‘Fiscal federalism has collapsed; Centre’s decisions arbitrary’

AM Jigeesh New Delhi | Updated on April 28, 2020

Kerala Finance Minister K.M. Thomas Isaac   -  The Hindu

In the thick of battling the Covid-19 pandemic, the CPI (M)-ruled Kerala government gathered Opposition parties on a virtual platform to chart out a common course on livelihood issues and the economic crisis that is simultaneously unfolding. Kerala Finance Minister TM Thomas Isaac, a trained economist, told BusinessLine that India is facing an attack on economic federalism and there is urgent need for the States to combat the Centre’s increasing consolidation of fiscal power. Excerpts:

What was the urgent need for the States to get together at this time?

Every State is fighting independently with the Central government on more or less the same issues. There is a lot of debate on the same issues in the academia as well. But they don’t put their heads together.

Therefore, the only voice we hear is that of the Central Government. There is a lot of arbitrariness in the Centre’s decision-making. This is dangerous. There is an urgent need for more consultations, especially with the States which are at the forefront of battling the pandemic.

But the GST council has not been called even once since this crisis began. We thought we should be a catalyst in taking this discourse further.

When we are faced with a complex problem, a linear, unilateral approach such as the one exhibited by the Centre, is not creative.

Opposition parties need to put their heads together and formulate a more nuanced and well-considered approach in addressing the twin issues of lives and livelihood, to address health concerns as well as the deep economic crisis that is staring at us.

We need creative solutions not clapping hands and burning lamps. The Budget is irrelevant now. We need an alternative approach.

The crisis had begun even before Covid-19 arrived and the only solution the Centre came up with was corporate tax concessions which the big business had not even asked for!

In the midst of this crisis, all they have come up with is a niggardly ₹15,000 crore for the States.

But they don’t think twice before doling out ₹50,000 crore to share markets to address the mutual fund crisis. And there is no concrete plan yet to address the larger economic crisis that has knocked the migrant workers and the poor further to the bottom. We want to make it clear that we have an alternative position and we wouldn’t accept this as fait accompli.

Some Opposition leaders fear Financial Emergency. Do you agree?

There are reasons for this beginning with the arbitrary manner in which decisions are taken by the Centre. I’ll go back to demonetisation and the comical rationale that was put forth for such a drastic step. It had disastrous after-effects but that didn’t deter them. Decision-making at the Centre continues to remain arbitrary without even a modicum of consultative processes that should precede them. And what, may I ask, is the Finance Ministry doing? State Governments are on the brink of financial collapse but there is no help forthcoming, they’re not even doing the basic minimum and that leads us to believe that they’re finding alibis for imposition of a financial emergency. Fiscal federalism is already demolished and a financial emergency, we fear, will be its final death knell.

State Finance Ministers were specific in their mention of the FRBM Act and GST which have curtailed their fiscal space. What is your view?

With FRBM, I can guarantee that no State can have a public healthcare system. Kerala is financing health and education by running a revenue deficit. It is a fact that most States bring their revenue deficit to zero by not spending the money they have. They slot it in the Government of India securities. Till this crisis began, ₹1.5 trillion of State money was in the Government of India securities. Can there be anything more scandalous? States pay an average of 8 per cent interest and they put in the Government securities for a rate of 4.5 per cent. This is crazy. This is what FRBM is forcing the States to do. Kerala wants to build infrastructure and that requires additional borrowing. But the Centre does not allow that. FRBM severely curtails the States’ fiscal space.

As for the GST, Kerala being a consumerist State, the calculation was that Kerala will do well. The initial thinking when the idea of GST was mooted before the empowered committee on VAT headed by Ashim Dasgupta was that States would gain more fiscal space as tax base widens with the inclusion of service tax, secondly, we would be able to put a revenue neutral rate so that there is more revenue and thirdly, the committee recommended a range in which the States will be free to put the rate. Under VAT, already there were several limits. It became de jure once GST was established. But things have turned out quite differently. Centre has veto power in GST Council. On top of that, revenues are falling.

What is the impact of Covid-19 on Kerala specifically?

Immediate impact on Kerala will be terrible. We are expecting some five lakh migrants to come back. It may be higher. We opened a registration system yesterday. Within 24 hours, more than two lakh people registered. That’s the scale of return migration, which would mean reverse multiplier effect on Kerala economy. Remittances constitute around 30 per cent of the GSDP. This will have serious impact on macro economy of the State.

Published on April 28, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like