Context:

• The states are urging the centre to work in the spirit of cooperative federalism.

Why so?

• There is a huge gap between what the 14th Finance Commission promised to the States and what they have received.
• According to a study by the Centre for Policy Research, there is a ₹6.84 lakh crore gap between what the 14th Finance Commission promised to States and what they have received.

Widening gaps

Delayed payments

• The 14th Finance Commission promised that it would devolve more finances to the States from the divisible tax pool i.e. 42 percent. In reality, tax devolution to States has been consistently below 14th Finance Commission projections.
• Economic slowdown, caused primarily by a shortfall in GST collections is the primary reason.
• The Centre owed States about ₹35,000 crore as GST compensation for December 2019 and January 2020, which was only paid in June 2020 after a delay of more than five months.

Series of cesses

• The Centre has imposed a series of cesses, which are not part of the divisible pool and not shared with the States.
• Despite this, the Centre’s fiscal deficit exceeds the consolidated State deficit by 14%.

Lack of centre’s support

• According to a State Bank of India report, the collective loss to GSDP due to the pandemic is ₹30.3 lakh crore or 13.5% of GSDP.
• States are being required to spend more to help common citizens and save livelihoods while the Centre is providing almost negligible support.
• For example,

To cope up with the devastating effects caused by Cyclone Amphan, the worst cyclone in Bengali memory,  the government in Kolkata immediately released ₹6,250 crore however the Centre has offered just ₹1,000 crore.

Directives to cut down expenditure

• Following the pandemic, the Ministry of Finance has asked all Union Ministries to cut expenditure. The immediate impact is being felt by States, and grants-in-aid are drying up because of which crucial rural development programmes have come to a standstill.
• For example,

The Union Rural Development Ministry is supposed to transfer Rs. 4,900 crore to West Bengal in 2020-21 for projects to be undertaken by panchayati raj institutions which has not happened till now hampering the projects.

FRBM provisions

• As per provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, the Gross State Domestic Product (GSDP) can actually accommodate a fiscal deficit of 3%. 
• It is difficult for the state government to contain within limit at this crucial time with negligible support from the centre.
• The FRBM has an “escape clause” that allows for a one-time relaxation of the fiscal deficit threshold upto 0.5% in a time of exigency.
• The escape clause has been utilised by the Centre but it has proven woefully insufficient in addressing the current crisis.

Conditions to raise fiscal deficit limit

• In theory, the Centre has raised the fiscal deficit limit for States, under the FRBM, from 3% to 5%. But only 0.5% of this rise is unconditional. 
• The remaining 1.5% is dependent on fulfilling certain unrealistic and impractical measures  including privatisation of power distribution and enhancing revenues of urban local bodies.

Way forward:

• The rigidity of the FRBM has to be revisited.
• It should allow for greater flexibility and consultation as to when and how the “escape clause” can be applied.
• Upholding the spirit of cooperative federalism can help states to withstand difficult times such as COVID-19.