IASbhai Daily Editorial Hunt | 5th Nov 2020

“If the wind will not serve, take to the oars.” – Latin Proverb

Dear Aspirants
IASbhai Editorial Hunt is an initiative to dilute major Editorials of leading Newspapers in India which are most relevant to UPSC preparation –‘THE HINDU, LIVEMINT , INDIAN EXPRESS’ and help millions of readers who find difficulty in answer writing and making notes everyday. Here we choose two editorials on daily basis and analyse them with respect to UPSC MAINS 2020-21.

EDITORIAL HUNT #225 :“Revamping India’s Fiscal Federalism | UPSC

Revamping India's Fiscal Federalism | UPSC

Krishna Byre Gowda
Revamping India’s Fiscal Federalism | UPSC

Krishna Byre Gowda is former Agriculture, Rural Development and Panchayat Raj Minister, Government of Karnataka.

      HEADLINES:

The financial capacity of States is being weakened

      CENTRAL THEME:

Through various means the Union government has substantially reduced the fiscal resource capacity of the States

SYLLABUS COVERED: GS 2 : 3 : Devolution of Funds : Centre-State Relations : Agriculture

      MAINS QUESTION:

What are the systemic policy lags in India’s fiscal domain ? Comment on a futuristic vision of fiscal federalism in India -(GS 3)

      LEARNING: 

  • Background
  • States Vs Welfare Schemes
  • Declining Devolution
  • Shrinking the divisible pool
  • Recommendations

      INTRODUCTION: 

  • BACKGROUND : The Government of India Act 1919 and 1935 formalized the tenet of fiscal federalism and revenue sharing between the Centre and the states.
  • THE MOTIVE : It aimed at enhancing political, economic and administrative efficiency, and granting increased autonomy to the provinces of India.

State governments drive a majority of the country’s development programmes.

  • WELFARE SCHEMES : Greater numbers of people depend on these programmes for their livelihood, development, welfare and security.
  • RENDERING ASPIRATIONS : States need resources to deliver these responsibilities and aspirations.
  • SUSTAINABLE ECONOMIC GROWTH : Varied economic growth and income levels across States confirm the primacy of State governments in the economic sphere as well.
  • ERODING STRUCTURE : Unfortunately, the financial capacity of the States is structurally being weakened.
  • AUGMENTED INCOME : The ability of the States to expand revenue has been constrained since the Goods and Services Tax (GST) regime was adopted.
  • LEVERAGING RESOURCES : The Centre’s resource mobilisation space vis-a-vis that of the States is now far greater.
  • UNDERMINING CAPACITIES : New Delhi, instead of finding mutually beneficial solutions, has repeatedly opted to undermine the current and future fiscal capacities of the States.

It has systematically cut the share of States in taxes raised by the Union government (devolutions).

  • POOL OF FUNDS : It has reduced the pool of funds to be shared with the States by shifting from taxes to cesses and surcharges, and it is needlessly thrusting measly options to overcome the GST shortfall.

      BODY: 

DECLINING DEVOLUTION

  • FC RECOMMENDATIONS : Finance Commissions recommend the share of States in the taxes raised by the Union government.
  • DEVOLUTION OF FUNDS : Prior to 2014, devolution of funds to the States were consistently and cumulatively more than 13th Finance Commission’s projections.
  • The year 2014-15 commenced saw an actual devolution was 14% less than the Finance Commission’s projection.
  • SUBSEQUENT DEVOLUTIONS : Subsequent devolutions have been consistently less every year, ending the period 2019-20 with a whopping -37%.
  • PROJECTED TRANSFER OF FUNDS : Between 2014-15 and 2019-20, the States got ₹7,97,549 crore less than what was projected by the Finance Commission.
  • SUBSTANTIAL REDUCTION : This is an undeniable and substantial reduction of the fiscal resource capacity of the States.

SHRINKING THE DIVISIBLE POOL

  • ALTERNATIVES AVAILABLE : Various cesses and surcharges levied by the Union government are retained fully by it.They do not go into the divisible pool.

This allows the Centre to raise revenues, yet not share them with the States.
 

  • TAX VS CESS BONAZA : Hence, the Union government imposes or increases cesses and surcharges instead of taxes wherever possible and, in some cases, even replaces taxes with cesses and surcharges.

EXAMPLE
When taxes are replaced with cesses and surcharges, as has been done repeatedly by this government in the case of petrol and diesel, the consumer pays the same price.

