THE CONTEXT: The debate surrounding Kerala’s protest of the Centre’s imposition of a Net Borrowing Ceiling (NBC) underscores a growing concern over the erosion of fiscal federalism in India. This brings into the limelight the conflict between the constitutional autonomy of states to manage their finances and the Centre’s regulatory mechanisms intended to ensure fiscal discipline and transparency.

THE ISSUES:

• Net Borrowing Ceiling (NBC): The NBC is a limit set by the Centre on the total amount that states can borrow from all sources, including open market operations and loans from state-owned enterprises. Specific to Kerala, the NBC now includes debts incurred by the Kerala Infrastructure Investment Fund Board (KIIFB), which funds infrastructure projects through extra-budgetary routes. Including KIIFB’s debts under the NBC restricts Kerala’s financial autonomy, directly impacting its ability to fund welfare schemes and pensions.
• Constitutional Limits and Fiscal Federalism: Article 293(3) requires states to seek the Centre’s permission to borrow if they have any outstanding federal loans. The imposition of the NBC by the Centre is under this article, which Kerala contends is a violation. Kerala’s legal stance to move to the Supreme Court suggests that the Centre’s decision infringes on the state’s constitutional rights to manage its public debt (Entry 43, State List) and public accounts (Article 266(2)).
• State Fiscal Responsibility and Transparency: Kerala Fiscal Responsibility Act, 2003 mandates reducing the fiscal deficit to 3% of Kerala’s Gross State Domestic Product (GSDP) by 2025-26. Kerala’s fiscal deficit has been reported at 2.44% and the revenue deficit at 0.88% of the GSDP, indicating a responsible fiscal approach compared to the Centre’s fiscal deficit, pegged at 5.8% for 2023-24.
• Impact on Governance and Welfare Implications: The restricted borrowing capacity directly impacts the state’s social obligations, such as funding pensions and welfare programs essential for balanced socio-economic development. The KIIFB’s innovative financial strategy for infrastructure development in Kerala is a model of how state autonomy can be effectively utilized for the public good, which NBC hinders.
• Assessment of Federal Dynamics: The shift in Federal Structure by transitioning from cooperative federalism towards a more ‘annihilative federalism,’ where the Centre’s stringent controls over state finances limit the states’ operational independence. Examination of this shift in India’s federal structure reflects on the long-term implications on centre-state relations and the principle of subsidiarity.
• Borrowing Restrictions: The 15th Finance Commission recommended that 41% of the net proceeds of Union taxes be shared with the states. However, the Centre’s decision to include off-budget borrowings done by states while deciding their borrowing limits led to a sharp decrease in such borrowings. This has been seen as a restriction on states’ ability to borrow and manage their finances, with Kerala particularly affected due to the inclusion of the debt of KIIFB in the NBC.

THE WAY FORWARD:

• Seek Judicial Clarification: Given that Kerala has moved the Supreme Court on the matter, one solution is a judicial review of the constitutional validity of the NBC with respect to Article 293(3) and Article 266(2). The Court’s interpretation could resolve disputes regarding the constitutional limits of the Centre’s authority over state borrowing.
• Review of 15th Finance Commission Recommendations: The issues stemming from interpreting the 15th Finance Commission’s recommendations could be re-examined. States can engage with the Finance Commission or the Union Finance Ministry to advocate their concerns and seek a more nuanced approach that doesn’t infringe on states’ fiscal autonomy while upholding fiscal sustainability.
• Legislative Action: Parliament could consider enacting legislation or amending existing laws (subject to constitutional limits) to clarify the scope of central oversight on state borrowings. This should respect the balance of fiscal federalism and be designed after extensive consultations with states.
• Strengthen Cooperative Federalism: Regular high-level meetings between the Centre and States, through forums like the GST Council or a specially convened fiscal policy council, could help facilitate dialogue. These meetings would aim to negotiate borrowing limits and ensure that states have enough financial leeway to meet their obligations.
• Promote Fiscal Responsibility at the State Level: States can take proactive steps to strengthen their fiscal management, as Kerala has done through the Kerala Fiscal Responsibility Act. By setting clear deficit targets and budget management practices, states can demonstrate their commitment to fiscal prudence, potentially increasing their negotiating power with the Centre.
• Build a Consensus on Public Account Handling: The issue of including public account withdrawals within the NBC could be addressed by building a broader consensus among all states, which can then be presented to the Centre in a united front to exclude such transactions from the borrowing limits.
• Economic Reforms and Growth Promotion: Widening the tax base through economic reforms, boosting the investment climate, and promoting growth in the state’s own-source revenue can be sustainable ways of ensuring sufficient funds for state spending without reliance on borrowings.

