Random Reflections

India is a federal union of states. Without the states, there is no union. Fiscal federalism means the allocation of taxes to the states. However, after the introduction of GST, the states have very limited scope of raising resources by themselves.

In the year 1919 as well as in 1935 the British government brought several Acts indicating allotment of funds to states as per their needs.

After independence, the Planning Commission prepared development plans for the country and the states. States also had State Planning Commissions, which worked in tandem with the Planning Commission of India. Periodically, the Finance Commission evolved norms to support the plans of the Planning Commission by allocating adequate funds for the Union and the States. The 14th Planning Commission headed by former RBI governor, Dr. Y.V. Reddy, recommended the allocation of 42% of central taxes to the States.

Now it has come to light that the Prime Minister asked the finance commission to reduce it to 32% but Dr. Y.V. Reddy did not agree. The same Prime Minister when he was the Chief Minister of Gujarat demanded that 50% of taxes should be allocated to the States. As per the regulations, the Union Government cannot change the recommendations of the Finance Commission, but in this case, there was an attempt to change the recommendations. This is an attack on fiscal federalism.

Newspaper reports have detailed that last year, Tamilnadu received only 35% of the tax revenue. Kerala, West Bengal, Telangana and other States have been crying that the Union Govt is acting against federalism and discriminating against the devolution of funds to opposition-ruled states. States have been forced to mobilise revenue through liquor sales.

West Bengal has been punished by not allocating funds under various schemes like the MGNREGA, Prime Minister Awas Yojana and other centrally sponsored schemes. The same is the case with Kerala and Tamilnadu.

When there is a disaster, BJP-ruled states get more funds than the opposition-ruled states from the National Disaster Relief Fund.

The Union Govt gets income tax, corporate tax, excise duty, customs duty and GST. It has to share 42% of this with the States. But this Govt has been increasing cess, surcharge and GST cess which amounts to 27% of the total tax revenue. These three are not shared with the States at all.

The States are suffering because of this attack on fiscal federation, as they are neither able to mobilise taxes nor able to spend more on welfare schemes.

In contrast, Gujarat is getting more funds. All banks, LIC, and public sector understandings have been forced to increase their spending in Gujarat. The GIFT CITY Gujarat has received huge investments including foreign investments.

Recently, Tamilnadu Govt organized a global investor’s meet. The Prime Minister or the Finance Minister did not attend it. But the PM was there at the Global Investors Meet in Gujarat which received much more investment promises. In his address there, Mukesh Ambani said that it is only because of Narendrabhai that Gujarat has received unmatched funds and that he (Mr. Modi) is the undisputable leader.

Is the Prime Minister only responsible for Gujarat or for India?

The final report of a study submitted by M. Govinda Rao to NITI Ayog titled ‘Central Transfers to States in India Rewarding Performance while Ensuring Equity’ has suggested certain good recommendations but they have not been implemented. I quote a few statements and recommendations. The assignment of revenue and expenditure “according to the principles of comparative advantage results in the Central Govt having access to most broad-based taxes and sub-national Govts having responsibilities to provide most of the economic and social services but inadequate revenue handles to provide them.”

The report recommended a reduction in centrally sponsored schemes.

The Hindu published a report titled, ‘Rethink the Emerging Dynamics of India’s Fiscal Federalism’ on 28.08.2023. It said, “unlike the Planning Commission NITI Aayog has no say in Centre state transfers which could motivate states to reform with plan grants.”

“Some State Finance Ministers have alleged that the GST Council’s decisions are influenced by political considerations and not by economic rationality.”

“They have also complained that their views are not given due weightage and that they are often outvoted by the majority.”

“The cess and surcharges can lead to an imbalance in resource allocation and fiscal autonomy.”
It had recommended the following:

  • Equity-oriented inter-governmental transfer
  • Removal of horizontal and vertical imbalances
  • Performance-based grants
  • Revise Article 246 and the seventh schedule to redefine the division of powers and responsibilities between the Centre and States
  • Empower local governments
  • Uniform financial reporting system
  • Review of off-budget borrowing
  • Convergence of development indicators
  • Alignment of Fiscal Responsibility and Budget Management (FRBM) Act
  • Devolving tax powers
  • Co-operative federalism
  • Regular review and dialogue

But the present Government does not listen, and this is leading to anger. The Budget exercise has become a force as its numbers have become unbelievable.

The time has come for the States to ascertain this autonomy. Like the USA and parts of Europe, the States have to be given their right to mobilise revenue and taxes. Otherwise, the States will wither away.

Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.

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