Inside the Centre vs states battle over funds

The entire Karnataka cabinet and Congress party MLAs staged a protest at Jantar Mantar, and the Kerala cabinet will host a protest at the same venue.

Karnataka protested against the Centre on Wednesday, claiming it was not getting its fair share of taxes, which crimps its ability to do good for the state, and Kerala and Tamil Nadu have similar protests lined up in Delhi in the coming days, as the fractures in India’s fiscal federalist framework become more marked. On February 2, West Bengal chief minister Mamata Banerjee held a two-day dharna in Kolkata against the Centre’s alleged denial of funds under key central schemes.

Karnataka chief minister Siddaramaiah and his deputy (on his left) DK Shivakumar during the protest at Jantar Mantar in New Delhi on Wednesday. (Reuters)

Such protests relate to five main issues. One, the share of states in central taxes; two, the end of the GST compensation; three, the Centre’s support for state borrowing programmes; four, the Union government’s receptiveness to demand for special assistance such as drought or flood relief by states; and five, the funding of large infrastructure projects in the states.

The first is guided by the formula set by the finance commission and the second was how the move to GST was structured. The fourth and fifth are a function of discretion, and, by extension, politics; and the third is an area where both sides have plausible arguments. But underlying the widening fracture in the country’s fiscal federalist framework are two trends: one, the growing realisation among states that the Centre’s welfare schemes (many from subjects in the state or concurrent list) are a great vote puller, and that their own ability to launch similar schemes is limited by lack of funds; and two, the tremendous antipathy between the Centre and the states that is most evident in the conduct of governors of states ruled by parties that are opposed to the NDA.

On Wednesday, the entire Karnataka cabinet and Congress party MLAs staged a protest at Jantar Mantar and on Thursday, the Kerala cabinet will host a protest at the same venue. Tamil Nadu chief minister M K Stalin on Tuesday wrote a letter to his Kerala counterpart, Pinayari Vijayan, supporting the latter’s claim that the Centre was “arbitrarily” restricting state’s borrowing limit by “misusing” its power under Article 293 of the Constitution.

The article provides for the state legislature to fix borrowing limits with guarantee from the Consolidated Fund of India. Prior consent from the Union government has been converted into a restrictive tool to limit deficit financing beyond the limits prescribed by the State Fiscal Responsibility and Budget Management Act, Stalin argued in the letter. “As a result, the fundamental principle of fiscal federalism envisioned by the Constitution makers is under grave threat,” he said.

All three southern states have alleged that the Centre has imposed restrictions on their borrowing and their funds flow has reduced due to the recommendations of the 15th Finance Commission. These states also say they are losing money on account of the end of GST compensation in June 2023 (which was always known).

On Monday, Union finance minister Nirmala Sitharaman told the Lok Sabha that there was no discrimination against any state as disbursement of funds were as per guidelines of the finance commission and audit reports of the Comptroller and Auditor General (CAG). For instance, the funds for West Bengal under MGNREGA were stopped following audit objections by the CAG as the state had failed to submit utilisation certificates.

Karnataka

Leading the protest in Delhi on Wednesday, Karnataka chief minister Siddaramaiah accused the Centre of bias.

“We are raising the issue of discrimination meted out by the Government of India against the state of Karnataka. The state is number two as far as tax collection is concerned. Maharashtra is number one. This year, Karnataka is contributing more than ₹4.30 lakh crore as tax. If we collect ₹100 and give it to the Government of India, we are only getting ₹12 to ₹13 back,” he said.

Siddaramaiah accused the central government of neglecting Karnataka’s interests, citing a loss of ₹62,098 crore in tax devolution due to changes in the finance commission’s recommendations. “Nirmala Sitharaman says ‘I do not want to interfere in the report of the finance commission’. Why are you lying? This is all based on facts. Anybody can verify from the budget documents of the Government of India,” he said.

On Monday, Siddaramaiah said the state’s devolution of funds has decreased from 4.71% under the 14th Finance Commission to 3.64% under the 15th Finance Commission. He added that the Centre did not compensate for loss in tax revenue because of GST.

“The state’s projected growth from 2017 to the conclusion of financial year 2023-24 amounts to ₹4.92 lakh crore. However, the anticipated actual collection for the state stands at ₹3.26 lakh crore. Of the shortfall of ₹1.65 lakh crore, the Union government has compensated the state with ₹1.06 lakh crore, resulting in a loss of ₹59,274 crore,” he said, blaming the loss on “unscientific implementation” of GST.

The Karnataka government is also sore with the central government for not getting any substantial funds for drought relief. The state had sought ₹17,901 crore from the National Disaster Relief Fund. The chief minister also criticised the failure of the Centre to disburse funds promised for projects such as the Upper Bhadra irrigation project, despite announcements made in the Union Budget.

Kerala

While presenting the budget for 2024-25 FY on February 5, Kerala finance minister KN Balagopal said that there has been a ‘curtailment’ of ₹57,400 crore made by the Centre in the state’s receipts in the current fiscal.

“This includes ₹12,000 crore due to the cessation of GST compensation, ₹8,400 crore in this year’s Revenue Deficit Grant, ₹7,000 crore made in the borrowing limit by accounting the borrowings of KIIFB and Pension Company as Public Debt, ₹12,000 crore by considering public account money as public debt and reduction of ₹18,000 crore resulting from the decline of state’s divisible pool share from 3.87% to 1.925% during the 10th to 15th Finance Commission tenures,” he said in the assembly.

He alleged that the state’s borrowing entitlement as per the Centre’s own criteria has been denied in the current financial year.

