Date: 26/08/2022

Relevance: GS-2: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

Key Phrases: Cooperative Federalism, Fiscal Federalism, Good and Services Tax, Niti Aayog, National Development Council.

Context:

• The emerging debate on “revri culture” highlights bitterness between Centre and states in the fiscal domain.
• In this context, let us look into issues w.r.t. fiscal relations on between the centre and states.

Background

• The framers of our Constitution were aware of the apprehensions raised when India embraced a federal structure with strong unitary features.
• But they would have never dreamt of a situation where trumpeting unilateralism is hailed as some kind of a good governance model.
• It’s time the country and its opinion makers understood the Center’s stranglehold over states on almost all fronts, which is leading to a breakdown of trust between the two “partners”.

Critical Analysis of Fiscal relations between centre and states

• Over the years, the very nature of fiscal transfer has become thoroughly centralized.
• For a long time, the Planning Commission and Finance Commission were the cardinal pillars of Centre-state relations on the fiscal front.
• But the ushering in of the Goods and Services Tax (GST), the scrapping of the Planning Commission and non-adherence to Finance Commission recommendations have led to an asymmetrical framework.

The GST

• It was once hailed as a milestone for cooperative federalism.
• But it is now touted as a manifestation of the growing dependence of the states on the Center.

The Niti Aayog

• With the disbanding of the Planning Commission, all the powers of allocation of resources to states were passed on to the Ministry of Finance.
• Consequently, even the pretense of an objective allocation of resources to states has disappeared, and all decisions were rendered ad-hoc.
• Under the Planning Commission, the Gadgil formula was used to allocate funds to states.
• However, after 2015, transfers to states are determined based not on any formula but purely on political exigencies. Consequently, the federal foundations of the Indian polity were also enormously weakened.

The National Development Council (NDC)

• It is where the prime minister used to regularly meet the chief ministers but it has long been abolished.
• Instead, CMs were made members of the governing council of the Niti Aayog.
• This was neither a substitute for the discussions between the planning bodies of state governments and the Planning Commission nor the discussions in the NDC.
• Even the occasional visits of Niti Aayog members to states have been reduced to a formality: No serious policy discussion, leave alone decision-making, takes place during these visits.
• The Comptroller and Auditor General ( CAG) has pulled up the Center as it failed to transfer a substantial portion of the money collected from cesses and surcharges to the designated funds which ensures that they are used for the intended purpose. The very idea of a cess is being turned on its head.

Data and Statistics

• As per the 15th Finance Commission, states bear more than 62 per cent of expenditure responsibilities but are given only 37 percent of revenue raising power
• Whereas the Union government owns 63 per cent of revenue raising power to spend on 38 percent of its expenditure responsibilities.
• The share of cesses and surcharges, as percentage of gross tax revenue, has more than doubled - from 6.26 percent in 2010-11 to almost 20 per cent in 2021-22.
• Despite the last two successive Finance Commissions pegging the share of states in gross taxes to over 40 per cent, the actual transfer never reached this prescribed level.
• The peak was 36.6 per cent in FY19 and it fell to a meager 29 per cent subsequently.
• The Center’s debt burden has shot up from Rs 53 lakh crore to Rs 136 lakh crore since 2015.
• The Center’s record is even worse on the fiscal deficit front and off-budget borrowing.

The Need of the Hour

• The concerns of CMs over the dwindling state revenues raised in the recently held Niti Aayog meeting presided over by the PM need to be taken in its right perspective.
• It’s the states that deal with the broad range of aspirations of the people on the ground.
• Even though the Center distributes various funds to states via central schemes, states are not merely implementing agencies of central schemes.
• The Constitution empowers the states to conceive schemes to provide sustenance and relief to people and state government schemes are more innovative and appropriate to the targeted groups.
• Non-adherence to the recommendations of its own finance commissions is the tipping point in the chaotic Center-state relations.

Way Forward

• India is at a crossroads today and the need of the hour is cohesion and not confusion.
• We need unity and not uniformity, assimilation, not extinction. The central government has to find a new narrative instead of usurping the powers of the states and crying foul at the same time.
• The Center invited rebuke when it turned a recent all-party meeting convened to discuss the Sri Lankan issue into a podium to “discipline” states on the fiscal front.
• This should be taken in the right spirit and all stakeholders should work in a coherent manner.

Source: Indian Express

Mains Question:

Q. The emerging debate on “revri culture” highlights bitterness between Centre and states in the fiscal domain. Discuss the emerging issues in center-states relations. [150 Words].