Editorial: Fighting fiscal bias

The protests from southern States must serve as a wake-up call for the Centre to correct the anomalies

Over the last few years, there has been a systematic attempt to chip away at the core principles of fiscal federalism and thereby weaken the States. The NDA government’s policies on tax devolution and grants to the States have evoked a sense of consternation among several States, particularly in the South. No wonder some southern States have now decided to hit the streets and hold protests in the national capital to highlight the issue of dilution of fiscal powers of the States. The legislators and MPs from Karnataka and Kerala, including their Chief Ministers Siddaramaiah and Pinarayi Vijayan, will stage a sit-in at Jantar Mantar to protest against the Centre’s biased fiscal policies. Tamil Nadu too has lent its support. The timing of the protests is significant since the 16th Finance Commission’s deliberations have just started. In June last year, the Telangana government had raised serious objections over the raw treatment being meted out to the States in tax devolution. It was pointed out that despite the 15th Finance Commission recommending that 41% of central taxes be devolved to the States, the actual amount the States were receiving was only about 30% since the Centre was relying more on cesses and surcharges, which do not need to be shared with the States. In fact, Telangana’s share in tax devolution from the Centre decreased from 2.893% in 2014-15 to 2.102% in 2021-22. The protests from southern States, which are losing out in the devolution mechanism, must serve as a wake-up call for the Centre to correct the anomalies.

If the Centre is serious about preserving and strengthening fiscal federalism, it needs to rebuild the trust of the States. The declining share of States in real terms in the divisible pool of taxes, faulty implementation of the Goods and Services Tax (GST) regime and restrictions on borrowings by the States are some of the issues that have created tensions in the Centre-State relations. There are allegations that the Centre was exploiting its powers under Article 293 of the Constitution to severely limit the borrowing capacity of States. Prior consent from the union government, mandated by this section, has been converted into a restrictive tool to limit deficit financing. The southern States feel, justifiably so, that the fundamental principle of fiscal federalism envisioned by the Constitution-makers was now under threat. At a time when there is a need for greater freedom and flexibility to the States in matters of financial management, there has been a growing tendency to centralisation of powers, be it in the implementation of the GST regime or devolution of taxes to the States. As a result of such a skewed model, the consistently high-performing States suffer gross injustice. The 16th Finance Commission must objectively determine the tax devolution criteria with the objective of reducing inter-State disparities.