The Very Concept of Cooperative Federalism Needs Resuscitation

Context:  The Centre-state relation has soured on account of the issue of Goods and Services Tax (GST) compensation.

Issues concerning Centre-State fiscal relations 

• Decline in Statutory absolute grants for disaster relief:

• No addition beyond the disaster provision made by the 15th Finance Commission for the current fiscal year of ?41,373 crores in total, of which ?34,574 crore was due from the Centre.
• An early promise of disaster funding would have covered incremental expenditure on testing and quarantine camps, and possibly prevented the subsequent mini lockdowns which have had such a shattering effect on growth.

• Denial of revenue insurance in the form of compensation: at a 14% year-on-year revenue increase, starting from collections in 2015-16 in respect of state taxes subsumed under the GST.

• The COVID crisis has been a deep synchronous exogenous shock, affecting both the Centre and states

• Centre’s revenue growth has been in negative territory.
• States have suffered a steep fall in other taxes as well, like excise on alcohol.

Alternatives offered by Centre for GST compensation

• Option 1: estimates the shortfall at Rs 97,000 crore, on the basis of state GST collections projected from last year before the COVID crisis
• • It is basically a transfer because the debt will be fully serviced by the Centre, and not add to the state’s debt stock. 
  • Enhancement of state borrowing up to 2% of the State Gross Domestic Product (SGDP).
• Option 2: Covering the entire shortfall of Rs 2.35 trillion of which Rs 1.38 trillion (residual amount from the Option 1) will add to the state debt, but interest on the entire debt will be payable by the states.

• Centre does not cover interest servicing, and only offers repayment of principal.  
• Partial enhancement of state borrowing.

Conclusion: The corona shock has been double-edged for states, reducing their revenues while adding pressure for expenditure on a function falling squarely in their domain.