It is usual for states to place their needs before the Union finance minister on the eve of the Union Budget. This time, rather than asking for state-level favours, Kerala's finance minister K N Balagopal has framed the state's pre-budget memorandum as a last-ditch effort to save federalism in the country.
By speaking for all the states in the country, the CPM is also positioning itself as one of the sharpest voices in the anti-BJP coalition that is emerging.
The denial of these pro-federal demands in the Union Budget, which is a near certainty, could then become the axis around which the anti-BJP Opposition could be mobilised. The CPM could then use the February 8 national meeting on federalism it would be organising at Jantar Mantar in Delhi as the starting point for such a mobilisation.
Nonetheless, the threat to Kerala's fiscal autonomy is at the heart of Balagopal's petition. "For Kerala the current financial year and the two years to come are crucial in terms of the resource availability and hence may impose limitations in continuing the legacy of the state intervention," Balagopal has written to his Union counterpart Nirmala Sitharaman.
After stating the fiscal predicament Kerala is in, Balagopal puts forward six proposals to strengthen state economies in India.
Unfair 50:50 formula
Kerala wants the share of states in the total GST revenue to be enhanced. As it stands, it is 50:50. Kerala wants it to be revised to 60:40 in favour of the states.
Balagopal is backed by the 15th Finance Commission report, which states that 62.7% of the total receipts are being taken by the Union Government while 62.4% of the expenditure commitments are borne by state governments.
Keep compensating
Kerala wants GST compensation extended by five more years.
Kerala's argument is that the GST regime, contrary to expectations, had caused state revenues to fall. When the GST was implemented, more than 200 goods were under the 28% category, but later these goods were moved to reduced tax rates from October 2017 onwards. The reduction in tax rates, especially for the luxury goods, has effectively led the Revenue Neutral Rate (RNR) to fall from 16 per cent to around 11 per cent.
Do away with cesses and surcharges
Kerala wants the Centre to phase out the practice of imposing cesses and surcharges.
Balagopal has argued that the share of Central surcharges and cesses in the gross tax revenue (GTR) of the Centre has increased from around 10% in 2011-12 to 20% in 2020-21. Since cesses and surcharges need not be shared with states, the percentage of GTR shared with states has declined in the last decade.
At present, the share of divisible pool is less than 30% of GTR. The 15th Finance Commission, on its part, has recommended that 41% of the net proceeds be shared with the states.
Flexible funds for states
Kerala wants Sitharaman to create a flexible pool for states. From this pool money can be made available for state-specific demands that are meant to address the new generation issues faced by states.
According to Kerala, this will help the states focus on emerging issues like the burgeoning geriatric population, poor higher education standards, failures in adopting advanced technologies and return migration from the Gulf.
The CSS funds are so rigid that they are not freed to tackle emerging second-generation issues. States like Kerala or Tamil Nadu or Andhra Pradesh that have largely solved primary issues suffer as a consequence.
Expand borrowing limit
Kerala wants Sitharaman to fix the borrowing limit of the states at 4% of GSDP at least for the next two financial years of 15th Finance Commission (2024-25 and 2025-26).
Kerala has argued that such an increase is necessary for two reasons. One, the GST compensation has ended in 2023. Two, the General Purpose Grants under article 275 are tapering to a close.
Soon after Covid, during the 2020-21 fiscal, the Centre had allowed borrowing limit of 5% of the GSDP. This was to pump money into an economy that was forced to a standstill. In 2021-22, the ceiling was 4% and then in 2022-23 it was brought down to 3.5%, of which 0.5% was allowed only if states carried out reforms in the power sector.
Balagopal arugues that the Centre can impose capital expenditure requirements on states while enhancing the borrowing limit to 4%.
Leave KIIFB alone
The Centre should not include the borrowings of Kerala Infrastructure Investment Fund Board (KIIFB) and Kerala Social Security Pensions Limited (KSSPL) in Kerala's debt.
As part of measures to curb off-budget borrowings, the Centre has treated the loans of KIIFB and KSSPL as open market borrowings of Kerala. As a consequence, Rs 14,312.80 crore has been deducted from the borrowing ceiling of the state in four instalments from 2022-23 fiscal. In the current fiscal, 2023-24, there is a reduction of Rs 3,578.20 crore in the net borrowing limit of the state.
Top finance department sources said that chances were high that all these demands would be turned down. But in rejection, there is a political opportunity.
"This would strengthen the CPM's case when it calls Opposition leaders for a meeting on federalism on February 8, a week after the Union Budget is presented," a senior CPM leader told Onmanorama.
