Editorial: Modi government must address fiscal bias

Despite Prime Minister Modi’s talk of ‘Team India’ spirit, 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

Despite the lofty talk of the ‘Team India’ spirit guiding the Centre-State relations, the ground reality presents an entirely different scenario; one that is skewed against the interests of the States. 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. The 10th Governing Council Meeting of NITI Aayog, held in New Delhi recently under the chairmanship of Prime Minister Narendra Modi, provided a platform for the States to air their grievances and put across their demands to ensure fair distribution of resources and uphold the federal spirit. The dwindling share in the central tax pool is a major area of concern for the States. Despite the 15th Finance Commission recommending that 41% of central taxes be devolved to States, the actual amount the States were receiving was only about 30% since the Centre relies more on cesses and surcharges, which do not need to be shared with the States. There is a strong case for increasing this share reasonably. Tamil Nadu Chief Minister MK Stalin’s request for a 50% share of central tax revenue for the States deserves serious consideration. Another issue that is bothering them is that the GST has failed to live up to its potential because it was only recently that the net revenues for the States surpassed the pre-GST indirect tax levels.

Since GST subsumed many of the States’ levies, the Centre must seriously consider their demand for a bigger share in central taxes. Another suggestion that deserves serious deliberation was the one made by Andhra Pradesh Chief Minister N Chandrababu Naidu for the creation of three sub-groups of States to focus attention on the issues of GDP growth and investments, leveraging India’s demographic advantage, and using technology to drive governance. If the Centre is serious about preserving and strengthening fiscal federalism, it needs to rebuild the trust of the States. The declining share of the States in real terms in the divisible pool of taxes, faulty implementation of the GST regime and restrictions on their borrowings are some of the issues that have created tensions in 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 the States. 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. As a result of such a skewed model, the consistently high-performing States suffer gross injustice.

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