Modi government discriminating ; fiscal federalism is at stake

As per India’s Constitution, an independent Finance Commission, made up of economists and public finance experts, decides what percentage of money the federal government should share with the states from its tax collections, excluding those it labels as “cess” or “surcharges”.

Under the constitutional provisions, the government has only two options: accept the Finance Commission’s recommendations or reject them and establish a new commission.

It cannot argue, debate or negotiate with it formally or informally. The issue of preserving fiscal federalism is on the wane for Non-BJP ruled states like Karnataka, Kerala, Tamil Nadu and West Bengal.

Coincidentally, these states have been the most vocal Modi critics too. In the case of Kerala, the Modi government is restricting the states' borrowing space by misusing its powers under article 293 of the Constitution.

In the case of these states the cess and surcharge has been increased. States are not entitled to any portion of this.

The federal government’s continued attempts to restrict states’ financial independence also showed up when it set up the 15th Finance Commission in 2017 and tasked it with recommending fiscal sticks and carrots to convince states to avoid “populist measures”.

Modi, since mid-2022, has been accusing opposition-governed states like Karnataka of indulging in a “revdi culture”.

Sitharaman, who is also a Rajya Sabha member from Karnataka, claimed that the Siddaramaiah government is feeling the heat due to the financial burden of nearly Rs 58,000 crore for implementation of his party's poll promises.

The share of cesses and surcharges stood at 10.4 percent of total taxes collected in 2011-12 by the Congressled UPA government.

Between 2017-18 and 2021-22, the total cess and surcharge collected by the NDA government more than doubled, from 2.66 trillion rupees ($33.7bn) to 4.99 trillion rupees ($64.8bn).

During that period, cesses and surcharges rose from 13.9 percent to 18.4 percent as a share of gross tax revenue.

A January 2023 paper by researchers at the National Institute of Public Finance and Policy analysed state revenues and found that in 17 out of 18 states they reviewed, the revenue that states generated through state-level taxes declined in the post-GST period compared with the pre-GST period when seen as a percentage of the gross state domestic product (GSDP).

The Left government in Kerala, which has been blaming the Centre for the state's financial woes, had in its budget attacked the union government by saying that it was pushing the southern state towards the worst financial crisis in its history.

The Kerala government’s borrowing has been put under a ceiling cap by the Modi government. Karnataka ranks second in Goods and Services Tax (GST) collection in India, but receives only Rs 12 out of every Rs 100 in taxes paid to the Centre, with the rest held by the Modi government.

Under new formulas adopted by the 15th Finance Commission, Karnataka's share of funds has fallen from 4.71 per cent to 3.65 per cent, representing a loss of over Rs. 1.87 lakh crore.

The formula used to devolve taxes to the states, under the 14th Finance Commission was changed by the 15th Finance Commission, on insistence by the BJP-led NDA government leading to loss of revenue, and several financial constraints for non-BJP ruled states in general, and Southern states like Karnataka, Tamil Nadu and Kerala , in particular.