THE CONCLUSION:

Kerala’s challenge against the Centre’s Net Borrowing Ceiling (NBC) imposition highlights a significant constitutional dispute over fiscal federalism and state autonomy in financial management. The state argues that the Centre’s restrictions on borrowing, including debts of state-owned enterprises and public account balances, infringe upon its constitutional rights. This legal battle underscores the tension between central oversight and state fiscal independence, potentially reshaping the dynamics of federal-state financial relations in India.

UPSC PAST YEAR QUESTION:

Q.1 Though the federal principle is dominant in our Constitution and that principle is one of its basic features, but it is equally true that federalism under the Indian Constitution leans in favour of a strong Centre, a feature that militates against the concept of strong federalism. Discuss. (2014)

Q.2 The concept of cooperative federalism has been increasingly emphasized in recent years. Highlight the drawbacks in the existing structure and the extent to which cooperative federalism would answer the shortcomings. (2015)

Q.3 How far do you think cooperation, competition, and confrontation have shaped the nature of federation in India? Cite some recent examples to validate your answer. (2020)

Q.4 Public expenditure management was a challenge to India’s government in the context of budget-making during the post-liberalization period. Clarify it. (2019)

Q.5 What are the reasons for introducing the Fiscal Responsibility and Budget Management (FRBM) Act, 2003? Discuss its salient features and their effectiveness critically. (2013)

MAINS PRACTICE QUESTION:

Q.1 Critically examine the contention between the State of Kerala and the Centre over the imposition of a Net Borrowing Ceiling (NBC) concerning Article 293(3) of the Indian Constitution. Analyze the implications of such a ceiling on fiscal federalism and state autonomy, along with its potential impact on state welfare schemes and infrastructure projects.

SOURCE:

https://www.thehindu.com/opinion/op-ed/the-severe-erosion-of-fiscal-federalism/article67818283.ece

THE CONTEXT: Recently, a High-Level Committee headed by a former president, Ram Nath Kovind, issued a public notice asking for suggestions for simultaneous election between January 5-15, 2024. According to the Union Law Ministry, 81% of the 20,000-plus responses received by the High-Level Committee on One Nation, One Election have favoured the idea.

ABOUT THE RECENT COMMITTEE:

• Government has constituted an eight-member high level committee to examine One Nation, One Election in September, 2023.
• Former President Ram Nath Kovind has been appointed as Chairman of the committee. Union Home Minister Amit Shah, Congress MP Adhir Ranjan Chowdhury, Former Leader of Opposition in Rajya Sabha Ghulam Nabi Azad, Former Chairman 15th Finance CommissionK. Singh and others are appointed as the members of the committee.
• The high level committee will examine and make recommendation for holding simultaneous elections of Lok Sabha, State Legislative Assemblies, Municipalities and Panchayats, keeping in view the existing framework under the Constitution and other statutory provisions.
• It will examine and recommend, if the amendments to the Constitution would require ratification by the States.
• They will also suggest a framework for synchronisation of elections and specifically, suggest the phases and time frame within which simultaneous elections may be held.
• The committee will also examine the logistics and manpower required, including EVMs and VVPATs for holding simultaneous elections.

