Center-State Relations

Synopsis: The 15th Finance Commission has submitted its recommendations for 2021-26 to the centre. Amongst which maximum have been accepted by the centre while others are put on a hold by it. 

Background:

• The commission headed by N.K Singh was required to give recommendations for the period 2020-21 to 2024-25. 
• Although due to COVID 19, it was required to submit an interim report for a year 2020-21 and later give a road map for 2021-22 to 2025-2026.
• Further, the recommendations were to be given keeping in mind the multiple challenges. This included dissolution of the planning Commission, introduction of GST and above all the fiscal and revenue stress induced by the pandemic.
• The commission gave the recommendations based on a judicious interpretation of the unusual terms of reference given to it. This has ensured that recommendations are based on the principle of equity.

Recommendations accepted by the Centre:

• 41% of the Centre’s taxes would be distributed amongst the states.
• Revenue deficit grants amounting to 2.95 lakh crore would be given to 17 states in 5 years.
• Grants towards urban and local bodies would be conditional upon: 
  • Setting up of a State finance commission
  • Online publication of Local bodies accounts
  • Sanitation and Water services provided by local bodies (60% weightage)
• Setting up of a non-lapsable defence modernisation fund for augmenting capital expenditure on defence beyond the normal budgetary allocations.

Recommendations put on hold:

• Taking out 1.53 lakh crore rupees from the consolidated fund of India to partly finance defence modernization fund.
• Sectors specific and other grants to states amounting to 1.8 lakh crore rupees.

Way Forward:

• The Centre must take proactive steps to win the confidence of states, especially in the current stressful times. 
• The instances of introducing more cess and surcharges should be reduced as these are not shared with states, like the recent agricultural infrastructure development cess 
• The Centre needs to take states along with it to drive the country on a sustainable fiscal path and ensure equitable growth throughout the country.

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Issues in 15th Finance Commission Recommendation

Synopsis: The 15^th Finance Commission recommendations are slightly different from the other Finance commissions. It has introduced many revolutionary changes that can shape India’s future.

What are the major challenges faced by 15^th Finance commission?

The 15^th Finance commission (FC) had many challenging tasks while preparing its report for the year 2021-26. The most important among them are,

1. One, the issue of using 2011 population census data. The southern states were against it.
2. Two, the issue of creating a non-lapsable defence fund.
3. Three, using certain parameters for calculating performance incentives to states.
4. Fourth, the 15^th FC required to prepare the fiscal roadmap for the Union and state amid a shortfall in the GST collection and the Pandemic.

How the 15^th FC report addressed these challenges?

1. First, the 15^th FC recommended vertical devolution at 41 per cent to states against 14^th FC recommendation of 42%. The 15^th FC adjusted 1 per cent for the erstwhile state of Jammu and Kashmir.
2. Second, for horizontal distribution, it introduced efficiency criteria for tax and fiscal efforts of states. This is expected to harmonise the principles of revenue needs and performance.
3. Third, the 15^th FC assigned 12.5 per cent weight to demographic performance. By that, it incentivized the states for the progress made by southern states in replacement rate of population growth.

What was the recommendation by 15^th FC for distributing grant in aids to the states?

• The grant allocation will be based on the below five categories. 1. Revenue deficit grants, 2. Grants for local governments, 3. Grants for disaster management, 4. Sector-specific grants and 5. State-specific grants.
• The centre in its Action Taken Report accepted all the grants except sector-specific grants (Rs 1,29,987 crore) and state-specific grants (Rs 49,599 crore).
• The Commission also tasked to examine, whether revenue deficit grants should be provided at all to the states. Some states argued that providing revenue deficit grants will disincentives tax efforts and prudence in expenditure.
• However, the FC recommended revenue deficit grants of Rs 2,94,514 crore for (2021-26). It will help fiscally stressed states by COVID, such as Kerala, Punjab, West Bengal.

What were the Changes brought by 15^th FC regarding grants to local governments?

