The NDA government has opened a new battle front with the states by imposing conditionalities for additional borrowings. This move is largely seen as an attempt to undermine the federal spirit and usurp the powers of the states.
The southern states — Tamil Nadu, Kerala, Telangana, and Andhra Pradesh — and West Bengal have raised objections over the central government linking the increased borrowing limits for states to the implementation of a set of four conditions pertaining to reforms in the power sector and municipalities, ease of doing business norms, and completion of the ‘One Nation, One Ration Card’ linkage.
At present, states are allowed to borrow loans to the tune of 3 percent of the Gross State Domestic Product (GSDP). This cap is prescribed by the Fiscal Reforms and Budget Management (FRBM) Act.
The states have been asking for increasing this limit to 5 percent to enable them to go for more borrowings from the market.
Nod with a rider
While unveiling the fifth tranche of the economic stimulus package, the Union Finance Minister Nirmala Sitharaman said the states would be allowed to borrow up to 5 percent of GSDP — or an additional ₹4.28 lakh crore — from the markets. But, the nod came with a rider that the states must fulfil the conditions for borrowings beyond 3.5 percent.
They must implement “One Nation, One Ration Card” scheme, improve ease of doing business, bring in reforms to make state-owned power distribution firms more profitable and shore up urban local body revenues.
For taking steps to meet each of these conditions, they can borrow an additional 0.25 percent each. The remaining 0.5 percent borrowing will be subject to them fully meeting three out of the four conditions.
“Are we beggars?”
“The Centre has reduced the states to the status of beggars,” Telangana Chief Minister K Chandrasekhar Rao fumed.
Raising objections over the conditionalities, he said his government would neither implement the reforms proposed by the Centre as part of the draft Electricity (Amendment) bill nor was it willing to impose additional municipal taxes in the name of reforms.
“The states are not subservient to the Centre. We are accountable to our people. We should have compete freedom to borrow from the market. How can the Centre impose conditions?” KCR, as the Chief Minister is popularly known, said.
At a time when the finances of states were paralysed due to the COVID-19 global pandemic, the state governments wanted funds to reach them so that they could help people in different forms. “This is a very cruel package. It is fully in a feudal policy and dictatorial attitude. We fully condemn this. This is not what we asked for,” he said.
The Chief Minister said he felt anguished and the way the Centre was wielding control over states was against the spirit of federalism. “The Prime Minister spoke about cooperative federalism. But, this has proved that it is totally hollow and bogus,” KCR said.
Telangana is already leading in the country in terms of Ease of Doing Business parameters, meeting the condition set by the Centre for availing the 0.25% hike in the borrowing limit. It has also fully implemented the ration card portability.
The neighbouring Andhra Pradesh has also opposed imposition of conditionalities for availing additional borrowings and said the states should have greater flexibility and freedom to decide on such matters.
In a letter to Prime Minister Narendra Modi, Tamil Nadu Chief Minister E Palaniswami termed the conditions as “unreasonable and needlessly onerous” and said they would constrain the state government from finding funds for meeting essential expenditure.
“The states sought the additional borrowing limit, beyond 3 per cent of GSDP, mainly because of the significant shortfall in revenues due to the lockdown imposed in the wake of the COVID-19 pandemic. There are also large additional expenditure commitments,” he said.
These borrowings, he said, have to be repaid by states from future tax revenues and are not grants from the central government.
“Aggressively pushing a reform agenda on which a consensus is yet to be developed at a time when states have approached the Centre for additional borrowing out of sheer desperation is not in keeping with the spirit of cooperative federalism,” the chief minister said.
“Linking of the central government’s power under Article 293 (3) of the Constitution to permit additional borrowing by states to conditionalities is unprecedented,” he said.
In the letter, Tamil Nadu specifically opposed the power distribution reforms criterion, calling it a politically sensitive matter. The state, Palaniswami said, is opposed to doing away with free power supply to farmers.
“Such conditionalities are not only against the principles of federalism but also set a bad precedent,” Kerala Finance Minister Dr T M Thomas Isaac told The Federal.
Though Kerala was in a position to comply with most of the conditions, it was opposed to the conditions as a matter of principle.
“This implies that they might impose more stringent conditions in the future. The states are paying back the principal amount with interest. The states should have the freedom to prioritise the expenditure,” he said.
Dubbing the conditionalities as “undemocratic”, the Finance Minister said, ”Similar suggestions were made to the 15th Finance Commission but it did not agree. It did not recommend any conditions on the borrowing limits of the states.”
Isaac alleged that the Centre was using the pandemic as an excuse to impose conditions on the state’s market borrowing.
West Bengal Chief Minister Mamata Banerjee also called it an assault on India’s federal structure.
“The increase in the FRBM is an eyewash. It has been increased from 3 percent to 5 percent on paper, but we will only get 0.5 percent. For the rest 1.5 percent, the states have to do away with the federal structure. We have decided not to bow down like this and to protect the federal structure. We will protect our rights,” she said.
Terming the overall financial package announced by the Centre as a “big zero”, she said the state did not get any financial help from the Union government in its fight against the pandemic.
“If I adhere to those conditions, then the state’s federal system is gone. If we don’t accept them, we will not get the relaxation. I think it is better not to bow our heads and carry on…” she told a press conference.
“I will not allow the Centre to take control of our power sector… I will not impose additional taxes on my urban population. They (Centre) want us to give away even the public distribution system. I can’t do it,” Banerjee asserted.