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Wednesday, February 19, 2025

Cooperative Federalism under the Modi Government: A Fair Approach to Tax Devolution

The opposition should address its role in state-level economic issues before criticizing tax devolution under Modinomics. In actuality, the amount of money the Center gives the states has grown.

In recent months, Opposition-ruled states have raised concerns over perceived inequities in the distribution of funds from the Centre’s divisible tax pool. They allege that their share of tax revenues is less than proportional to their contribution, claiming this disparity is unjust. However, a detailed examination of constitutional provisions, financial frameworks, and fiscal records under the Modi government refutes these claims and highlights the equitable nature of current tax devolution practices.

The Constitutional Framework for Tax Devolution

The financial relationship between the Centre and the states is clearly defined by Article 270 of the Indian Constitution. This article governs the distribution of net tax proceeds from the Union government to the states, based on recommendations from the Finance Commission (FC), constituted every five years under Article 280. Taxes shared include corporation tax, personal income tax, Central GST, and the Centre’s share of the Integrated GST (IGST).

The FC’s recommendations account for multiple criteria to ensure fairness, including population, area, income distance, demographic performance, tax effort, forest and ecology, and fiscal discipline. States also receive grants-in-aid, as advised by the FC. Notably, cesses and surcharges levied by the Centre are excluded from the divisible pool. These constitutional safeguards ensure transparency and fairness, leaving little scope for manipulation.

Opposition Allegations: Baseless and Politically Driven

The Opposition’s allegations of bias in tax devolution are both unfounded and politically motivated. Karnataka, for instance, has been vocal in accusing the Modi government of unfair treatment. However, these claims ignore key factors like fiscal discipline, which significantly influence tax devolution. Karnataka’s fiscal mismanagement under the Congress government’s “freebie culture” has driven the state into financial distress, undermining its credibility in demanding higher allocations.

Fiscal Discipline: A Crucial Determinant

Fiscal discipline is a cornerstone of economic stability and a major criterion in tax devolution. It encompasses prudent borrowing, budgetary buffers, judicious resource allocation, and macroeconomic stability. Karnataka’s Congress-led government, however, has exhibited financial recklessness by introducing populist schemes without sustainable revenue streams. The state’s borrowings have soared, with open market loans projected at Rs 96,840 crore for 2024-25, a dramatic rise from Rs 44,549 crore in 2022-23. Alarmingly, half of these borrowings are directed towards servicing existing debt.

Welfare vs. Freebies: Drawing the Line

While welfare measures are essential for social development, there is a fine line between genuine welfare and politically motivated freebies. Congress’s Gruha Lakshmi scheme, which provides Rs 2,000 per month to women heads of families, exemplifies the latter. Such schemes, although politically expedient, strain state finances and compromise long-term economic health. Karnataka’s debt-to-GSDP ratio is projected to rise from 75% in 2021-22 to 78% in 2024-25, signaling fiscal instability.

Historical Context: Congress’s Own Decisions

The Opposition’s grievances also lack historical consistency. The Congress-led UPA government had reduced Karnataka’s share of tax allocation from 4.13% to 3.73%, based on the Raghuram Rajan Committee’s recommendations. Similar reductions were made for other southern states, including Andhra Pradesh and Kerala. These decisions were implemented during the Congress regime and cannot be attributed to the BJP-led NDA government.

The Modi Government’s Commitment to Cooperative Federalism

Under Prime Minister Narendra Modi, the share of tax revenues devolved to states has increased significantly. During 2014-24, Karnataka received Rs 2.95 lakh crore in tax devolution, a 261% rise compared to the UPA era. The Modi government adopted the 14th Finance Commission’s recommendation to raise the state’s share in central taxes from 32% to 42%, a transformative move towards fiscal empowerment. Although this share was marginally adjusted to 41% under the 15th Finance Commission, it remains a substantial improvement over previous allocations.

Addressing Allegations of Inequity

The criteria for tax devolution are meticulously designed to ensure fairness and objectivity. Factors like population, income distance, and fiscal discipline are evaluated to determine allocations. States with higher fiscal prudence and developmental needs receive proportionate support, ensuring an equitable distribution of resources.

Karnataka’s Mismanagement

Karnataka’s financial woes stem primarily from mismanagement rather than inadequate central support. The Congress government’s focus on populist schemes has diverted funds from development to appeasement. Corruption scandals, such as the Maharshi Valmiki ST Development Corporation and the MUDA scam, further erode fiscal discipline. These issues, coupled with unsustainable borrowings, undermine Karnataka’s economic stability.

Himachal Pradesh: A Parallel Case

Himachal Pradesh’s Congress government faces similar challenges. With loans exceeding Rs 27,000 crore in 18 months, the state’s debt burden has reached unsustainable levels. Judicial interventions, such as the closure of loss-making state-owned hotels, highlight the severity of the crisis. These examples underscore the need for fiscal prudence across states.

Cooperative and Competitive Federalism: The Way Forward

The Modi government has emphasized cooperative federalism, fostering partnerships with states to achieve holistic growth. Initiatives like the release of Rs 1.73 lakh crore in tax devolution this month demonstrate a commitment to empowering states. This approach contrasts with the “big brother” model of previous Congress regimes, which imposed a one-size-fits-all policy on states.

Structured Support Mechanisms

The Centre’s support extends beyond tax devolution. Grants for specific purposes, such as disaster relief and infrastructure development, are allocated based on objective criteria. This ensures that states receive targeted assistance for their unique challenges.

Conclusion

The Opposition’s claims of unfair tax devolution under the Modi government are both factually incorrect and politically motivated. The constitutional framework, coupled with the Finance Commission’s recommendations, ensures equitable distribution of resources. Karnataka’s financial challenges are a consequence of its fiscal mismanagement, not central discrimination. Under Prime Minister Modi, cooperative federalism has been strengthened, empowering states to contribute to India’s growth story. The Opposition would do well to focus on governance and fiscal discipline rather than indulging in baseless allegations.

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Dr. Prosenjit Nath
Dr. Prosenjit Nath
The writer is a technocrat, political analyst, and author. He pens national, geopolitical, and social issues. His social media handle is @prosenjitnth.

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