Fiscal federalism, or rather its perceived erosion in recent times, has occupied centre stage in the increasingly strained financial relations between the BJP-led Union government and the Left-ruled Kerala government in the run-up to the 2024 Lok Sabha elections.
The CPI(M)-led Left Democratic Front (LDF) has consistently blamed the Modi government for Kerala’s deepening financial woes. Recently, Kerala Finance Minister K.N. Balagopal attributed the “financial crunch” to unfair cuts in Central transfers, the revenue deficit grant, GST compensation, and loan approvals. The Centre denied these accusations.
The conflict hit a new flashpoint on November 25 when Union Finance Minister Nirmala Sitharaman, while in Thiruvananthapuram, denied any negligence in releasing funds to Kerala. And if money had indeed been withheld, it was on account of the State’s failure to meet the necessary criteria, she said. She added that the Pinarayi Vijayan government was welcome to move the Court on the matter, but that it would merely offer her another venue to explain “what the story is really.”
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Ms. Sitharaman’s remarks evoked indignant replies from Mr. Vijayan and Mr. Balagopal, who, accompanied by their Cabinet colleagues, are on a State-wide bus tour meeting people. Both alleged that the Union Minister was twisting facts and misleading the public. In a lengthy response, Mr. Balagopal repeated his claim that the State stood deprived of ₹57,400 crore in Central transfers and loan approvals in 2023-24 “compared to the previous fiscals.”
At the heart of the latest round of fiscal fisticuffs are a set of payment demands made by Kerala on July 12 and October 7. The State wanted the Centre to quickly release the piled up arrears in payments due under various heads — health grant, the Central share in social security pensions, and the 7th University Grants Commission pay revision arrears. In response, Ms. Sitharaman listed out six components where she said all arrears had been settled. She argued that “not one rupee” had been held back by the Centre, except in instances where the State had failed to fulfil criteria or toe the 15th Finance Commission’s recommendations.
Both governments are also wrangling over the ‘branding’ of centrally aided schemes. The special assistance for capital expenditure has allegedly been withheld on the ground that the Left government changes the names of schemes to claim credit. The Kerala government has protested against this, noting that the Centre’s share is often meagre in schemes. In housing, for example, Kerala executes the Pradhan Mantri Awas Yojana (PMAY) in coordination with its own LIFE Mission. Under PMAY (Urban) and PMAY (Gramin), each beneficiary receives an additional State share of 62.5% and 82%, respectively. In the case of the monthly social security pensions paid to over 60 lakh people, only 5.66 lakh receive Central aid, according to the State. The Minister for Local Self-Government M. B. Rajesh wrote a letter to Union Minister for Housing Hardeep Singh Puri contending that affixing branding logos on houses built using public money implies charity and “compromises the dignity and self-respect” of the beneficiaries.
But away from the optics of politics, Kerala’s fiscal woes appear very real. While the LDF government accuses the Centre of “financially choking” Kerala for political gain, the Opposition Congress-led United Democratic Front (UDF) has been critical of the State government’s extravagance. Of late, Kerala has struggled to meet its commitments to social security pensioners and farmers. Critics also trace the present troubles to the pay revision for government employees announced in 2021. The revision had come with retrospective effect from July 1, 2019. “If ₹46,754 crore was the required amount to disburse salary and pension during 2020-21, ₹71,393 crore was the required amount for 2021-22. Through this alone, the government has assumed an additional commitment of ₹24000 crore,” the 2023-24 State budget noted. To manage the crisis, Kerala will need to control expenditure while capitalising on the positive trends in own revenue (which rose from ₹58,300 crore in March 2022 to ₹71,900 crore in March 2023). More importantly, it will need to present its case convincingly before the 16th Finance Commission to recapture the fiscal space that it claims to have lost.