“As per the Centre’s own guidelines, Kerala’s eligible borrowing limit is ₹39,626 crore. The state budget was prepared considering the same. But Kerala has been allowed to borrow only ₹28,830 crore till now. The borrowing limit was cut short during mid fiscal without any prior notice, based on improper calculation of public account balance,” Balagopal said.

On January 30, the finance minister, while responding to a starred question by an MLA on the reasons for the state’s financial crisis, said the state was denied ₹3,000 crore in the form of interest free loans under the Centre’s Scheme for Special Assistance for Capital Expenditure 2023-24.

He said the Centre denied providing loan assistance as the state did not follow the guidelines related to branding/naming for five central government schemes. The schemes for which the central government has mandated branding are Swachh Bharat Mission (Gramin), Ayushman Bharat Health & Wellness Centres, Pradhan Mantri Awas Yojana (Urban), Poshan Abhiyan and National Health Mission.

“Respective state government departments had informed the Centre about the progress in implementing the guidelines related to branding/naming of these schemes. However, the Centre did not take decisions in favour of the state. The funds of these schemes have not been released this year,” the finance minister said.

Tamil Nadu

A Tamil Nadu government official familiar with the development said between financial year 2014-15 – when the BJP first came to power – and 2022-23, the Union government gave the state ₹4.75 lakh crore, including the central tax share of ₹2.46 lakh crore and subsidy of ₹2.28 lakh crore, whereas direct tax collection from the state in this period was ₹6.23 lakh crore.

The official said that during the same period, the BJP-ruled Uttar Pradesh was given ₹15.35 lakh crore and the direct tax collection by that state was ₹2.23 lakh crore. Tamil Nadu finance minister Thangam Thennarasu said that for every rupee given to the Union government, the state gets back only 29 paise, while Uttar Pradesh gets ₹2.73.

The official, who asked not to be named, said the state is facing a revenue shortfall of ₹20,000 crore every year as compared to the pre-GST regime. The official also said the Centre has not provided its 50% share for phase-II of Chennai Metro Rail Project costing ₹63,246 crore. The official said that the borrowing limit for financial year 2023-24 was restricted as the Union government fixed the GSDP growth at 8% as against the state achieving around 15% nominal growth in the last two years, resulting in a loss of ₹6,000 crore in the borrowing space.

Another issue the state has raised is that Tamil Nadu’s share from the total divisible pool of central taxes had decreased from 5.305% under the 12th Finance Commission to 4.079% under the 15th Finance Commission. “There has been no mention in the Union Budget on funds sought for the flood damage in Chennai and the four southern districts (of ₹2,000 crore). The state’s own tax revenue is impacted by this,” the official said.

Tamil Nadu will present its state budget on February 12 with an estimated revenue deficit of ₹37,540 crore for 2023-24, factoring into the expenditure on account of the welfare schemes such as the Kalaignar Magalir Urimai Thogai Thittam.

Centre’s stance

After an emailed query of HT, the Union finance ministry issued a statement, saying the Karnataka government’s claims of discrimination in sharing central taxes are “patently wrong and mischievous”. “There are factual errors, false monetary claims, misleading statements, and selective mention of certain losses allegedly suffered without mentioning of the gains that have accrued to the state in the 15th Finance Commission (FC) period,” it said.

“The share of each state in sharable central revenues fluctuates from commission to commission. Each commission makes recommendations in its wisdom considering all the factors affecting various states and the Centre and with wide consultations with state governments,” it added.

The ministry also said that “despite the exceptional circumstances arising from the (Covid-19) pandemic which depressed Central revenues, Government of Karnataka will be getting substantially more as devolution during the first five years of the 15th FC period than in the 14th FC period.”

The Centre also said that the Siddaramaiah government has “sought to portray undue accruals to the Centre through increase in cess and surcharge levied by Government of India in a deliberately misleading manner, by omitting to mention that a large part of the cess collection comprises GST compensation cess”. “This cess does not belong to the Centre and goes entirely for the benefit of the states,” it said.

The ministry said that unlike Karnataka and Kerala, states such as Uttar Pradesh, Madhya Pradesh, Gujarat and Bihar did not receive any revenue deficit grant. “...hardly a discrimination against any region or party in power. The selective reference on devolution and ignoring grants is mischievous and unfair to the non-partisan expert Constitutional body, that is, the finance commission,” it said.

A government official, who requested anonymity, also said there is no arbitrary allocation of financial resources to states. The resources are allocated on the basis of recommendations of the finance commission.

For the current period, resource allocations are done on the basis of the 15th FC recommendations. It recommended that 41% of the net proceeds of Union taxes be shared with the states.

“The central government cannot discriminate among states as guidelines are transparent and clear. But release of funds is also subject to following expenditure guidelines, including completion certificates, certified by the competent authority such as AG [accountant general]. Some states are not willing to follow the laid down norms, which is not possible in a rule-based financial governance system,” he said.

“If states have a transparent system of expenditure, they must not shy away from following guidelines, followed by all other states. If they have nothing to hide, then they should provide completion certificates etc as required by the law,” a second official with direct knowledge of the matter said.

There are tendencies of some states to divert funds, change the names of the schemes or skip mandatory matching contributions and such things are in violation of the guidelines and do not pass the audit, the official added. In such cases, funds are stopped until they follow the guidelines in letter and spirit, he said.

“The so-called aggrieved states are leveling general charge against the Centre without giving any specific details, because technically, the Centre cannot stop any fund or any penny due to the states if they follow guidelines. Possibly, some of them have over promised freebies to their people to win the assembly elections and now they don’t have enough resources to fulfil their promises. The easy way to deflect attention of their constituencies is to blame the Centre.”