CONCEPT OF SIMULTANEOUS ELECTIONS AND BACKGROUND

• ‘Simultaneous Elections’ is defined as structuring the Indian election cycle in a manner such that elections to Lok Sabha and State Assemblies are synchronized together.
• The elections to the House of the People and Legislative Assemblies of States were mostly held simultaneously from 1951-52 to 1967 after which this cycle got broken.
• Lok Sabha and State legislatures went to polls together in 1952 and 1957, with the Congress initially comfortably placed all over the country.
• The synchronised cycle was first broken in Kerala, in July 1959, when the Centre invoked Article 356 of the Constitution to dismiss the ministry headed by E M S Namboodiripad of the Communist Party. This was followed by state elections in February 1960.
• As the Congress’s popularity declined, it suffered major setbacks in several states Bihar, UP, Rajasthan, Punjab, West Bengal, Orissa, Madras and Kerala in the 1967 elections.
• Consequently, Samyukta Vidhayak Dal governments, comprising Bharatiya Kranti Dal, SSP, PSP, Swatantra Party, Jana Sangh and Congress defectors, came to power.
• Defections and counter-defections ultimately led to the dissolution of Assemblies, which separated the poll cycles of many states from the central one.
• At present, Assembly elections in Andhra Pradesh, Odisha, Arunachal Pradesh and Sikkim are held together with Lok Sabha polls.

PREVIOUS RECOMMENDATIONS:

• Election Commission (1983): In 1983, the Election Commission proposed the idea of holding simultaneous elections to the Lok Sabha and state legislative assemblies.
• The Law Commission (1999): The Law Commission, led by Justice B.P. Jeevan Reddy, presented its 170th report in May 1999. The report recommended exploring a system where elections for the Lok Sabha and all legislative assemblies are held simultaneously.
• Election Commission (2019): In 2019, Chief Election Commissioner Sunil Arora expressed support for the idea of simultaneous elections, calling it a desirable goal. He suggested aligning the terms of state assemblies with the life of the Parliament for successful implementation.
• Parliamentary Standing Committee (2015): The Parliamentary Standing Committee on Personnel, Public Grievances, Law, and Justice, led by E.M. Sudarsana Natchiappan, compiled a report in 2015. The report highlighted benefits such as
• Massive expenditure that is currently incurred for the conduct of separate elections
• Policy paralysis that results from the imposition of the Model Code of Conduct during election time;
• Impact on delivery of essential services
• Burden on crucial manpower that is deployed during election time,” the report observed.
• Law Commission’s Draft Report (2018): In August 2018, the Law Commission, under the leadership of Justice B.S. Chauhan, drafted a report stating that simultaneous elections couldn’t be held within the existing constitutional framework. The Commission recommended amendments to the Constitution, the Representation of the People Act 1951, and parliamentary procedures for its implementation. The report suggested that at least 50% of states ratify constitutional amendments.

ISSUES:

• Partisan committee: Given the constitution and manner of functioning and the larger context of one-party dominance, the newly formed committee gives the impression of just being the rubber stamp.
• Constitutional Amendments:Implementing simultaneous elections needs extensive amendments to the Constitution and electoral laws, which requires complex negotiations and consensus-building.
• Impact on Federal Structure:Simultaneous elections has the potential to weaken the federal structure and eroding the autonomy of state elections.
• Financial burden:Coordinating simultaneous elections would place a significant burden on the Election Commission’s resources, possibly affecting the efficiency and credibility of the electoral process.
• Lack of engagement of opposition: There is a lack of robust debate on the proposal of simultaneous elections as there is lack of engagement of opposition. For example, Congress leader in the Lok Sabha, refused to be a part of the Committee arguing that it is imbalanced.

