• India’s fiscal federalism has been effective in maintaining macroeconomic stability and fostering economic growth
• Structured fiscal transfers from the Centre to states address resource constraints, compensating for differences in expenditures and revenues.
• Fiscal transfers aim to rectify vertical imbalances by supporting sub-national governments financially.
• Transfer channels include both statutory (mandated by law) and non-statutory methods.

RECENT CHALLENGES

• Signs of stress are emerging due to increased asymmetry, impacting the fiscal capacity of states negatively.
• The imbalance leads to disproportionate revenue allocations and responsibilities between the Union and states.
• State governments face challenges in fulfilling constitutionally-mandated responsibilities due to these imbalances
• Recent disputes between Kerala, Karnataka, Tamil Nadu, and the Union government have escalated to the Supreme Court, indicating significant stress in fiscal federal relations
• The disputes revolve around executive decisions, highlighting issues beyond simple revenue allocation, expenditure, or macroeconomic stability
• While conflicts between states and the Union government have occurred in the past, political-economy factors and cooperative federalism principles aided in their resolution

CONSTITUTIONAL FRAMEWORK AND FISCAL TRANSFERS IN INDIA

• Article 293: State Borrowing Powers
  • States can borrow within set limits by their legislature.
  • Union can extend loans and impose conditions on further borrowing.
• Article 275: Finance Commission Grants
  • Finance Commissions recommend grants-in-aid for services and budget balance.
  • Aim for comparable service levels and fiscal responsibility.
• Moral Hazard Concerns
  • Gap-filling transfers may encourage fiscal irresponsibility in states.
  • States might become fiscally profligate due to unconditional grants.

KERALA’S CHALLENGE

• Kerala moved to the Supreme Court against the Union government’s imposition of a Net Borrowing Ceiling (NBC).
• Claimed the NBC led to a financial crisis and violated fiscal federalism principles.
• Union Government’s Argument
  • Defended NBC as a measure against reckless state borrowing for unproductive expenditure.
  • Emphasized macroeconomic stability and public finance responsibility under Article 293(4).
• Amendments to FRBM Act
  • 2018 amendment capped general government debt at 60% of GDP to prevent off-budget borrowings.
  • Aimed to curb fiscal indiscipline and ensure transparent fiscal practices.

TAMIL NADU’S ALLEGATION

• Accused the Union government of delaying disaster relief funds, citing a delay of nearly Rs 38,000 crore.
• Highlighted the state’s need for funds to address cyclone Michaung and floods in southern districts.
• Described the delay as ‘step-motherly’ treatment towards Tamil Nadu.
• Stressed the urgency of financial aid to mitigate the impact of natural disasters.

KARNATAKA’S GRIEVANCE

• Filed a petition with the Supreme Court against the Union government’s delay in responding to its request for financial relief.
• Highlighted the state’s dire need for assistance due to a severe and ongoing drought situation.
• Magnitude of Request
  • Karnataka sought Rs 18,171 crore under the National Disaster Response Fund (NDRF) over six months ago.
  • Emphasized the critical nature of the funds to address the humanitarian crisis caused by the prolonged drought.
• Violation of Statutory Scheme
  • Argued that the Centre’s inaction violated the provisions of the Disaster Management Act, 2005.
  • Asserted that timely relief is essential to effectively manage and mitigate the impacts of natural disasters.

REFLECTION ON DISSONANCE IN FISCAL FEDERAL RELATIONS

• Political Influence
  • Significant portion of dissonance attributed to political factors rather than purely economic concerns.
  • Political expediency often drives fiscal decisions, leading to contentious situations between Centre and states.
• Monetary Control Dynamics
  • Union government’s control over monetary policies enables it to offset fiscal profligacy caused by political motivations.
  • This control is utilized strategically, sometimes leading to political tensions, especially with Opposition-ruled states.
• Empirical Evidence
  • Empirical data shows that fiscal transfers don’t always achieve revenue equalization or enhance state fiscal capacities.
  • Instead, they sometimes result in Union government encroaching upon states’ fiscal autonomy, adding to the dissonance.
• Sensitivity of Fiscal Measures
  • Fiscal measures are politically sensitive due to their impact on resource allocation and financial autonomy.
  • Contentious issues arise when fiscal decisions are perceived as infringing upon states’ fiscal space or prioritizing political interests over economic prudence

RENEWED CONCERNS IN RESOURCE ALLOCATION AND EXPENDITURE

• State and Local Finances
  • States play a crucial role in human development and provision of social goods due to their proximity to grassroots issues.
  • Focus on state and local finances is essential for effective resource allocation and service delivery.
• Merit-Based Support
  • Specific services like drought relief or flood relief are of national importance and merit special attention and expedited support.
  • National perspective is vital in recognizing and addressing critical issues that transcend state boundaries.
• Fiscal Distress Recognition
  • Union government must acknowledge the fiscal distress faced by several states, especially during crises like natural disasters.
  • Timely and targeted support is necessary to ensure effective response and recovery at the state level.
• Collaborative Approach
  • Addressing fiscal challenges requires a collaborative approach between the Centre and states, focusing on shared objectives and priorities.
  • Balancing national interests with regional needs is key to fostering sustainable development and resilience.