Erosion of fiscal federalism in the times of Covid-19

As India’s battle against Covid-19 completes two months, worrisome trends in Centre-State relations have come to the fore. With Prime Minister Narender Modi steamrolling policies on cash-strapped States, the fiscal demands of fighting the current pandemic have put extraordinary pressures on State finances. From imposing pan-India policies on subjects strictly within the States’ domain, prohibiting sale of alcohol, withholding of GST compensation, denial of State disaster funds from the benefit of CSR contributions to the suspension of MPLADS, the Modi government has ensured a consolidation of fiscal powers not only threatening fiscal federalism, but the very foundations of the federal structure evolved over the past decades.

Centralisation trend

With GST collections drained as a result of the lockdown, and the Covid-19 pandemic burdening their responsibilities and stretching financial capacities, the condition of the States is desperate, to say the least. Despite their repeated demands, the Centre has still not released outstanding GST compensation of about ₹30,000 crore to the States. With GST dues of States such as Karnataka (₹8,000 crore), Punjab (₹4,000 crore), Kerala (₹3,000 crore), Maharashtra (₹16,600 crore) pending, even the timely payment of salaries and pensions looks difficult, without immediate Central intervention.

The trend towards centralisation is also evident in the Terms of Reference (ToRs) for the 15th Finance Commission (FC), which, amongst other things, asks the FC to examine whether revenue deficit grants should be provided at all for the State Governments (ToR 5), and to recommend measures for controlling “populist measures by the States” [ToR 7(viii)]. Such mandates not only compel the FC to go beyond its constitutional mandate, but also reveal how non-elected bodies are being misused to constrain the fiscal space of the States. This not only weakens the foundations of fiscal federalism but also runs against the tenets of cooperative federalism.

The imposition of a pan-India lockdown with virtually no consultation with State governments, and all-pervasive notifications and guidelines issued by Union, have not only paralysed State finances, but have significantly undermined concepts of federal cooperation. The notifications issued by the Central Government on March 24 (the first lockdown) and April 15 (extended lockdown) are in the nature of rag-bag executive orders covering fields strictly falling within the domain of the State (7th Schedule of the Constitution). This includes the State government offices (Entry 41), hospitals (Entry 6), shops and markets (Entry 28), industries (Entry 24), agriculture (Entry 14), alcohol (Entry 8) etc.

Even in subjects where the States have significant financial stakes, such as liquor, they have chosen to submit to the Central government diktats rather than exercising what was already constitutionally guaranteed to them. While it is only recently that some States have started opening up liquor vends, the long wait has made them financially weaker.

Financial crippling

The Centre’s recent unilateral decision to suspend the MPLAD Scheme for two years and divert the money to the Consolidated Fund of India is yet another instance of anti-federal centralisation of financial resources. In times such as the present health crisis, local-level customised interventions, which the MPLAD Scheme allows for, could have filled the gaps in relief work left by the Central and State governments. Exclusion of the CM and State Covid relief funds from CSR contributions by way of a mere “circular”, containing FAQs issued by the Ministry of Corporate Affairs, is another example of attempts to divert funds from the States to the Centre. This circular is not only illegal, in so far as it is ultra vires the Companies Act, 2013, but is also unconstitutional as it makes an arbitrary distinction between two identical entities set up for the same statutory purpose, ie the PM Cares Fund and the State Funds, to fight Covid-19. Policy experts have emphasised that the battle against Covid-19 also needs a decentralised fight and local tailor-made interventions; such attempts by the government are crippling the response of the State governments to deal with the crisis.

The current scenario has seen the bypassing and disregarding of elected State governments by the Centre, with the Prime Minister interacting with local politicians and the Centre sending powerful bureaucrats to monitor and admonish recalcitrant State governments. The loss of national dominant politics post the 1990s made India shift towards a more real federalism, as enshrined in the Constitution. Four decades of healthy federalism has much to show for in terms of an increased strength in India’s sense of security and integration. However, aided by Modi’s immense popularity, the Central government’s methods and policies demonstrate a reverse-shift which is increasingly reminiscent of an era pre-1990s.

Utilising a moral justification in the Covid-19 crisis, the Centre is attempting to strengthen its iron grip on State finances. A tug of war between the Centre and the State over finances is already underway. This is not only about money and who controls the purse strings, but about the very basis of the federal constitution of India.

The writer is an advocate practicing at the High Court of Delhi. Views are personal