In recent times, Kerala has found itself embroiled in a financial dispute with the Central Government, leading to a case in the Supreme Court. This disagreement has raised several questions about fiscal policies, state rights, and the impact on the state’s economy. Let’s break down the situation into a simple Q&A format.
Why is Kerala facing a financial crisis?
Kerala claims that the Central Government’s fiscal policies have significantly restricted its financial capacity, leading to a crisis. Specifically, the state points to a reduction in its borrowing limit and claims of insufficient tax shares from the Centre as primary reasons. Additionally, the cessation of GST compensation and the economic impact of the COVID-19 pandemic have further strained Kerala’s revenues.
What is the Net Borrowing Ceiling?
The Net Borrowing Ceiling is a limit set by the Finance Commission on how much a state can borrow in a financial year. For the 2023-24 financial year, it was set at 3% of the Gross State Domestic Product (GSDP). For Kerala, this amounted to Rs 32,442 crore according to Finance Minister Nirmala Sitharaman.
Why is there a dispute over Kerala’s borrowing limit?
Kerala claims that the Central Government reduced its borrowing limit twice last year, reducing the amount from Rs 32,442 crore to Rs 15,390 crore. This reduction has been a point of contention between the state and the Centre.
Why is Kerala considered a “highly debt stressed” state?
The Finance Commission labeled Kerala as highly debt stressed because it frequently borrows money, often to cover daily expenses like salaries and pensions. Notably, Kerala has the second-highest expenditure on salaries as a percentage of its total revenue, a figure that continues to rise.
What issue does Kerala have with its share in taxes?
Kerala alleges that the Central Government is not providing its fair share of tax revenues. Citing an RBI report, the state argues that it receives only Rs 21 for every Rs 100 of tax collected, whereas the average share given to states is Rs 35 per Rs 100.
How did the Covid-19 pandemic and GST compensation cessation affect Kerala?
The pandemic and the end of Goods and Services Tax (GST) compensation in June 2022 severely impacted Kerala’s revenue collection. The introduction of GST in 2017 came with a promise from the Centre to compensate states for revenue shortfalls for five years, anticipating growth in tax revenues. However, the pandemic halted expected growth, exacerbating Kerala’s financial strain.
What triggered Kerala to approach the Supreme Court?
Kerala approached the Supreme Court in December 2023, arguing that the reduction of its Net Borrowing Ceiling by the Central Government is unconstitutional. The state contends that managing public debt is a state subject and that the Centre’s limitations on its borrowing capacity are unjust. Kerala seeks immediate financial relief to avert a crisis.
How does the Central Government justify its actions?
The Central Government argues that the financial stress in Kerala is primarily due to the state’s mismanagement of funds. It emphasizes the need for macroeconomic stability and the potential negative impact of state debts on the country’s credit rating. The Union Government also highlights the provision of substantial financial resources to Kerala beyond what was recommended by the 15th Finance Commission.
What has been the response of the Supreme Court?
The Supreme Court has encouraged negotiation between the Centre and Kerala to find a resolution. Despite attempts, negotiations have yet to yield a satisfactory solution for both parties. The Court has shown disapproval towards conditions placed by the Centre for financial relief and is set to continue hearing the case.
What lies ahead for Kerala and the Central Government?
The ongoing dispute reflects deeper issues of fiscal federalism, state autonomy, and financial governance in India. As the Supreme Court continues to hear the case, a resolution will require balancing Kerala’s immediate financial needs with broader concerns of national economic stability and the principles governing state-Centre relationships.