• First, the 15^th FC has prescribed the following conditions to local bodies to get access to the grants.
  • Constitution of State Finance Commissions
  • Timely auditing and online availability of accounts for rural local bodies
  • Notifying consistent growth rate for property tax revenue for urban local bodies.
• Second, it has also recommended for tying the grants to the local bodies to drinking water, sanitation, solid-waste management and faecal sludge management. This is in line with the national programmes such as Swachch Bharat Mission and Jal Jeevan Mission.
• Third, for the first time, the FC recommends Rs 8,000 crore to states for incubation of eight new cities. It also provides for urban grants to million-plus cities for improving air quality, to meet the benchmark of solid waste management and sanitation.
• Fourth, the landmark recommendation of the 15^th FC is the health grant of Rs 70,051 crore through local bodies. It will help to address the gaps in primary health infrastructure.

15^th FC recommendations for strengthening Disaster risk management

• The FC recommends setting up the state and national level Disaster Risk Mitigation Fund (SDRMF). It is in line with the provisions of the Disaster Management Act.
• Also, for the first time, it introduced a 10-25 per cent graded cost-sharing by the states for the NDRF and NDMF. Though, this is not accepted by the states.

15^th FC recommendations to strengthen Defence sector

• It recommends for setting up of a dedicated non-lapsable fund and the Modernisation Fund for Defence and Internal Security (MFDIS) for 2021-2026.
• The fund will bridge the gap between projected budgetary requirements and budget allocation for defence and internal security. It will also provide greater predictability to critical defence related to capital expenditure.
• It has recommended the following four specific sources from where the funds for defence can be sourced.
  1. Transfers from the Consolidated Fund of India.
  2. Disinvestment proceeds of DPSEs.
  3. Proceeds from the monetisation of surplus defence land.
  4. Proceeds of receipts from defence land, which is likely to be transferred to state governments.
• Furthermore, It recommends an allocation of Rs 1,000 crore per annum for the welfare of families of the defence and CAPF personnel who sacrifice their lives in frontline duties.

Synopsis: The recent 15^th FC report recommendations criticised on the basis of two grounds. One, the recommendations will impact co-operative federalism. Two, the recommendations are not aligned with the changing federal structure in India.

Background

• Recently, the 15^th Finance commission (FC) report tabled in the parliament. It’s following key recommendations accepted by the government.
  1. The Commission has recommended a total devolution of Rs 8,55,176 crore to the states, which is 41% of the divisible pool of taxes.
  2. It also recommended for revenue deficit grants of Rs 1.18 lakh crore to the states.
  3. Furthermore, It recommended a non-lapsable defence fund. The grants component of the states has been reduced by 1 per cent (from 42% to 41%). It will be used to set up special funds for defence.
• The FC’s recommendation for the vertical devolution at 41% is pragmatic. However, some of its recommendations will have an implication on the co-operative federalism.

What are the issues in the 15^th FC recommendations?

• First, the 1% cut in the devolution is for special funding on defence. It means states are paying Rs 7,000 crore for defence and internal security. But, Defence and National Security are the centre’s responsibility as per the 7th Schedule of the Constitution. This use of funds from states to finance the Centre’s expenditure is against the spirit of cooperative federalism.
• Second, the issues in the horizontal distribution of funds. Successive finance commissions have used the criteria of need, equity for devolving 92.5 per cent of funds to a state. Whereas 15^th FC has reduced this to 75%. And the remaining 25% will be based on efficiency and performance. This is the lowest weightage for equity, making the 15th FC transfers the least progressive.
• Third, 15^th FC recommendations do not depict the changed fiscal conditions. For example, after GST, the tax collection method has changed from a production-based tax system to a consumption-based tax system.
  • This structural change has a significant impact on the interstate distribution of tax.  It is not taken into account by the 15^th FC report.
• Fourth, the approach for distributing revenue deficit grants is not changed. The 15^th FC could have recommended a minimum-guaranteed revenue of 14 per cent to every state.
  • This unchanged policy approach has resulted in an increase of statutory and non-statutory grants to almost 55 per cent of the total transfers. Whereas the aggregate transfers have dropped to 45 per cent. This makes the devolution process more discretionary.

Source: Indian Express

Gs2: Issues and Challenges Pertaining to the Federal Structure, Devolution of Powers and Finances up to Local Levels and Challenges Therein.

Synopsis:  The reforms suggested by the 15^th Finance commissions (interim report) can improve the financial governance of India’s municipalities.

Background:

• The 15^th Finance Commission submitted an interim report for FY 2020-21.
• Now, the final report for FY 2021-22 to FY 2025-26 is expected to be tabled along with the forthcoming Budget 2021-22.
• The Interim report for 2020-21 talks about raising the standards of financial governance of India’s municipalities in four specific ways.
• Implementation of the suggested 4 changes can be a watershed moment in the financial governance reforms of India’s municipalities.

