Federalism and Development Financing

Kerala has a long history of state-led development strategy with a focus on social sector spending. This approach paid rich dividends as the State is known for its achievements in human development. Kerala’s development model has been widely appreciated.
The Covid-19 induced crisis has trapped governments the world over in a double bind, with expenditure requirements rising to address the pandemic and its economic fallout and revenues falling because of the contraction in economic activity. Kerala, along with many other India States, finds itself hit hard by this fiscal squeeze.

The problem in India is particularly severe for three reasons.

First, fiscal reform that involves tax forbearance and concessions aimed at incentivising private capital has curtailed fiscal transfers from the Centre to the States.

Second, the current implementation of the Goods and Service Tax regime has meant that States find that actual receipts have fallen short of what was envisaged.

Third, the flexibility of the states to borrow, even in emergency situations, is limited by the imposition of FRBM requirements that are more burdensome at the State level.

Four, resource mobilisation outside the Budget through Special Purpose Vehicle’s with or without Government guarantees.

The resulting fiscal crisis has meant that forward-looking capital expenditures needed to finance crucial physical and social infrastructure requirements have fallen short of the just requirements of States. The session would seek to address questions arising from this fiscal situation. They include the following issues:

  • What needs to be done to reverse practices that have eroded, despite the constitutional provision for revenue sharing based on recommendations of Finance Commissions, both the volume of sharable revenues and the relative shares of the states?
  • Can the GST regime be made a meaningful form of indirect tax revenue generation?
  • What is the case for a change in federal fiscal arrangements that would provide greater headroom
    with flexible limits for borrowing by the States, especially in times of crisis such as now?
  • What innovative measures can be adopted to both enhance the own tax revenues of the States as well as widen the scope for sustainable market borrowing at competitive interest rates?
  • How do we revisit the attempts being made to restrict the rights of the States for resource
    mobilisation outside the Budget?

Kerala State Planning Board.
Pattom, Thiruvananthapuram KERALA 695 004