  • REDUCING SIZE OF POOL : The Union government keeps more of that revenue and reduces the size of the divisible pool.As a result, the States lose out on their share.
  • CESS AND SURCHARGE BOOM : Between 2014-15 and 2019-20, cesses and surcharges soared from 9.3% to 15% of the gross tax revenue of the Union government.
  • SYSTEMATIC RISE : This systematic rise ensures that the revenue that is fully retained by the Union government increases at the cost of the revenue that is shared with the States.
  • TOTAL HARVEST : In 2019-20 alone, the Union government expected ₹3,69,111 crore from cesses and surcharges.This will not be shared with the States.

GST SHORTFALL

  • GRADUAL SHORTFALLS : Shortfalls have been persistent and growing from the inception of GST.
  • GST COMPENSATION : Compensations have been paid from the GST cess revenue. GST cesses are levied on luxury or sin goods on top of the GST.
  • CESS COLLECTIONS : GST compensation will end with 2021-22.But cesses will continue.During 2019-20, the cess collected was ₹95,444 crore.

STATE’s SHARE

  • PANDEMIC EFFECT : With the abnormal exception of this year, the years ahead will generate similar or more cess revenue.
  • STATE’s OPINION : Many States have been insisting outside and inside the GST Council that the New Delhi should borrow this year’s GST shortfall in full and release it to the States.
  • INTEREST CLAUSE : The Union government will not have to pay a rupee of this debt or interest.
  • REPAYMENT OF LOAN : The entire loan can be repaid out of the assured cess revenue that will continue to accrue beyond 2022.
  • COMPENSATION GRANTED : Of the nearly ₹3 lakh crore GST shortfall to the States, the Centre will only compensate ₹1.8 lakh crore.

The States will not get the remaining ₹1.2 lakh crore this year.This cut is being imposed for no reason.

  • NEED OF THE HOUR : In fact, it flies against the need of the hour to revive the economy.

REVIVING THE ECONOMY

  • DEMAND GENERATION : Governments ought to spend money this year to stimulate demand.
  • GRANTS : Central grants are also likely to drop significantly this year.

₹31,570 crore was allocated as annual grants to Karnataka.Actual grants may be down to ₹17,372 crore. 

  • EXPECTED SHORTFALL : Due to the combined effect of cutbacks in devolution , the States may experience a fall of 20%-25% in their revenues this year.
  • COLOSSAL BORROWINGS : To overcome such extreme blows to their finances and discharge their welfare and development responsibilities, the States are now forced to resort to colossal borrowings.

Repayment burden will overwhelm State budgets for several years. 

  • THE IMPACT : The fall in funds for development and welfare programmes will adversely impact the livelihoods of crores of Indians.
  • NEGATIVE SUM GAME : The economic growth potential cannot be fully realised. Adverse consequences will be felt in per capita income, human resource development and poverty.
  • GROWTH ENGINE OF INDIA : States are at the forefront of development and generation of opportunities and growth.

      IASbhai Windup: 

RECOMMENDATIONS

  • COOPERATIVE FEDERALISM : In a framework of cooperative federalism, it is important to have provisions for a higher devolution to the state governments in order to fiscally achieve the goals of the nation.
  • DECENTRALISED APPROACH : In fact, all tiers should be fiscally empowered to achieve state-specific targets of fiscal deficit, rather than adopting a top-down approach.
  • FUTURE OBLIGATIONS : Future legislations issued by the New Delhi in relation to states should enact more provisions for cost-sharing to aid them in fulfilling their duties.

The present structure of fiscal federalism in India was formed at the time when its economy was much less market oriented than today.

  • FOCUSSING ON LIBERALISATION : Liberalizing the financial system, and increase the role of the private sector should reap benefits.
  • FUTURE ECONOMIC REFORM : It must therefore include substantial changes in the system of intergovernmental fiscal relations, with the ultimate objective of substituting market discipline of state finances.
  • NO-BAILOUT POLICY : If such a policy lacks credibility, and as a consequence states prove reluctant to push ahead with reforms, there would appear to be no alternative but to rely on tight borrowing restrictions .

Strong States lead to a stronger India.The systematic weakening of States serves neither federalism nor national interest.

       SOURCES:   THE HINDU EDITORIAL HUNT | Revamping India’s Fiscal Federalism | UPSC

 

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