Undermining federalism, eroding States’ autonomy

• NITI Aayog has not taken any major steps since its constitution to promote cooperative federalism.
• Contrary to its public statements on promoting cooperative federalism, the Government of India has been accused of doing exactly the opposite.
• The following instances clearly demonstrate as to how the central government’s policies have undermined the spirit of federalism and eroded the autonomy of the States.

Why states are angry over hypocrisy of the Centre?

• Centre raises off budget borrowings states are restricted: The borrowings by corporations against State guarantees are mostly used for capital investment.
• The Centre has also been raising off Budget borrowings but mainly for meeting revenue expenditure.
• CAG report on extra budgetary resources: CAG Report on the Compliance of FRBM Act for 2017-18 and 2018-19 pointed out as many as eight instances of meeting revenue expenditure through Extra Budgetary Resources (EBR).
• Unjustified limitations on states: Revenue expenditure met through EBR by the Centre were not reflected in the Budget of the central government.
• In view of this, treating off Budget borrowings of State corporations as States’ borrowings retrospectively is totally unjustified.

Unhappiness about the grants by the finance commission’s recommendations?

• Special grants are not given to states: The 15th Finance Commission recommended a special grant to three States to ensure that the tax devolution in 2020-21 in absolute terms should not be less than the amount of devolution received by these States in 2019-20.
• Nutritional grants are accepted: The recommendation relating to grants for nutrition amounting to ₹7,735 crore was not accepted.
• Grants to states are refused by the Centre: A similar approach has been followed by the Union Government with regard to grants to States recommended by the Finance Commission for the period 2021-26.
• Sector and state specific grants: The sector specific grants and State specific grants recommended by the Commission have not been accepted.
• Demonstrating that the Union Government has undermined the stature of the institution of the Finance Commission and cooperative federalism.

How borrowing of states is controlled by the Centre?

• Changes in off budget borrowing norms: Decision to treat off Budget borrowings from 2021-22 onwards serviced from the State budgets as States’ borrowings and adjusting them against borrowing limits under FRBM in 2022-23 and following years is against all norms.
• No recommendations by finance commission: Government of India is proposing to treat off Budget borrowings as government borrowings retrospectively from 2021-22 but there is no recommendation to this effect by the Fifteenth Finance Commission.
• No amendment to FRBM act: Timetable for defining and achieving debt sustainability may be examined by a high-powered intergovernmental group
• FRBM Act may be amended as per the recommendations of this group to ensure that the legislations of the Union and the States are consistent.
• No such group has been appointed so far by the Centre.

Cess and Surcharge- A tool to raise revenue for Centre not available to states

• Rising share of cess and surcharges: The government has been resorting to the levy of cesses and surcharges, as these are not shareable with the States under the Constitution.
• States don’t get all share in divisible pool: Though the States’ share in the Central taxes is 41%, as recommended by the 15th FC they only get a 29.6% share because of higher cesses and surcharges.
• Undermining the purpose of cess: The CAG Audit Report on Union Government Accounts for 2018-19 observed that of the ₹2,74,592 crore collected from 35 cesses in 2018-19, only ₹1,64,322 crore had been credited to the dedicated funds and the rest was retained in the Consolidated Fund of India.
• NITI Aayoge recommendations are not accepted: The Sub-Committee of Chief Ministers appointed by NITI Aayog has recommended a reduction in the number of schemes and the introduction of optional schemes. These recommendations have not been acted upon.

Conclusion

• Finance commission is balancing wheel of fiscal federalism.
• Share of states in central taxes may have increased but cess and surcharges have also increased.
• Off budget borrowing on states can lifted provided it should reduce the unnecessary freebies in the state budget.