After Karnataka, Kerala takes on Modi govt over fiscal regime

Fiscal federalism has emerged as a crucial issue for southern states, and with general elections round the corner, it is all set to become a serious topic of debate, in the coming days. While the Karnataka government has already staged a protest in the national capital, Kerala Chief Minister Pinarayi Vijayan is preparing to lead a similar demonstration. His Tamil Nadu counterpart MK Stalin has pledged his support. Telangana CM Revanth Reddy has joined the chorus.

Despite the lack of enthusiasm from the Congress in Kerala for the protest, it appears that southern state governments are unified in resisting what they perceive as financial coercion by the Centre. This unity not only addresses the fiscal issues but also serves as a strategic move ahead of the upcoming elections.

Not about North–South divide

“This isn't about a North–South divide or any regional differences. Our focus is on advocating financial federalism and resisting the encroachment of the central government on the rights of states, whether they're in the North or South. With non-BJP governments now in power in several southern states, we recognise the shared challenges we face and are prepared to unite in addressing them. We appreciate the Karnataka government, currently led by the Congress, for acknowledging our concerns, said Pinarayi ahead of the proposed protest in New Delhi.

“While we initially discussed this issue with the opposition in Kerala, they ultimately decided not to join us after internal deliberations. Despite this, we've extended invitations to all non-BJP state governments to join our protest. While Congress leaders may not attend, we anticipate participation from leaders of other parties. In fact, we've already received confirmation from the DMK,” he added.

Karnataka vs Kerala Congress

In a move that might embarrass their Kerala state unit, the Karnataka Congress has echoed the sentiments expressed by the Kerala Chief Minister, despite the Kerala state unit declining to join the protest.

“We stand in solidarity with the Kerala government against the Union government, as it mirrors the neglect we experience from the BJP government. The Kerala CM's appeal for our support is justified, and we must unite against the suffocation of opposition-ruled states by the Centre. Tax disparities and grant allocations underscore the blatant challenge to federalism. Let's set aside political differences and join forces to confront this issue collectively,” said DK Shivakumar, the Deputy Chief Minister of Karnataka, during the sit-in protest at Delhi.

DMK to lend a helping hand

Stalin on Tuesday (February 6) expressed solidarity with Kerala. Assuring DMK 's cooperation in Kerala's ongoing litigation in the Supreme Court, Stalin also pledged support to the protest.

The LDF government in Kerala feels that the central government seems to prioritise the 17 states where the BJP or allies are in power, neglecting those states not aligned with the NDA, giving them a favourable differential treatment while imposing punitive measures on others.

Kerala's primary concern revolves around the significant reduction of its borrowing limit by the Union government, a decision that has severely crippled the state's financial stability.

Curtailment of borrowing limits

In 2022, the Union Finance Ministry imposed new conditions affecting state borrowing limits, overturning recommendations of the 15th Finance Commission. Loans taken by state-owned enterprises, including Kerala Infrastructure Investment Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL), are now included in state borrowing limits retroactively. According to the state government, this move resulted in a Rs. 12,000 crore reduction in Kerala's borrowing limit for the 2021–22 financial year, with further reductions in store. The methodology for calculating borrowing limits, which includes public account amounts over a three-year period, inadvertently increases loan amounts and reduces borrowing limits. These measures appear to intentionally exert financial pressure on Kerala, violating constitutional principles.

“The fact remains that the central government has no constitutional authority to determine the borrowing limits of the states. These measures, deemed unconstitutional and contrary to the recommendations of the Finance Commission, have been implemented through the exercise of powers lacking legal standing,” said Pinarayi.

The state has already challenged the Union government in the Supreme Court on the issue.

Dwindling share in the central pool

Central grants, a vital component of centre–state fiscal relations, supplementing tax revenues as per the Finance Commission's recommendations, are another bone of contention. The state government feels that the intricacies of centrally sponsored schemes, dictated by Union ministries, challenge federalism principles.

Grants and similar allocations constitute less than 20 per cent of the Finance Commission's funding, with 80 per cent coming from taxes. Kerala’s share was reduced from 3.8 per cent of the divisible pool during the 10th Finance Commission to 2.5 per cent during the 14th Finance Commission. Subsequently, during the 15th Finance Commission, it was further brought down to 1.9 per cent.

Making Centre’s branding a precondition

According to the government, the case of Livelihood Inclusion Financial Empowerment (LIFE), the mission of which is to provide employment to all homeless people in the state, highlights the disparity in awarding grants, with only 30.38 per cent of households receiving nominal central assistance. The state covers the remaining costs, spending as much Rs. 17,104.87 crore. Despite this, the Union Finance Ministry demands branding of houses under the LIFE Mission with the central scheme's name, leveraging the central funding. Kerala is all against branding of these houses, asserting housing as a right, not a gift, resisting undue branding and advocating for fair fiscal practices.

“Branding state-run schemes as central initiatives, while completely excluding the states in which they contribute at least 40 per cent and oversee implementation, as well as imposing financial sanctions on states for not adhering to branding requirements, amounts to a challenge to our democratic system,” said the Kerala CM.

Denial of special grants

Kerala's share of the nation's revenue has notably declined, despite some relief from revenue deficit grants between 2020–21 and 2023–24. However, this relief was insufficient and is now dwindling. The central government, through the 15th Finance Commission, explicitly excluded the allocation of special grants to states grappling with revenue deficits, exacerbating Kerala's financial challenges.

On the other hand, the opposition led by Congress in Kerala holds the left government equally responsible for the fiscal crisis the state is facing.

The Leader of Opposition VD Satheesan said they did not agree with the Left narrative that the Centre was to be blamed for all of the financial problems of the state. “Central policies were only one of the reasons for the financial troubles of Kerala as mismanagement and administrative failures of the ruling Left government also contributed to it,” said Satheesan.