The fading of “Modi Magic” in the recent elections to the Parliament saw the BJP stop at 240 seats in the Lok Sabha, falling short of a clear majority or trailing behind the 272-mark by around 32 seats. Those numbers were provided by its NDA allies – the Telugu Desam Party TDP and the Janata Dal United JD(U). Naturally, the support came with a price tag – demand for special status for Andhra Pradesh and Bihar or a special deal in the budget. The government did not have a choice as it was a quid pro quo with the government’s survival at stake.
In line with the expected reciprocal exchange (support for sops), Finance Minister Nirmala Sitharaman announced significant allocations and special schemes for Bihar and Andhra Pradesh in the Union Budget 2024-25. Bihar received ₹26,000 crores for various road projects. Additionally, ₹11,500 crores have been earmarked for flood control measures in Bihar. The Union Government will arrange financial assistance to Bihar through aid from multilateral development agencies.
Similarly, significant allocations and special schemes for Andhra Pradesh were announced in budget. A specific allocation of ₹15,000 crores was made for the development of its capital – Amaravati. A backward region grant will be provided to three districts of Andhra Pradesh. Further, the Centre assured support towards the development of the multipurpose irrigation project Polavaram, which is crucial for the state.
The special allotment to these two states triggered a barrage of censuring comments from the members of the Opposition and leaders of other states. Rahul Gandhi termed the budget as a “kursibachao” (power retention) budget. The Finance Minister of Kerala, KN Balagopal termed the Budget as a “political exercise” aimed at saving the life of the BJP-led NDA at the Centre.
Former Minister and Bharat RashtraSamithi (BRS) leader of Telangana, KT Rama Rao was more forthright, saying, “Despite having a budget of more than ₹48 lakh crore, only a few states received major benefits. It is disappointing that Telangana is not mentioned in the entire budget. Once again, Telangana has received nothing.”
Atishi Marlena of the AamAadmi Party (AAP) expressed her displeasure saying, “Why the national capital received not a single penny as its share in central taxes in the Budget 2024 despite paying ₹2.32 lakh crore in taxes to the central government.”
To understand the backlash that the government received from different states, we need to understand the concept of “fiscal federalism” in India and why it is important to have the correct financial autonomy between the Centre and the states for equitable distribution of resources. It ensures democratic governance by promoting local decision-making and accountability, while addressing regional disparities and enabling cooperative federalism.
The Constitution of India established mechanisms such as shared taxes and grants-in-aid to address regional imbalances. It added institutional frameworks like the Finance Commissions that have specific mandates. The Modi government initiated major reforms, including the abolition of the Planning Commission, establishment of NITI Aayog, constitutional amendments for GST, and increased tax devolution based on the 14th Finance Commission. These have fundamentally altered fiscal relations between the Union and states.
Despite the 14th and 15th Finance Commissions suggesting 42% and 41% of net tax revenue to be given to states, their actual share of gross tax revenue declined to 35% in 2015-16 and again came down to 30% in 2023-24. States saw a decline in their ability to set tax rates independently on revenue sources. This became apparent after the adoption of value-added tax (VAT) for intra-state trade. Financial aid provided to States saw a decrease from ₹1.95 lakh crore in 2015-16 to ₹1.65 lakh crore in 2023-24.
Consequently, the combined proportion of statutory financial transfers to the Union government’s gross tax revenue declined from 48.2% to 35.32%. A key factor that reduces the States’ share of gross revenue is the inclusion of revenue collected through cess and surcharge in the net tax revenue deduction process. This collection, excluding GST cess until June 2022, has significantly increased over time. The Union government uses Centrally Sponsored Schemes (CSS) and Central Sector Schemes (CS) as direct financial transfers to States, thereby influencing their fiscal priorities. The allocation for CSS rose from ₹2.04 lakh crore to ₹4.76 lakh crore between 2015-16 and 2023-24, covering 59 CSS. This approach forces States to commit equivalent financial resources alongside Union funds.
The implementation of CSS creates disparities among states wherein wealthier states can independently fund matching grants, while less affluent states must rely on borrowing, increasing their fiscal liabilities. This disparity worsens the inter-state inequality in public finances. Despite transferring less than 50% of gross tax revenue to States, the Union government retains a significant fiscal deficit of 5.9% of GDP. This allowance grants substantial financial authority to the Centre while limiting its expenditure obligations, leaving less room for maneuver to the states.
Experts warn that the desire to appease coalition partners can lead to excessive spending and populist measures, impacting fiscal discipline and macroeconomic stability. The inherent instability of coalition governments creates uncertainty in the fiscal space, deterring long-term investments and planning. The pressure to distribute resources to satisfy coalition partners can lead to the misuse of funds and corruption. So, what is the way forward? How should the monetary resources be distributed between the Centre and the states?
Based on the principle of justice and equity, both horizontal imbalances (disparities among states) and vertical imbalances (between the central and state governments) must be addressed. The devolution formula must be designed for a fair and equitable distribution of resources. Performance-based grants that reward states for achieving certain developmental targets, such as improving health and education indicators should be introduced. This makes the states to focus on better governance and delivering results. Local governments should be empowered. The GST Council, the Finance Commission and The Inter-State Council should become more effective and efficient.
The best piece of advice regarding Centre-State relations can be gleaned from what Amir Muawiya bin Abu Sufiyan (the Ummayad Caliph) stated when asked about his relationship with his subjects. He said, “The relation between me and my people is similar to that of the horse rider and the halter. If he loosens it much, the horse will go out of control and if he pulls it much, the horse will stop in its tracks.”