India’s constitutional scheme awards vast financial powers to the Union government – even as states are expected to do most of the development work. With the states shouldering the burden of the fight against the Covid-19 pandemic, it was expected that the Centre would do its job and release money to them. So far, there has been little of that.
Since the start of the lockdown in March to contain the spread of the disease, states have been clamouring for a relaxation in the amount of money they can borrow. This limit is set as per the Fiscal Responsibility and Budget Management Act at 3% of the gross state domestic product. Since the Union government has released little money and in fact even held back tax revenue due to the states, this borrowing would help states raise funds in order to fight the pandemic and tide over the severely reduced tax revenue as a result of lockdown.
Strings attached
On Sunday, the Union government did accede to this demand but with significant conditions. States can now borrow up to 5% – but only if they do what New Delhi tells them. Of the extra 2%, only 0.5% is truly unconditional, as per what the states wanted initially. However, after that states will only be allowed four increments of 0.25% if they meet specific conditions laid down by New Delhi. The final 0.5% will be awarded to states if they tick off three of four conditions set by the Modi government.
The four policy conditions set by the Modi government fall in the area of ease of doing business, privatising power distribution, increasing urban local body revenues and linking states’ food welfare schemes to the Modi government’s national grid (“One Nation One Ration Card”).
The Indian Constitution allows the Union government to place barriers on state borrowing as long as the state owes it money. However, by placing conditional borrowing limits, the Union government is using the vast financial powers awarded to it under the Constitution to intrude into policy areas that are firmly with the states. In effect, this seeks to weaken the constitutional scheme of separate policy areas for the Centre and states.
Naturally, many state governments have objected to this.
Overbearing Centre
This is not the first time this has happened. Just after independence, for example, the Nehru government appointed the Planning Commission which “functioned in violation of the provisions of the Constitution” to transfer monies to the states – as opposed to the entire money being channeled through an apolitical, technocratic Finance Commission. The vast financial powers the commission held meant that it could dictate policy to the states – even in areas which were firmly in the state list of the Constitution – in return for money.
Another method by which the Centre has used finance to push policy is through Centrally Sponsored Schemes, where it funds one portion of a development project and the state provides the rest. Many of these schemes are squarely in areas with the states – which means states need to conform to policies set in New Delhi if they want access to the Central pool of taxes. Since 2002 to 2015 for example, the Union spending on both the state list and concurrent list (a shared area between the two levels of the Indian state) have gone up significantly.
Abdication and usurpation
Ironically, the Centre’s decision to take advantage of the bedraggled condition of states during lockdown to push policies on the state list comes when the Union has also palmed off the critical subject of inter-state migration to the states. The Modi government’s move to impose the lockdown at four hours’ notice has created conditions for millions of migrant labour to decide to walk back home, often undertaking journeys of more than a thousand kilometres.
Rather than confronting the problem it had created, the Union government more than a month into the national lockdown allowed the states to decide if they wanted to run trains carrying back migrants home.
This was accompanied the Union minister of railways, Piyush Goyal, blaming Opposition-run states for not running enough trains. This of course raises the question: if the Union thinks the states are doing a bad job on inter-state migration, why did it not do it itself, given the subject is part of the core duties of the Centre?
India’s states are already struggling due to the devastating financial impact of the lockdown. Yet, they are also India’s frontline warriors for the pandemic. It is the states that do everything that helps in fighting the disease, from testing to treatment to lockdown. For the Centre to now use its vast financial powers not to help the states but to arm twist them into following certain conditions set by New Delhi is a short-sighted way to fight a problem as complex as the coronavirus pandemic.