Kerala Govt Protests Against Centre: What’s The Tussle Over Fund Distribution To States? What The Law Says

The Kerala government, led by the CPI(M), is staging a protest at Jantar Mantar in New Delhi. This comes after the Karnataka government held a similar protest over the distribution of central funds.

Kerala alleges that the fiscal policies of the BJP-led government at the Centre are financially stifling the state. Chief Minister Pinarayi Vijayan, his cabinet colleagues, LDF MPs and legislators are likely to participate in the protest.

Here is a look at the issues.

Kerala claims that COVID-19 has made a curtailment of Rs 57,400 crore in the State Receipts in the current fiscal, and it is not getting its due share from the tax collected by the Centre. According to an RBI report on state finances, the Centre is to provide Rs 35 for every Rs 65 collected by the states on average.

But the Centre provides only Rs 21 against Kerala’s tax collection of every Rs 79. In other words, only Rs 21 out of Rs 100 is the Centre’s combustion. Uttar Pradesh gets Rs 46 out of Rs 100 from the Centre, while Bihar gets Rs 70 out of Rs 100.

Kerala says the state was deprived of a major source of revenue, Rs 12,000 crore this year, because of the cessation of Goods and Services Tax (GST) compensation from June 2022. After the GST was introduced in 2017, the Centre promised to ensure an annual tax growth rate of 14% under GST as part of resolving the loss of tax entitlements due to GST.

However, due to shortcomings in the implementation of the GST system, natural calamities and COVID-19, this growth rate has not yet materialised. The proposed GST compensation was terminated after five years, and Kerala wants the period extended.

In the divisible pool of tax collected by the Centre, which is to be devolved among the states, 3.87% was Kerala’s share during the 10th Finance Commission period.

This has come down to 2.5% in the 14th Finance Commission and to 1.925% in the 15th Finance Commission, causing a heavy fall in the state’s revenue. Kerala wants the Centre to consider second-generation development problems, lifestyle diseases, and the growing proportion of elderly in the population.

The Centre provides Special Capital Assistance to states in the form of a 50-year interest-free loan. However, Kerala feels that its guidelines are not practical. Kerala had submitted proposals for financial assistance under the scheme, but it did not comply with some norms, particularly the branding/naming of five central-sponsored projects in Kerala.

Kerala is against co-branding of these projects as the state is contributing 40% of the share in the majority of these schemes. This results in the delayed transfer of both Capex and Central Share of Centrally Sponsored Schemes. Despite taking up the matter at various levels, over Rs 600 crore under the National Health Mission and Rs 2,500 crore under Special Assistance for Capex have not been released so far.

The net borrowing ceiling of a state (the amount that it can borrow) for each financial year is determined by the Union Finance Ministry. As per the Centre’s guidelines, Kerala’s eligible borrowing limit is Rs 39,626 crore.

The State Budget was prepared considering the same. But Kerala has been allowed to borrow only Rs 28,830 crore till now. The borrowing limit was cut short mid-fiscal without any prior notice, based on the improper calculation of the public account balance, the state claims.

Kerala has undertaken off-budget borrowings mainly for the Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pension Limited (KSSPL). While KIIFB was floated in 2016 to mobilise funds for the state’s infrastructure projects, KSSPL, launched in 2018, was meant to do so for social security welfare pensions.

In 2017, the Union Finance Ministry stipulated that all such borrowings of state government entities will also be taken into consideration while setting the state’s borrowing limits. In short, the Union Finance Minister considers the off-budget borrowings, mainly of KIIFB and KSSPL, as the borrowings made by the state.