THE WAY FORWARD

• Taking into account opposition viewpoint: Though, the Committee’s terms of reference assume that One Nation, One Election is in “national interest”. But despite this, there is a need for opposition leader to play an important role by pushing for greater transparency in the process. As such a fundamental change in the democratic structure and process cannot be brought without adequate engagement with the Opposition’s concerns.
• Consultative approach: Achieving simultaneous elections in India requires a consultative approach and stakeholder consultations to adapt a framework that can pave the way for a synchronized electoral process.
• Uphold federalism: There is a need to balance the benefits of streamlined governance with the complexities of diverse regional dynamics to uphold federalism. A system of election should be devised that respects federal structures while enhancing administrative efficiency.
  

THE CONCLUSION:

The concept of one nation, one election remains a subject of ongoing deliberation in Indian politics. While proponents emphasize the potential advantages of simultaneous election and critics raise valid concerns about its implementation and impact on regional dynamics. The future of this proposal of simultaneous election will depend on various factors in the evolving political landscape of India.

PREVIOUS YEAR QUESTIONS

Q.1 In the light of recent controversy regarding the use of Electronic Voting Machines (EVM), what are the challenges before the Election Commission of India to ensure the trustworthiness of elections in India? (2018)

Q.2 To enhance the quality of democracy in India the Election Commission of India has proposed electoral reforms in 2016. What are the suggested reforms and how far are they significant to make democracy successful? (2017)

MAINS PRACTICE QUESTION

Q.1 Discuss the challenges for conducting simultaneous election in India and suggest measures to ensure federalism while upholding democratic process in the country.

Source: https://indianexpress.com/article/opinion/editorials/one-nation-one-election-union-law-ministry-high-level-committee-lok-sabha-elections-2024-9122617/

TAG: GS 3 INDIAN ECONOMY

CONTEXT: The government has reconstituted the ministerial group of the GST Council that was tasked with recommending the simplification of the complex tax structure and a rejig of its multiple rates.

EXPLANATION

• Since the beginning of the introduction of the GST tax regime, there has been a call to rationalize the tax structure.
• The group of ministers (GoM) on GST rate rationalisation, headed by former Karnataka CM Basavaraj Bommai, had been in suspended mode since its formation in 2021.
• The convenor’s role for the seven-member GoM has been assigned to Uttar Pradesh Finance Minister Suresh Kumar Khanna.

CURRENT GST STRUCTURE

• The current GST structure has a total of four tax slabs, including 0%, 5%, 12%, 18%, and 28%.
• There are different forms of taxes levied under GST:

Central GST (CGST)

This tax is imposed on the movement of goods and services within the state but is appropriated by the central govt.

State GST (SGST)

It is the tax levied by the state government and appropriated in the state where the transaction occurs or where the goods are sold and consumed.

ntegrated GST (IGST)

This tax is imposed on all the goods and services between two or more states or union territories.

Union Territory GST (UTGST)

Imposed on supply of goods and services within the Indian Union Territories.

NEED FOR RATIONALISATION

• Ease-of-doing-business is needed as the current structure is quite complicated. For example, there are some items whose tax rates depend on their packaging, like specified food products, or selling prices.
• To reduce the number of litigations arising from classification disputes.
• GST is an indirect tax, which means that it is regressive in nature. Lower tax rates on some of the basic items would ease the pressure on common man.
• The frequent changes in rates for different goods and services in the past have created uncertainty for businesses.
• The 15th Finance Commission had observed that the GST’s revenue neutrality was compromised due to multiple tax rate reductions.

IMPLICATIONS

• Improved compliance: As too many tax rates lead to tremendous compliance-related problems.
• Improved tax collection: Higher tax rates doesn’t always imply higher revenue collection, going by the Laffer curve theory. This is proven by the fact that with reduction in tax rates on some items in the past, tax collection has only increased.

CONCLUSION

• Rate rationalization in the GST regime remains an ongoing challenge.
• There is a need for careful consideration to strike a balance between revenue generation and easing the compliance burden.

Source:https://www.thehindu.com/business/centre-rejigs-gom-to-simplify-gst-rates/article67635249.ece