The ongoing assault against federalism

Concerns about fiscal federalism

Source: The Hindu

Context: 

Today, amid the pandemic, some States are raising complaints about the Union government’s anti-federal moves.

A series of steps by the Union government undermined the principles of federalism,

Fiscal federalism:

Increasing monetary share of the States in Centrally Sponsored Schemes (CSS),

The terms of reference of the 15th Finance Commission revisiting increased devolution of taxes in the past.

Imposition of demonetisation without adequate consultation with the States,

Institutionalisation of the Goods and Services Tax (GST) - taking away major taxation powers from the state.

A delay in transfer of GST compensation,

Administrative curtailment:

Implementation of the schemes: Such as Outsourcing of the statutory functions under the Smart Cities Mission, ‘One Nation One Ration’, etc.

During Covid: States were curtailed in aspects relating to COVID-19 management such as procurement of testing kits, vaccination, the use of the Disaster Management Act, and the unplanned national lockdown.

Ironically, Union Ministers used the ‘health is a State subject’ argument to counter criticism when the second wave caught the government unprepared.

Encroachment of Legislative powers:

These include the farm laws; the Banking Regulation (Amendment) Act of 2020; the Government of National Capital Territory Amendment Act, 2021; the Indian Marine Fisheries Bill, 2021; the Draft Electricity (Amendment) Bill, 2020; the Dam Safety Bill, 2019; the National Education Policy of 2020; and the Draft Blue Economy policy.

Encroachment of Executive power

The creation of the Ministry of Co-operation and the Reserve Bank of India directives on cooperatives are being perceived by the States as measures to strangulate a sector that is still struggling to recover from the devastation of demonetisation.

The Fiscal Problem

Worsened fiscal situation: These coercive policies, coming on top of the pandemic-induced economic shock, have worsened the fiscal situation of State governments.

Tax collection through cess instead of taxes: Enlarging the non-divisible pool of taxes in the form of cess in petrol tax and instituting the Agriculture Infrastructure and Development Cess have resulted in a situation where the Union continues to exclusively benefit from tax collection.

Share in fuels:

Share of non-divisible pool cess and surcharge in total taxes collected by the Union government jumped from 12.67% in 2019-20 to 23.46% in 2020-21.

On December 6, 2021, the Union government informed Parliament that its share in the total contribution of the petroleum sector to the exchequer for 2020-21 was 68%, which left only 32% to the States. In 2013-14, the Union: State share was almost 50:50.

GST:

Delay in compensation: During the pandemic, the Union government repeatedly violated the compensation guarantees to the States under the GST regime. Delay in paying the States their due worsened the impact of the economic slowdown.

Borrowing to address shortfall: The crisis was aggravated in July 2020, when the Union government proposed borrowing as an option to address the shortfall in GST compensation. Most States, forced by economic pressure, had to accept the proposal. In effect, this meant that they were not only getting the share of GST collections due to them but were now forced into debt which they would have to serve.

Expiration of Compensation: The GST compensation period expires in 2022, and despite multiple requests from the States, the deadline has not been extended.

Wrongful appropriation of Compensation money: The Comptroller and Auditor General found that the Union government, in 2018-19, wrongly retained ₹47,272 crores of GST compensation cess in the Consolidated Fund of India — money that was supposed to be transferred to the States. It is also pertinent to recollect that the 2021-22 Budget Estimates indicate that the States’ share of Union tax has been reduced to 30% against the mandated 41% devolution prescribed by the 15th Finance Commission.

No donation to the CM disaster relief fund: the Union government issued a clarification that funding to the Chief Minister’s Disaster Relief Funds will not be considered as CSR expenditure, unlike the case with PM-CARES.

Suspension and transfer of the Member of Parliament Local Area Development (MPLAD) fund to the Consolidated Fund of India.

This leads to a governance problem:

Non-tax revenues increase: the Cash-starved States have been seeking non-tax avenues to generate funds to sustain their programmes.

Increased borrowing: This led to a major crisis situation for most States and resulted in demands for increasing borrowing limits under the Fiscal Responsibility and Budget Management Act (FRBM), from 3% to 5%.

The Union government decided to increase FRBM borrowing limits, linking it to the performance of States in fulfilling certain conditions — implementation of the One Nation, One Ration policy, ease of doing business reforms, urban local body/utility reforms, and power sector reforms — making it difficult for the States to perceive this as an address of their concerns.

Some solutions

Research and introspection on federalism: It is time for another State-centric committee like the Rajamannar Committee to study Union-State relations.

Discussion on the concurrent list before one-sided legislations: States should, as recommended by the National Commission to Review the Working of the Constitution, demand the creation of a formal institutional framework to mandate and facilitate consultation between the Union and the States in the areas of legislation under the Concurrent List.

State governments could also consider deploying human resources to support them in preparing responses to the consultations initiated by the Union, especially with a focus on the federalism angle.

Extension of GST compensation to 2027 and inclusion of cess in the divisible pool of taxes.

Conclusion: 

Federal flexibility — or the lack of it — is going to play a crucial role in shaping the future of our democracy. The Union government needs to invest resources towards facilitating effective consultation with States as a part of the lawmaking process. It is critical that the Union establishes a system where citizens and States are treated as partners and not subjects.