny.

The outcomes of the upcoming elections will significantly influence the trajectory of Centre-state fiscal relations, potentially leading to either a more conciliatory approach from the next government or a further deepening of federal fissures, making the recommendations of the next Finance Commission even more critical.