Context

The Centre is facing a serious financial crisis because of the exigencies created by the pandemic and its own policies. However, monetising assets and cutting down funds to states could aggravate the crisis.

3 Policies aggravating the crisis

1) NMP and disinvestment

• Union Finance Minister, while announcing the National Monetisation Pipeline (NMP), said that asset monetisation is based on the philosophy of creation through monetisation and is aimed at “tapping private sector investment for new infrastructure creation”.
• Loss of dividend: Disinvestment of profitable Navratna companies will result in a loss of dividend, a major source of income for the Centre.
• Loss due to tax exemptions: Tax exemptions to the investors will take away another major share of income.
• Central funds will be squeezed and this, in turn, will have a bearing on state finances.
• NMP will seriously hurt the interests of the country.

2) Cutting down funds to States

• Kerala’s case: The state was getting about 3.92 per cent from the divisible pool in the 1970s and 1980s.
• It came down to 2.66 per cent and 2.34 per cent in the awards of the 12th and 13th Finance Commissions.
• The 14th Finance Commission award increased it to 2.45 (2.50) per cent.
• Now, the 15th Finance Commission has reduced it to 1.92 per cent.
• This arbitrary cut is a result of the adoption of certain new yardsticks by the commission without considering the state government’s views
• The 15th Finance Commission’s special grant (RD grant) of Rs 19,800 crore for this year will no longer be available in the coming years.
• Karnataka and many other states have also suffered because of the policy to reduce the divisible pool share.

3) Tax exemptions and surcharge

• Exemptions amounting to Rs 99,842.06 crore were extended to corporate houses in 2019-20.
• Many taxes on goods were reduced because of electoral compulsions. This reduced central revenues.
• Along with such tax exemptions, the increased use of cesses and surcharges is responsible for the shrinking of the shareable pool.
• The shareable resources with the Centre was around Rs 6.8 lakh crore in 2019-20 which has come down to Rs 5.5 lakh crore in 2020-21.
• All the cesses and surcharges that are not shared with states come to about 20 per cent of the total revenues of the Centre.
• States have been demanding that this money should be shared with them, particularly while fighting a pandemic.
• States complaining for resources does not augur well for cooperative federalism.

Way forward

• Developing basic infrastructure and the production sector is the only way to face an economic crisis.
• That should not be done by selling or handing over public assets to private individuals and corporations.
• We need massive public investment that will help people to form cooperatives and collectives in agriculture and industrial production.
• Parliament, the National Development Council and the GST Council should discuss this unprecedented situation.

Conclusion

We need to find a way out collectively. Handing over the rights on public properties to private individuals will take the country back to the colonial era. This must not be allowed.

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