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Fiscal Hurdles

Allegations by southern states that the centre is playing politics with financial resources, leaving them in the lurch, have seen them approaching the top court for a resolution

Complaints and allegations from southern states regarding financial resources have escalated to court battles with the Union government, with each state facing a different issue. 

For Tamil Nadu, it is delayed or inadequate relief for natural disasters, with the centre playing politics on infrastructure projects and unfair deals in sharing of resources. For Karnataka, it is about lower devolution of central funds and non-payment of GST compensation. And for Kerala, it is about the Union government curbing borrowings.

Justice BR Gavai of the apex court, heading the bench hearing a petition from Karnataka requesting drought relief, addressed Attorney General R Venkataramani and Solicitor General Tushar Mehta, both appearing for the Union government, and said: “Let there be no contest here between the Union and the State… We are seeing various State governments having to appear in court.”

Tamil Nadu accused the centre in the Supreme Court of treating the people of the state in a “step-motherly” manner by withholding the release of disaster relief funds totalling nearly Rs 38,000 crore to help residents cope with the twin tragedies of cyclone Michaung and unprecedented floods in its southern districts. 

Kerala also brought an unprecedented lawsuit directly before the Supreme Court, accusing the centre of unlawfully interfering with its net borrowing limitations and driving it to the verge of a financial emergency. 

Meanwhile Karnataka said that the centre had not complied with its request for financial assistance to deal with a “severe humanitarian crisis”. The state had requested Rs 18,171.44 crore through the National Disaster Response Fund (NDRF), but received no response. This was six months ago. According to the plea, the state’s overall estimated loss from crop destruction was Rs 35,162.05 crore.

The state, represented by counsel DL Chidananda, claimed that the extreme drought it was experiencing was having an impact on the lives of its citizens. “A total of 223 out of 236 taluks were deemed drought-stricken for the Kharif 2023 season (the season begins in June and ends in September); 196 taluks are classified as badly impacted, and the remaining 27 are classified as moderately afflicted. The state of Karnataka reported that its deficit rainfall in June was 56%, the lowest level in the state’s 122-year history,” he said.

The state government had submitted memoranda regarding drought relief: Rs 4,663.12 crore for crop loss input subsidy; Rs 12,577.9 crore for free relief to families whose livelihoods have been severely impacted by drought; Rs 566.78 crore for addressing the shortage of drinking water and Rs 363.68 crore for cattle care.

Article 21 of the Constitution guarantees the fundamental rights of its citizens, which the State is obligated to uphold. In its plea, Karnataka claimed that the central government’s decision to withhold financial support from the state “ex-favorably violates the fundamental rights of the people of Karnataka guaranteed under Articles 14 (right to equality) and 21 (right to life) of the Constitution”. The state said that the centre’s actions violated the National Disaster Response Fund, the State Disaster Response Fund, the Manual for Drought Management and the Guidelines on Constitution and Administration of the State Disaster Response Fund. As per the Manual for Drought Management, the centre needed to make a final determination about NDRF support to a state within a month after receiving the Inter-Ministerial Central Team (IMCT). But nothing had occurred, the state said.

Despite the IMCT team having visited various drought-affected districts of Karnataka from October 4 till October 9, 2023, and making a comprehensive assessment, the centre had not taken a final decision on assistance to the state, the petition said.

In another case in March, the Supreme Court observed and advised the centre and the Kerala government to iron out their differences on the cap on net borrowing by the state. The apex court was hearing a suit filed by the Kerala government accusing the Union of India of interfering in the exercise of its “exclusive, autonomous and plenary powers” to regulate the state’s finances by imposing a ceiling on borrowing. Appearing for Kerala, senior advocate Kapil Sibal said the state was left with no choice, but to agitate on the issue. Sibal said he wanted to inform the Court with a “heavy heart” that though the issue needed to be resolved in the spirit of cooperative federalism, it had not.

The centre said that as Kerala had challenged its power to impose conditions on borrowing, the state’s request for additional borrowing can only be considered after it had withdrawn the suit. However, the bench said: “You cannot say withdraw the suit that is a constitutional right under Article 131 (of the Constitution).” The apex court said the matter requires “very serious consideration because fiscal mismanagement of the states is an issue with which the Union must be concerned because ultimately it has its own impact on the nation’s economy”.

In an original suit filed under Article 131, the Kerala government said the Constitution bestows fiscal autonomy upon states to regulate their finances under various articles, and the borrowing limits are regulated by a state legislation. In a note submitted before the top court, the centre had said that uncontrolled borrowing by states would affect the credit rating of the whole country, and that the fiscal edifice of Kerala has been diagnosed with “several cracks”.

According to the Kerala government, there had been a fall of Rs 57,400 crore in the state’s receipts from the centre, a shortfall of Rs 12,000 crore in GST compensation, another cut of Rs 8,400 crore in this year’s revenue deficit grant and a fall in Kerala’s eligible borrowing limit to Rs 28,830 crore from the Rs 39,626 crore it expected.

Tamil Nadu too has its grouses against the centre. Chief Minister MK Stalin accused the centre of exploiting its powers under Article 293 of the Constitution to severely limit the borrowing capacity of states. “The prior consent from the Union government, mandated by this section, has been converted into a restrictive tool to limit deficit financing.” He asked why the centre had pegged the state’s gross domestic product growth for calculating net borrowing ceiling at a mere 8% despite Tamil Nadu achieving approximately 15% nominal growth in recent years. He also questioned the imposition of conditions for funding the losses of state-owned electricity distribution companies. He also raised “the deliberate delay” in approving infrastructure projects such as the Chennai Metro Rail Phase-II.

Union Finance Minister Nirmala Sitharaman had refuted claims that the centre was withholding funds to non-BJP ruled states. The matter was raised by Adhir Ranjan Chowdhury, the Congress MP from West Bengal, whose government led by the TMC has staged several protests on the issue. Sitharaman said the devolution of taxes was based on the recommendations of the Finance Commission, and she had no discretionary powers. “This apprehension that some states are being discriminated against is a politically-vitiated narrative.”

She added: “This demand has been coming for a while, so the 16th Finance Commission may look into it, but the outcome is difficult to gauge. Whatever the Finance Commission has recommended in the past, the Union government has accepted, including the increase in the percentage of devolution.”

“Since states are responsible for over 60 percent of general government expenditure, lower than the recommended share of states in central taxes coupled with cess and surcharges will remain an important issue before the 16th Finance Commission,” according to Paras Jasrai, Senior Analyst, India Ratings.  

—By Abhilash Kumar Singh and India Legal Bureau

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