In ‘Act of God’, Coercive Not Cooperative Federalism

Context: In bridging the Goods and Services Tax (GST) gap, the Centre ought to help States through the Consolidated Fund of India rather than invoking a ‘Force Majeure’ by rendering the financial crisis of states as an “Act of God”.

Arguments for the Centre to provide Financial support to the States.

• Legislative Basis: GST compensation was built in the GST Act 2017, on the promise that if States faced revenue deficits after the GST’s introduction, the Centre would make good the loss.

• Paragraph 92 of the Standing Committee report shows that the Centre assured payment of compensation for a speci?ed period if there were such a loss.
• The constitutional framework that ushered in the GST does not provide an escape clause for ‘Acts of God’.

• Prior to Assurances by the Centre: Allaying these apprehensions of the states, the central government made the assurance that it would provide funds to meet States’ de?cits.

• For E.g. In the seventh meeting of the GST Council, the Chairman observed that it was the constitutional commitment of the central government to provide cent per cent compensation.

• Centre is best placed: since it is the only one that can act as the last resort for the financial help for the states. For E.g. 

• Increased Devolution: The 14th  Finance Commission allotted 42% of central government tax revenues to States.

• Monetary measures: are the monopoly of the central government and borrowing becomes cheaper and efficient.

• Equal Representation: 

• As equal representatives of the citizens of the federal republic of India, State governments expect the Centre to demonstrate empathy during COVID crisis and lockdowns.

Arguments justifying the Centre’s actions:

• Compensation through the Consolidated Fund of India(CFI) was not agreed under the GST Council, making it difficult to agree compensating the states through CFI.
• Large borrowings by the Centre would push up the bond yield of states leading to hike in the interest rates for businesses and individuals. 

• The states’ borrowing would become costlier (due to rise in interest rate) if the Centre were to borrow for compensating states.

• States have the comfort of assured 14% growth through the compensation mechanism, the Centre has no such guarantee.
• The borrowing capacity of the states is not very inferior, as they have on the average borrowed just about 1.25% of the Gross State Domestic Product so far.
• The debt receipts of all the states as a percentage of GDP has been between 2.4% and 3.6% during the last four years and an average level of 2.9%
• On the other hand, the Centre has already breached the budgeted borrowing limits, with steep fall in revenues.
• The cost of state borrowings can be considerably lowered if arranged through a special window and fiscal concessions.
• Instead of borrowing the entire shortfall (increase the interest rate), States can borrow the shortfall attributable to GST implementation. 
• Remaining shortfall to be made good from the Cess Fund post the transition period. 

Impact on Centre-State Relations

• Broken Social Contract: Abdication of responsibility by the centre to compensate states is a cruel blow to the social contract that exists between the Government of India and State governments. 

• States sacri?ced their constitutionally granted powers of taxation in the national interest. 

• Cooperative Federalism turning into Coercive Federalism: The central government has let them down by thrusting on them two options, both of which involve borrowing by States.

• Cornering of resources by the Centre:

• Analysis of State Budgets shows that States received only 30% of central tax collections during 2015-19 as against the 42% recommended by the 14th Finance Commission.
• The Centre raised an estimated ?3,69,111 crore revenue through cesses and surcharges in 2019-20 alone, which are not shareable with States.
• Cesses on petroleum products have resulted in the Centre receiving 60% of petroleum tax revenues, with only 40% going to States. In 2013-14, the ratio was 50-50.

Conclusion: In the light of COVID induced health and financial risk, this is the most appropriate time to provide states relief through the Consolidated Fund of India.