Stalin writes to Pinarayi on fiscal federalism, need for ‘resisting’ Centre’s control

A day after Basavaraj Rayareddi, the economic adviser to Karnataka Chief Minister Siddaramaiah, mooted the idea of an Economic Alliance of Southern States, Tamil Nadu Chief Minister MK Stalin has written to his Kerala counterpart Pinarayi Vijayan, appreciating “Kerala’s commitment to preserving fiscal federalism” and calling for the need of resisting the Centre’s restrictive policies “by likeminded progressive states”.

On Monday (January 6), Rayareddi explained that he has mooted the idea because the southern states “contribute a greater share to the national economy” and yet their taxation gains are being distributed to “non-yielding states” in North India while they are receiving only a “pittance” compared to what they are giving the Centre.

“Union’s attempt to stifle states”

On Tuesday (January 7), Stalin wrote to Vijayan, appreciating his efforts to draw the Supreme Court’s attention to the “pressing issue of the Union Government’s attempts to stifle State Governments by exercising arbitrary and discriminatory control over their deficit financing”.

“Although this has been happening for quite some time, the situation has rapidly deteriorated in the last few years and there is a clear consensus emerging amongst progressive State governments that such indirect control over state finances needs to be done away with,” Stalin’s letter mentions.

“As rightly pointed out by you, the subject of Public Debt for financing the public expenditure of States is within the exclusive purview of the State Legislature as per the Constitution of India. However, the Union Government has been misusing its powers under article 293 of the Constitution of India to restrict the borrowing space of the States,” Stalin points out in the letter.

The letter goes on to mention that the Centre has converted the requirement for prior consent “into a restrictive tool to limit deficit financing beyond the limits prescribed by the State FRBMs”. Therefore, the “fundamental principle of fiscal federalism envisioned by the Constitution makers is under grave threat”.

Three cases in TN

Stalin goes on to list the cases in Tamil Nadu, where “such steps have caused a significant dent in mobilisation of funds for State initiatives”. First, for “2023-24, the Union Government has fixed the GSDP growth for calculating the net borrowing ceiling at a mere 8%, despite the state consistently achieving around 15% nominal growth in the last two years. This has resulted in a loss of Rs.6,000 crore in borrowing space in the current year”.

Second, “The mandatory condition of funding gross losses of State DISCOMs under the guidelines for additional borrowing for power sector reforms has forced Tamil Nadu to provide Rs.17,111 crore to TANGEDCO in the current year”. The letter says this has severely constrained the state’s fiscal space this year and is likely to affect it in future too.

Third, the “intentional delay in approving the Chennai Metro Rail Phase-II project as a Central Sector project has resulted in the entire debt of Rs.33,594 crore for the project being included within the State’s net borrowing ceiling”.

The GST spanner

Stalin’s letter adds that the Centre is pushing these “discriminatory and unconstitutional attempts” when the states’ fiscal autonomy has already been “seriously curtailed by the implementation of GST”. The Tamil Nadu government is facing a revenue shortfall of Rs 20,000 crore per annum compared to the pre-GST regime and the Centre has been refusing to extend the compensation regime, he alleges.

According to Stalin’s letter, the Centre’s intent seems to be to cripple “states’ ability to raise resources and fund crucial developmental initiatives”. “This needs to be resisted by likeminded progressive states,” he states.

The letter ends with Stalin expressing his “full support” to the Kerala government’s “commitment to preserving fiscal federalism” and the readiness of the Tamil Nadu government in extending its cooperation to “address this crucial challenge”.

Stalin's X post

During the day, Stalin also posted on X about his assurance to Vijayan that the Tamil Nadu government will fully support the Kerala government’s petition in the Supreme Court against the interference into state governments’ fiscal autonomy by the Union government.

He added that, in turn, the Kerala Cabinet will participate in the protest by DMK in Delhi on February 8. His asserted in the tweet that the “protest will not end until we succeed in winning the autonomy of the states”.