Federation is an agreement between two types of governments sharing power and controlling their respective spheres.
Thus, a federation is a system of national and local governments, combined under a common sovereignty with both national as well as federating units having autonomous spheres assigned to them by the constitution.
India opted for quasi-federal structure after independence.
The term “federal” has not been mentioned in the constitution but the working of Indian democracy is essentially federal in structure.
However, it is the practical working style of federalism, which brought the concept of cooperative federalism and competitive federalism in India.
Finance Commission role in devolution of funds:
Finance Commission has to play an important role in achieving the delicate balance in the conflicting domain of finance by addressing the concerns of both the players.
Any attempt to shift the uneasy balance in favour of the Centre will strengthen the argument that this government’s talk of cooperative federalism serves as a useful mask to hide its centralising tendencies.
As a neutral arbiter of Centre-state relations, the Finance Commission should seek to maintain the delicate balance in deciding on contesting claims.
This may well require giveaways especially if states are to be incentivised to push through legislation on items on the state and concurrent list.
The fiscal stress at various levels of the government necessitates a realistic assessment of the country’s macro-economic situation, the preparation of a medium-term roadmap, as well as careful calibration of the framework that governs Centre-state relations.
At this critical juncture, the Finance Commission should present the broad contours of the roadmap.
Though it could request for another year’s extension to present its full five-year report citing the prevailing uncertainty.
Delayed payments and consistently below 14th FC recommendations:
- The 14th Finance Commission report was accepted in 2015 with the promise that it would devolve more finances to the States.
- As part of the process, States would have new responsibilities, especially in the social sector.
- Two years later, the introduction of the Goods and Services Tax (GST) regime was also justified as a grand bargain that would eventually leave all States better off.
- In reality, tax devolution to States has been consistently below 14th Finance Commission projections.
- One reason for this has been the economic slowdown, caused primarily by the Central government, and lower-than-expected GST collections.
- The shortfall in GST collection for 2018-2019 was 22% when compared to projections. Payments have been delayed as well.
- For example, Centre owed States about Rs.35,000 crore as GST compensation for December 2019 and January 2020, which was only paid in June 2020 after a delay of more than five months.
Huge gap between FC recommendations and Actual Transfers:
- The COVID-19 situation has deepened the crisis. According to a State Bank of India report, the collective loss to GSDP due to the pandemic is ₹30.3 lakh crore or 5% of GSDP.
- States are being required to spend more to help common citizens and save livelihoods.
- The Centre is providing almost negligible support. In West Bengal, as of June 30, the State government had spent ₹1,200 crore in fighting COVID-19.
- The Centre has given ₹400 crore under the National Health Mission and to the State Disaster Response Mitigation Fund, but absolutely nothing specifically for the pandemic.
- The Centre has imposed a series of cesses, which are not part of the divisible pool and not shared with the States.
- There are now rumours of a COVID-19 cess as well. According to a study by the Centre for Policy Research, there is a ₹6.84 lakh crore gap between what the 14th Finance Commission promised to States and what they have received.
- And while this has happened, the nature of public spending in India has undergone a massive shift.
- In 2014-2015, States undertook programmes and projects spending 46% more than the Central Government; today the figure is 64%.
- Despite this, the Centre’s fiscal deficit exceeds the consolidated State deficit by 14%! India is paying for a profligate Centre.
Need to revisit the FRBM provisions:
In theory, the Centre has raised the fiscal deficit limit for States, under the FRBM, from 3% to 5%.
But only 0.5% of this rise is unconditional. The remaining 1.5% is dependent on fulfilling certain unrealistic and impractical measures — including privatisation of power distribution, and enhancing revenues of urban local bodies.
- Due to pandemic, the fiscal deficit for States, collectively, is inevitably going to breach the projection of 2.04%.
- As per provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, the GSDP can actually accommodate a fiscal deficit of 3%.
- Now, post-pandemic, this limit will be crossed. The FRBM has an “escape clause” that allows for a one-time relaxation of the fiscal deficit threshold up to 0.5% in a time of exigency.
- The escape clause has been utilised by the Centre but it has proven woefully insufficient in addressing the current crisis.
- Fiscal policymakers and technocrats agree that the rigidity of the FRBM has to be revisited.
- It should allow for greater flexibility and consultation as to when and how the “escape clause” can be applied.
- The Centre has gone in for subjective interpretation, imposing conditions that are outside the scope of the FRBM.
Cooperative and competitive federalism are not mutually exclusive. They have the same basic principle underlying i.e. development of the nation as a whole.
Cooperative and competitive federalism may be two sides of the same coin as the competition alone cannot give the best results, it is competition with cooperation that will drive the real change.
Centre government needs to be more considerate of the financial woes of the State and try to deliver on the recommendations of the 14th Finance Commission report.
The government should stress on the need to leverage the potential of cooperative and competitive federalism for achieving all round inclusive development in India.