What are the four changes suggested by the 15^th Finance commission?

The 15^th Finance commission in its interim report has suggested the following changes to bring reforms to the financial governance of India’s municipalities.

1. First, increasing the overall financial disbursement for municipalities (including panchayats) from the existing 30 per cent to 40 percent, in phases. This will result in increased financial resource for the municipalities over the five years.
2. Second,  it has set two very important conditions for all municipalities, for receiving grants. First, Publication of audited annual accounts. Second, notification of floor rates for property tax. It will result in financial accountability and increased revenue of Municipalities.
   • • Moreover, an Additional borrowing limit has been set for states (Rs 50,000 crore). It is linked to reforms in property taxes and user charges for water and sanitation.
3. Third, 100 percent outcome-based funding to 50 million-plus urban agglomerations (excluding Union Territories). Conditions emphasize specifically air quality, water supply, and sanitation.
   • • Note: India has 4,500 municipalities out of which approx. 250 municipalities are urban agglomerations with 53 million-plus population. It contains 44 per cent of the total urban population.
     • Whereas, the remaining 4,250-plus municipalities comprise 56 per cent of the total urban population.
4. Fourth, it has recommended a common digital platform for municipal accounts. This will give a consolidated view of municipal finances and sectoral outlays at the state level.

What are the suggestions?

Constitutional bodies like the finance commission can only prepare the grounds of reforms. The ultimate responsibility for municipal finance reforms remains with the state governments.  Thus, State governments need to enact municipal legislation towards following 5 Objectives:

1. Fiscal decentralisation by strengthening state finance commissions.
2. Revenue optimisation to enhance their own revenues.
3. Fiscal responsibility and budget management to accelerate municipal borrowings.
4. Strengthening institutional capacities by an adequately skilled workforce.
5. Facilitate transparency and citizen participation for democratic accountability.

• Also, State governments need to shift from the present discretionary grants practice to predictable fiscal transfers to municipalities.

Synopsis: Tussle between the Puducherry CM and LG Kiran Bedi is one of the examples of increasing frictions between constitutional functionaries. In today’s article we are listing the causes of frictions between them.  

Background 

• Recently, Puducherry Chief Minister (CM) V. Narayanasamy staged a three-day protest against Lieutenant Governor (LG) Kiran Bedi. 
• The CM accused LG of “functioning in an autocratic manner” and adopting an “obstructionist attitude” in ensuring the progress and welfare of people and asked the Centre for the recall of the Lt Governor.  
• Whereas, LG defended herself by stating that the Lt Governor’s secretariat is ensuring just, fair and accessible administration, within the legal limits.  

What are the causes of friction between Puducherry LG and CM? 

Both have been in friction over issues such as; 

• The appointment of the State Election Commissioner, an office critical to holding elections to local bodies in the Union Territory.  
• The implementation of direct benefit transfer in the public distribution system using cash, instead of free rice, being given to beneficiaries.  

How experts are seeing this issue? 

• First, the Assembly elections are likely in April or May. The protest of CM leading the protest against the Lt Governor was seen as an act of political mobilisation. 

• Second, experts opine that LG should also take into account the legitimate requirements of an elected government and try to accommodate Mr. Narayanaswamy’s views on important matters such as the free rice scheme.  

• Even the Centre itself did not see any benefit in the DBT mode when it decided to give additional food grains (rice or wheat) free of during the COVID-19 pandemic. 

Now the responsibility lies with the Centre to step in and restore the breakdown of communication between the Lt Governor and the Chief Minister in the interest of smooth administration.

Context- Importance of Centre-States coordination to deal with the emerging challenges of inter-state water governance.

How the two bills on water can attend the longstanding issue of inter-state externalities

1. The Interstate River Water Disputes Amendment Bill 2019– The bill seeks to improve the inter-state water disputes resolution by setting up a permanent tribunal supported by a deliberative mechanism, the dispute resolution committee.
2. The Dam Safety Bill, 2019– The bills provides for the surveillance, inspection, operation, and maintenance of specified dams, with the help of a comprehensive federal institutional framework comprising committees and authorities for dam safety at national and state levels.

