States in financial doldrums

During the period of 2020-25, around which the Recommendations of the Finance Commission are to implement, it is estimated that the Central revenues are expected to be around 175 lakh crores. It is quite unsure as to the time period that recession may last in the country. As long as the process of paying the cess to the central government, while, the states are at loss, it is quite difficult to balance the country’s economy.

Hyderabad: Recession, of late, has been playing a dramatic role in the lifestyle of the citizens, thereby pushing the economy of the country down the lane. Numerous professionals and workers have lost their employment, which has caused the families to end up in a financial crisis. This crisis is in not helping the country’s economy in any way, as the spending capacity of the citizen has come down drastically. People are no longer able to or showing interest in making purchases, through which the government exchequer earns tax money (GST).

Big enterprises have not been able to take up any product manufacture, thus creating a huge gap in the demand and supply curve. Thus, the GST sales have hit an all-time rock bottom, due to which the states and central government have ended up in severe financial crisis.

As per the GST Act, the central government shall have to reimburse the differential amount to the states and centrally governed UTs, which have been able to collect less than 14% of state taxes. The central government pays the differential amount to such States / UTs, on a bi-monthly basis. During the months of June/July, this year, the central government claims to have paid around 28 crores to the states.

Further, an amount of Rs 40 crores was expected to be received in the month of October, as due for the months of August / September, which is yet to materialize and the non-receipt of the same is pushing the states into a panic. The state of Kerala, which has the option of utilizing an overdraft facility, have crossed even the eligible loan criterion, which has left the state administration in oblivion.

Post-implementation of GST, 5 states- New Delhi, Rajasthan, Punjab, Kerala and West Bengal have, for the first time, been demanding a meeting of the GST Council, in order to revisit the Terms of Reference drafted earlier. The current status wherein the corporate taxes are also not received by the states, thanks to the recession effect, the states are further seeking a strong mechanism to be put in place so as to address such issues, which are beyond the control of the states.

This year, it is expected that a decrease of around 2 lakh crores of rupees in the central government revenue in the form of gross taxes. It was hoped that the 15th Finance Commission report may act the saviour role in bridging the economic crisis. However, if we are to go by the various news spread, that the time period of the release of the commission report under the aegis of NK Singh, is going to be delayed, the states are further at loss.

The Fourteenth Finance Commission set up in the year 2015 has recommended and accordingly the then NDA Government has agreed to increase the share of all the states and UTs in the collected central taxes to 42%. However, the Fifteenth Finance Commission, set up in the year 2017 has recommended and accordingly the share of the states has been brought down.

The Modi Government has, reasoned the ever-increasing functional responsibilities of the central government and wished on decreasing the earlier decided 42% of the state share. Previously, the BJP-led state of Gujarat had time and again proved that even 42% of the share was of not a great use to the state revenue base. The central government has been advocating that the need for taking care of the defence and national security issues of the country, is causing high pressure on the central exchequer, as stated to the Finance Commission.

In order to address this requirement, the central government, through the Defence Ministry has suggested that the states should also be made part of this responsibility. Thus came into being the proposal of ‘Suraksha Nidhi’. Under this scheme, it is proposed that certain amount out of the total revenue received shall be put aside, the balance of which will be divided amongst the states. Serious debates are still in progress on this proposal.

It is a further blow to the state finances which are supposed to be taking care of the economic status of the state citizens, especially in times of the current recession.

The Prime Minister Financial Advisory Board Chairman has been bringing up a lot of debatable issues such as – ‘When the state health requirements are being considered for and by the central government, why the states cannot be made part of the defence and security of the Nation?’ however the ground reality at state level defers with this statement.

While the Central Government enjoys the maximum share of the taxes collected, the implementation of all the developmental programs lies on the shoulders of the State Government. In order to envisage better financial federalism, the Constitution aimed at rational disbursement of proprietary funds amongst the states through setting up of finance commissions for every five years.

The central government has been increasing its revenue through levying Cess and surcharges over and above the divisible fund limit approportioned for the States respectively. Since decades, the centrally sponsored schemes are being linked with the state funds thereby making the states responsible for the implementation of such schemes, both – financially and administratively, while the authority of the scheme solely lying with the central government.

During the regime of the Modi Government, the number of centrally sponsored programs has decreased. However, the pressure on the State exchequer has been increasing drastically. Adding to this the failure of receipt of the required funds from the centre is leaving the state administration in the doldrums.

During the period of 2020-25, around which the Recommendations of the Finance Commission are to implement, it is estimated that the Central revenues are expected to be around 175 lakh crores. It is quite unsure as to the time period that recession may last in the country. As long as the process of paying the cess to the central government, while, the states are at loss, it is quite difficult to balance the country’s economy.

Further, the central government has added the additional responsibility of designing and defining the populous schemes on the shoulders of the 15 th Finance Commission. Now it is up to the rationalized view of the Finance Commission to see that the schemes are designed to meet the requirement of the state/country population instead of ending up as just another popular scheme, to suit the requirement of a vote bank political party!!

Unless otherwise, it will be difficult for the state government to rise out of the severe financial doldrums and stand up for its people and their future!!