The unfolding political contestation over the alleged erosion of ‘fiscal federalism’ bears some singular features. Three southern states ruled by Opposition parties — Kerala, Karnataka and Tamil Nadu — have protested vociferously in recent times, alleging that the Narendra Modi government at the Centre has been parsimonious in its disbursal of Central funds, thereby pushing the states into severe financial strain. Even the Andhra Pradesh chief minister, by no means a political adversary of the Bharatiya Janata Party, has made noises about the unfair nature of the devolution of taxes. Some other states — Bengal is an example — have been vocal about the tight-fisted nature of Mr Modi’s government too, albeit on different grounds. The resolution of the demands of the southern states is being thwarted by a number of issues that deserve a closer look. Overall transfers from the Centre to states — the sketchy data notwithstanding — are larger than before. But this has been offset by other, hydra-headed pitfalls. Kerala, for instance, has alleged that the Centre’s imposition of the net borrowing ceiling has curtailed its ability to borrow from sources. Moreover, one of the factors that the Finance Commission considers while devising a template of tax devolution is population size. The southern states, which have done better in limiting population growth, thus lose out even though their share of contribution to the exchequer is larger. Worse, this condition can disincentivise the states to undertake social reform for fear of losing out on Central funds. But then, if the demand for a reciprocal arrangement in terms of tax contributions to the exchequer is to be put in place, smaller states with weaker economies would lose out. There are other worries too. Special grants, such as drought relief measures demanded by Karnataka, remain unmet. Worse, given Mr Modi’s self-aggrandising sentiments, the Centre, the states allege, has also tightened the political conditions attached to transfers.
What is needed by way of a resolution is a patient, statesmanlike engagement between the states and the Centre. But the chances of such cooperation appear to be slim. The BJP is already croaking about the complicity of the southern states in fomenting regional divisiveness. The prime minister, typically, has fanned the flames, choosing to describe the states’ demands for greater parity in the devolution of Central funds as a narrative engineered to “break the nation”. This rabidly political and polarising rhetoric, which has been sharpened under Mr Modi’s watch, continues to weaken India’s federal architecture.