'Cooperative federalism faces huge crisis': What Kerala Conclave of non-BJP state FMs want

The conclave of non-BJP state ministers held in Thiruvananthapuram on September 12 marked a significant moment in the ongoing discourse surrounding federalism and fiscal relations in India.

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The meeting, attended by ministers from Telangana, Tamil Nadu, Karnataka, Punjab and Kerala, was primarily focused on the impending recommendations of the 16th Finance Commission.

The discussions highlighted the growing concerns over the imbalances in Centre-State fiscal relations and the need for a fair division of resources among states.

Kerala CM’s warning

Kerala Chief Minister Pinarayi Vijayan said the historical context of the conclave, recalling a similar gathering that successfully influenced the Terms of Reference (ToR) of the 15th Finance Commission. He expressed satisfaction that the common stand taken at that time led to significant changes in the recommendations of the Commission.

Vijayan stressed that the current ToR for the 16th Finance Commission should not be overly expansive, as this could restrict its ability to function effectively. “The Finance Commission should not be tied down with an expansive ToR, which would restrict its degrees of freedom,” he said.

Cut surcharges, cesses

A critical point raised by Vijayan was the increasing trend of surcharges and cesses, which now constitute about one-fifth of the Union's Gross Tax Revenue. He argued that this trend leads to a shrinking divisible pool of taxes, which directly affects the states' share of resources.

He urged the Commission to consider this trend when making recommendations. “The 16th Commission needs to factor in this trend in surcharges and cesses.”

Karnataka for fiscal equity

This point resonated with other ministers, including those from Karnataka, Tamil Nadu and Punjab, who echoed similar concerns regarding the fiscal autonomy of states post-GST implementation.

Karnataka revenue minister Krishna Byre Gowda emphasised the fundamental need for justice and equity in the distribution of resources. He articulated that Karnataka, despite constituting only 5 per cent of the Union's population, contributes 8.4 per cent to the national GDP. This disparity underscores the broader quest for a federal structure that recognizes and reciprocates the contributions of states.

Byre Gowda stated: “We do not demand equal reciprocation. We are willing to share what we have with others who may not have what we have. But we must do well also.”

This sentiment reflects a desire for recognition of the economic contributions of states, especially those that perform well.

The conclave witnessed a unified demand from the participating states for an increase in their share of the divisible pool from 41 per cent to 50 per cent. This call for a higher share is rooted in the persistent vertical fiscal imbalances that exist between the Union and the states.

Heed interests of states

Byre Gowda highlighted the need for capping cesses and surcharges at 5 per cent of the gross tax revenue, suggesting that any excess should be redirected to the divisible pool. He remarked: “We have recommended that anything above it should become part of the divisible pool.”

The challenge of balancing the interests of states with varying levels of development was a recurring theme. Vijayan noted that the Commission must delicately balance the needs of states with low per capita income against those that have achieved significant developmental milestones.

India’s fiscal federalism

He stated: “The 16th Finance Commission has the task of delicately balancing the interests of the states which have a low per capita income and a larger share of population and others which have achieved the aims of the National Population Policy, 1976.”

This balancing act is crucial for ensuring that all states can effectively address their developmental challenges.

The discussions at the conclave reflect a broader concern regarding the state of fiscal federalism in India.

Subordinate federalism?

Kerala Finance Minister KN Balagopal articulated that cooperative federalism was facing a crisis, increasingly resembling “subordinate federalism” or “coercive federalism.” This perspective highlights the growing sense of inequity in financial relations between the Centre and the states, which could hinder overall development and exacerbate regional disparities.

"The framers of our Constitution never envisioned centralized financial control. The Finance Commission must ensure a fair and equitable distribution of resources between the Centre and the states," said Mallu Bhatti Vikramarka, the deputy chief minister of Telangana.

Congress in Kerala backs stand

Tamil Nadu finance minister Thankam Tennarasu and his Punjab counterpart Sardar Harpal Singh Cheema also resonate the same sentiments.

It was significant that Kerala leader of opposition VD Satheesan, despite their differences with the ruling CPI(M), stood with the government urging for more allocation to states like Kerala which are at the risk of disasters due to climate change.

Review resource allocation

The conclave also served as a platform for experts and economists to provide insights into the fiscal architecture of the country. The presence of former chief economic advisor Arvind Subramanian added depth to the discussions, as he emphasised the need for a re-evaluation of the criteria used for resource allocation among states.

The state ministers have decided to follow up the conclave with another meeting, to be convened in Bengaluru soon. Previously, in 2020, finance ministers from non-BJP states held a similar conclave ahead of the visit of the 15th Finance Commission.

The outcomes of this conclave and the Centre’s response to it may very well shape the future of Centre-State relations and the fiscal autonomy of states in the years to come.