Kerala's White Paper Urges Serious Centre-State Fiscal Dialogue Amid Shrinking Fiscal Space
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Article summary
Kerala has released a White Paper on its fiscal health, urging the Union government to initiate serious discussions on deteriorating Centre-State fiscal relations. The document highlights three structural shocks: discontinuation of GST compensation post-2022, tightened borrowing limits imposed by the Centre, and the elimination of revenue deficit grants under the 16th Finance Commission regime. These changes have collectively compressed Kerala's fiscal space, limiting its ability to fund welfare expenditures and capital investments that the state is known for. Kerala argues that the current fiscal architecture disproportionately disadvantages states with higher human development spending and lower own-tax revenue buoyancy. For UPSC aspirants, this issue sits at the intersection of cooperative federalism, Finance Commission recommendations, and the constitutional framework governing Centre-State financial relations under Articles 268–293.
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Sample questions — answers revealed after test
Q1. The GST (Compensation to States) Act guaranteed compensation to states for revenue loss arising from GST implementation. For how many years was this compensation guaranteed, and when did it cease?
Q2. A state government publishes a White Paper arguing that its fiscal space has been structurally compressed by three simultaneous Central policy changes. It cites the expiry of GST compensation, restrictions on its borrowing limits linked to off-budget liabilities of state enterprises, and the discontinuation of a Finance Commission instrument that partially offset its revenue shortfall. Which Finance Commission instrument is the state most likely referring to in its third grievance?
Q3. Consider the following statements regarding Centre-State fiscal relations in India, in the context of Kerala's White Paper on fiscal federalism: 1. Article 293(3) of the Constitution empowers the Union to impose conditions on loans to states that have outstanding Central loans, and states contesting these conditions have no constitutional recourse. 2. The Inter-State Council, constituted under Article 263, is the primary institutionalised forum for resolving Centre-State fiscal disputes and has been regularly convened for this purpose. 3. The Net Borrowing Ceiling imposed by the Centre links a state's borrowing limits to the off-budget liabilities of state-owned enterprises, a practice contested by Kerala as an overreach of Central authority. 4. The vertical fiscal imbalance in Indian federalism arises because the Union dominates revenue-raising authority while states bear primary expenditure responsibility for welfare, health, and education. Which of the above statements are correct?