• It also provides for an institutional mechanism to ensure the safety of such dams.

However, these two bills were passed by Lok Sabha and are pending in Rajya Sabha.

What is the importance of Jal Jeevan Mission JJM?

• The chief objective of the Mission is to provide piped water supply (Har Ghar Jal) to all rural and urban households by 2024.
• The Jal Jeevan Mission will converge with other Central and State Government Schemes to achieve its objectives of sustainable water supply management across the country.
• The central assistance through JJM is an opportunity to open a dialogue with the States to address federal water governance gap.

Why a coordinated response from the Centre and states is vital?

1. Systematic federal response– Emerging concerns of long-term national water security and sustainability, the risks of climate change, and the growing environmental challenges, including river pollution needs systematic federal response where the Centre and the states need to work in a partnership mode.
2. For implementation of current national projects– Centre-States coordination is also crucial for pursuing the national projects. For example Ganga river rejuvenation or inland navigation or inter-basin transfers.
3. Critical for Jal Jeevan Mission’s success.
4. To pursue development and sustainability goals–

What is the way forward?

1. Absence of authoritative water data- Data systems related to water in the country are limited in their coverage, robustness and efficiency. The sector suffers from the following key data problems-
2. Limited coverage,
3. Unreliable data
4. Limited co-ordination and sharing.

Therefore, the Centre can work with the states in building a credible institutional architecture for gathering data and producing knowledge about water resources.

2. Jal Jeevan Mission presents an opportunity to get states on board for a dialogue towards stronger Centre-states coordination and federal water governance ecosystem.

Context- The role of the Finance Commission as a neutral arbiter in the Centre-state relation in achieving the delicate balance.

What are the key highlights of the latest report?

The Fifteenth Finance Commission led by Chairman N. K. Singh submitted its report for the period 2021-2026 to President of India.

Title of the report – ‘Finance Commission in COVID Time’s and the scales are used to represent the balance between the States and the Union.

Significance of report-

1. The report will determine how India’s fiscal architecture is reshaped.
2. And how Centre-state relations are reset as the country attempts to recover from the COVID-19 shock

What are the key points in the report that can impact states revenue share?

1. The 15th Finance Commission, in its interim report had said, ‘There is merit in ensuring funds for defence and internal security and this will receive appropriate consideration in our final report.’

• This had led to speculation that states will have to contribute to such a fund, in turn leading to a drop in their share of central government’s taxes.

2. Southern Indian states complaining their efforts to control population would go against them. This is because the terms of reference of the 15th Finance Commission included using the 2011 census to suggest devolution of taxes to states.

• The 15th FC has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool.

What are the States issues?

Recommendation of 14^th Finance commission– The commission had recommended for an increase in the share of the States in total tax revenues from 32% to 42%. However, states’ share never touched 42 per cent of tax collections due to-

• Dominance of Centre– The Centre is trying to claw back the fiscal space ceded to the states and assert its dominance over the country’s fiscal architecture. Central government spending has risen on items that lie in the state and concurrent lists.
• Shrinking of divisible pool– Centre has reduced the pool of funds to be shared with the States by shifting from taxes to cesses and surcharges, revenue from which is not shared with the states.

Way forward-

• Finance Commission has to play an important role in achieving the delicate balance in the conflicting domain of finance by addressing the concerns of both the players.
• The Centre can reduce States’ fears by tabling the report without delay, and address any apprehensions it may give rise to.

Context – The Fifteenth Finance Commission led by Chairman N K Singh, submitted its Report to the President of India.

What are the key highlights of the latest report?

The Fifteenth Finance Commission led by Chairman N. K. Singh submitted its report for the period 2021-2026 to President of India. As per the Terms of Reference (ToR), the Commission was mandated to give its recommendations for five years, i.e., 2021-2026.

• Title of the report – ‘Finance Commission in COVID Times’and the scales are used to represent the balance between the States and the Union.
• The report is divided into four volumes.
• The Report is devoted to the Union Government and contains key departments in greater depth, with the medium-term challenges and the roadmap ahead.
• After the report is tabled in the Parliament, it will be available in the public domain.

Which issues are addressed in the report?

1. The Commission submitted its report on vertical and horizontal tax devolution, local government grants, disaster management grant, incentives for States in many areas such as power sector, adoption of DBT, solid waste management etc.
2. The Commission also submitted its report on whether a separate mechanism for funding of defence and internal security ought to be set up and if so how such a mechanism could be operationalized.

