Rajeev Gowda: Government promoting ‘coercive federalism’     

Congress MP from Karnataka says while 14th Finance Commission laid out a 42% allocation of funds to states, central govt has ensured that only 30% of all centrally collected revenue reaches them

Rajeev Gowda
Rajeev Gowda

Ashlin Mathew

“While the Fourteenth Finance Commission laid out a 42% allocation of funds to states, through various strategies, the BJP-led central government has ensured that effectively only 30% of all centrally collected revenue reaches the states,” holds Rajeev Gowda, Congress MP from Karnataka.

State governments are unlikely to get full compensation for the shortfall in Goods and Services Tax revenue for the year. The budget has scaled down the GST proceeds estimate for FY20 by 10% from what was projected at the beginning of the year. Adding to these woes the 15th Finance Commission states that tax devolution should be on the basis of 2011 census.

The government decided to do this with the awareness that its decision hurts the better performing states in south India, adds Gowda while speaking to Ashlin Mathew

Why does the central government want to change the 1971 Census figure as the basis for devolution and change it to 2011 Census?

Population is absolutely a factor that must be taken into account during the allocation of tax revenues between the Centre and states.But those states that have performed well on population control should not be penalised for their good work. So, a balance needs to be struck between allocating funds on the basis of population versus rewarding states for effectiveness in family planning.

The Modi government, in its terms of reference to the 15th Finance Commission (FFC), has instructed it to use the 2011 Census as the basis for devolution of funds. This breaks the national consensus that has existed to stick to the 1971 Census as the basis for horizontal equity between states.(For example, the number of Lok Sabha seats allocated to states is still on the basis of the 1971 Census). 

This can result in an unjust outcome. The FFC has tried to strike a balance by allocating a weightage of 15% to population and 12.5% to demographic performance, which includes fertility rate and health-related factors. In spite of this, states like Karnataka, which I represent in the Rajya Sabha, are hurt disproportionately.

The central government justifies using the 2011 Census saying that fund allocation should be on the basis of current data, knowing fully well that its decision hurts the better performing states. Perhaps it sees its vote bank as being mainly in the more populous North Indian states.

How much do the five South Indian states stand to lose because of this?

While Tamil Nadu has not been significantly affected by theFFC basing its allocation on the 2011 Census, four of the top five losers from the new formulae are Karnataka, Kerala, Andhra Pradesh and Telangana.

Karnataka’s and Kerala’s share in the divisible pool has been reduced by more than 20 per cent. Clearly the signal from the FFC’s formula is that states who performed effectively toward achieving the shared national goal of family planning will be penalised. What sort of incentive is this for states to work towards a common goal?

Is the Centre using the devolution to force the states into following certain conditions? What does this mean for federalism?

While the Fourteenth Finance Commission laid out a 42%allocation of funds to states, the BJP-led central government has ensured that effectively only 30% of all centrally collected revenue reaches the states.

For example, the Centre has brought in a range of cesses through which it is able to raise more money but this do not have to be shared with states. The Centre then has the power to allocate more to states based on its political calculations.

Recall that during the last Bihar allocation, Prime Minister Narendra Modi offered an extraordinarily large special package to Bihar. Once the BJP tasted defeat, the special package never materialised. So, this government has now politicised revenue allocation.

Finance Commissions were set up as neutral, technocratic bodies to avoid exactly such politicisation. Over the course of six years, we have learnt that if this government claims something, the reality is exactly the opposite. Having promised co-operative federalism, the Modi government is practising coercive federalism. 

Now there are no conditions for the states to borrow money. Can conditions be imposed on states for borrowing money?

It would be better for states to get a fairer share of what they are due rather than go to the market and add to their debt. As the central government squeezes state finances, the states’ fiscal deficits increase, making it costlier for them to borrow from the market. So, freedom for states to borrow without conditions is hardly a mega boon.

How will the low GST collection affect state revenue? How grim is the economic situation in the states because of this default?

The low GST collections has already led to the Central government not releasing the states’ GST share on time. Last year Finance Ministers from various states complained of the delay in releasing the share of states, which affects their effective functioning.

With limited revenue opportunities, the delay in GST share and lower FFC allocation, states like Karnataka are massively hit. Under the FFC’s terms, Karnataka faces a 22.5% decrease in allocation from the central pool (from 4.7% under the Fourteenth Finance Commission to 3.6% under the FFC), and it was already facing a shortfall. Noting this, the FFC has recommended a special Rs. 5495 Crore grant to Karnataka, but the Central government has asked the FFC to review this.

States also want the Centre to extend the compensatory mechanism for GST to beyond 2022 or do you think it would be beneficial if states pulled out from GST?

States pulling out of the GST structure is not a feasible option at this point. The problem with GST arises from the top and the solutions will also have to come from there.

The government needs to simplify the GST structure and rationalise the rates; at the same time, it must end tax terrorism. We keep hearing how the GST regime is evolving. However, no significant reform has taken place. The shoddy implementation of GST has been a death knell for the manufacturing sector, particularly small and medium enterprises. The flawed GST needs to be corrected; if the government is unwilling to do that, it must extend the compensation period or states will be let down badly.

Other than Kerala, the other states are not reacting much to the default and the 15th Finance Commission. Why do you think so?

I beg to differ. Almost all non-BJP governed states have raised this issue. At the GST Council meeting in November, eight states had demanded that the Central government release the pending GST compensation.

Is there a sense of grievance in the south against the north? Does the south feel that they are funding the north?

I would say there is a feeling of being short-changed. Weall want to contribute towards nation-building, but the obligations must not be unjust. Take for example Karnataka.

There are areas in the state which are yet to match the development indices of the well-off districts like Bengaluru, Mysore, andMangalore. Now with our share in divisible pool being reduced by more than twenty per cent, we will be left with less funds to invest in the development of our own backward regions.

How do you propose to balance out the inequalities between the states?

Reducing inequalities will need a long-term commitment to investing in the social sector and complementing this with promotion of manufacturing and services in less economically advanced states.

North India has abundant water and natural resources which must be harnessed judiciously. We need to make farming lucrative and efficient. We need to nurture careful, eco-friendly urbanisation as cities can be phenomenal engines of growth. People are not waiting for governments to act andare “voting with their feet.”

Remember that India is also witnessing extraordinary internal migration between states, both of highly educated human capital and less-skilled workers seeking employment in areas that are growing rapidly. This can cause a draining of talent and workforce from states that really need to retain such resources for their own transformation.

So the Centre must work with states to ensure that they have enough capital, and that it is invested imaginatively, for example, to build a strong educational foundation or incubate industries that unleash the potential of our fellow Indians in states that are not performing as well economically.

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