What are the key points in the report that can impact states revenue share?

1. The Commission has addressed all its unique terms of reference such as considering a new non-lapsable fund for financing national security and defence spending, and offering performance incentives for States that deliver on reforms.
2. The Fifteenth Finance Commission has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes.

States issues-

• Cutbacks in devolution – Centre has systematically cut the share of States in taxes raised by the Union government.
• Shrinking of divisible pool- Centre has reduced the pool of funds to be shared with the States by shifting from taxes to cesses and surcharges.

Way forward-

The Centre can reduce States’ fears further by tabling the report soon so that any anxieties can be debated and laid to rest, and States can also plan upcoming Budgets with less uncertainty.

What is Cess?

• • A cess is an earmarked tax that is collected for a specific purpose and ought to be spent only for that.
  • Cess may initially go to the CFI but has to be used for the purpose for which it was collected.
  • Cess collections are supposed to be transferred to specified Reserve Funds that Parliament has approved for each of these levies.
  • Every cess is collected after Parliament has authorised its creation through an enabling legislation that specifies the purpose for which the funds are being raised.
  • Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.

What is GST Compensation Cess?

• The Goods and Services Tax in India is a comprehensive, multi-stage, destination-based value-added indirect tax. It has replaced many central and state indirect taxes in India such as the excise duty, VAT, services tax, etc.
  GST compensation: As per the GST (Compensation to States) Act, 2017, states are guaranteed compensation for revenue loss on account of implementation of GST for a transition period of five years (2017-2022).
• The compensation is calculated based on the difference between the current states’ GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16.
• Any shortfall has to be compensated from the receipts of Compensation Cess imposed on selected commodities that attract a GST of 28 per cent.
• At present, the cess levied on sin and luxury goods such as tobacco and automobiles flow into the compensation fund.
• But the issue was created when during Pandemic govt. denied paying compensation cess due to low revenue collection.

Recently Punjab has denied implementing the Central Farm Laws in the state and has moved amendments to the legislations.

Previously, on the Issue of CAA (Citizenship Amendment Act), several state governments like Kerala denied the implementation of the same in their states.

Thus, the question arises, are states empowered to reject the central laws in their states? if yes, then under what circumstances?

Powers of the central government

Article 256 of the constitution of India provides for the obligation of States and the Union.

• The executive power of every State shall be so exercised as to ensure compliance with the laws made by Parliament and any existing laws which apply in that State, and the executive power of the Union shall extend to the giving of such directions to a State as may appear to the Government of India to be necessary for that purpose.
• Thus, under article 256 of the constitution, states are in obligation to Implement the laws framed by the central government.
• Article 257 (1) of the constitution of India provides that state governments shall not exercise their executive powers in a manner that will “impede or prejudice” the exercise of the executive powers of the Union.
• If a state is not implementing the act, Article 355 of the Constitution can be invoked to issue warning to the concerned state which states that the government of every State is carried on in accordance with the provisions of this Constitution.”
• If the state ignores the warning under Article 355 as well, the Centre can impose President’s rule under Article 356.

Rights available to the state government

• If any central law is Infringing upon the rights or powers of a state, then a state can move to the Supreme Court.
• Article 131 confers exclusive jurisdiction on the Supreme Court in disputes involving States, or the Centre on the one hand and one or more States on the other.
• Unlike individuals, State governments cannot complain of fundamental rights being violated thus cannot move to SC or High Courts under Article 32 or Article 226 of the Constitution.

Previous cases

• In 2011, in the State of Madhya Pradesh v. Union of India and Another, the court said that the Central laws can be challenged in the State High Courts and Supreme Court under Article 32 and held that the constitutional validity of a central law cannot be normally challenged under Article 131.
• In the State of Jharkhand vs. State of Bihar and (2014), the Supreme Court upheld Article 131 as an appropriate tool to test the constitutionality of central law. The court ruled that the condition for invoking the court’s jurisdiction under Article 131 was that the dispute should involve a question on the existence or extent of a legal right and not a political one.

Thus, presently, the States can move the Supreme Court under Article 131 if any legal right derived from any statue or the Constitution of India is infringed. Further states cannot question the legality of central law on a political or ideological basis.