From central govt to local govts; Kerala's fiscal federalism paradox

In the current fiscal federalism discourse, Kerala positions itself at the forefront, contesting the union government's constraints on its borrowing limit. The recent Jantar Mantar protest led by Kerala's ruling front underscores the state's dedication to protect fiscal federalism. The dispute between the union government and the state has escalated to the Supreme Court. Against this backdrop, Mathrubhumi English is exploring how well Kerala itself fares in ensuring fiscal decentralisation, a pivotal element of fiscal federalism.

Fiscal federalism and decentralisation
Understanding the core of the matter requires delving into fiscal federalism and decentralisation. Fiscal federalism involves distributing financial responsibilities between the union government and states, while fiscal decentralisation transfers financial authority to local governments.  

Let's take an example: Imagine the union government in India collects taxes from all citizens and then decides how to distribute these funds among the different states. This is an aspect of fiscal federalism, where the union government plays a significant role in managing finances at the national level.

Now, fiscal decentralisation would be like the union/state government giving some of these tax-collecting powers to the local governments. So, instead of the union/state government deciding everything, local governments in each state get to decide how to spend a portion of the collected taxes based on the specific needs of their region.

In simpler terms, fiscal federalism deals with the overall money management between the union government and state governments, while fiscal decentralisation is about letting local governments have more say in how money is spent in their areas. It may be noted that fiscal decentralisation is a key aspect of fiscal federalism, as it involves distributing financial decision-making authority to different levels of government.

What studies and experts say
Kerala is often lauded for its advanced model of fiscal decentralisation.Centre for Policy Research, New Delhi in 2021 released 'PAISA for Panchayats Study for the State of Kerala' report, which explored the status of fiscal decentralisation. According to the study, Kerala has been recognised for its advanced model of fiscal decentralisation to rural local governments. It emphasised the state's commitment to devolving a significant percentage of devolvable revenues to panchayats, allowing flexibility in spending, and promoting participatory planning. However, the study suggests that Kerala is facing challenges in maintaining this reputation, particularly in managing various fiscal streams and showing signs of strain in expenditure flexibility. Despite these challenges, the study noted a harmonious relationship between line departments and panchayats, fostering cooperation. The concluding remarks of the study propose that Kerala may maintain its current model of devolution with limited reforms, and the focus may shift towards greater inter-governmental cooperation and networking rather than classical devolution. The need for networked services is emphasised, considering Kerala's unique settlement pattern and urbanisation trends.

Ajil Mankunnummal, PhD scholar at the Centre for Development Studies, also holds a similar view. He noted that studies also suggest local governments in the state are proactive in project formulation and local concerns are reaching the state government. "By 2016, the state government changed the planning methodology so that developmental plans would be ready before the commencement of a financial year. The movement of files concerned became swift, and local governments have a one-year window to implement projects. Now the issue is that local governments are devoid of funds, which puts planned projects in limbo," he noted.

In the peer-reviewed journal EPW, a commentary titled 'Enablers of Successful Fiscal Decentralisation' by Parvathy Sailesh, Pre-Doctoral Fellow at IIM B, and Dr. Padmini Ram, Director of Urban Ethnographers, shed light on factors that give Kerala an edge. “Public participation, local community aiding local administration, guidelines and infrastructural support given by state government, knowledge transfer and capacity building of local self-government officials, optimum fiscal autonomy, facilitation of state government are the key enablers,” Sailesh said.

However, Sailesh noted that public participation is steadily declining. "The availability and quality of data from local governments is an issue. Some of the criteria set by the state government for approval are rigid. Lack of private sector participation, the gap between projects needed by local governments and projects pitched by state/union governments are challenges,” she added.
 

Dr. Nisha Velappan Nair, assistant professor at the School of Gandhian Thought and Development Studies, MG University, who authored 'Fiscal Decentralisation and State Finance Commissions', shared her findings about the state. "It was declared at the commencement of people’s planning that 35 to 40 per cent of the state’s plan fund would be given to local governments. The First State Finance Commission (SFC), which was constituted before peoples planning, did not recommend any specific percentage of fund. The Second SFC proposed keeping it at a minimum of 33 per cent. However, the then government opposed the recommendation, stating that it should not be a mandatory condition. The Third SFC endorsed the second SFC recommendations and emphasised fund utilisation. The Fourth SFC recommended keeping it at 25 per cent and raising it gradually to 30 percent by the fifth year.  It merged the Union Finance Commission and the World Bank funds for the first time, thereby reducing the actual share of the local governments as well as the burden of the state government. Several accepted recommendations remain on paper. Also, the follow-up on the SFC recommendations by the state is poor," she said.

Nisha also commented on issues with local governments. "Local governments are heavily dependent on the state government and not very proactive in becoming self-reliant by finding methods to improve their funds. They worry that moves like hiking taxes may politically affect them. They are also not prompt in maintaining proper records on fund usage, which SFCs have flagged many times," she added.

BA Prakash, economist and former chairman of the Kerala Public Expenditure Review Committee and the SFC, shared his reflections. "While Kerala frequently highlights its superior fiscal decentralisation in comparison to other states, the sentiment expressed is at odds with my personal experience. In my observation, the state government does not appear to adopt a genuinely pro-decentralisation stance,," he said.

He detailed why he put forward such an argument. "The commission set up during the UDF government highlighted that the state's fiscal situation is bad and state's finances should be considered before devolving shares to local governments. However, the commission maintained that at least the ongoing practice of giving 20 percent of the net proceeds of annual State's Own Tax Revenue be devolved to local governments as total devolution on (t) basis for the first year should be continued. For the subsequent years, an annual increase of one percent was recommended. On the other hand, a finance department representative noted that such recommendations are impractical as the state is already burdened with the pay revision. Left leaders argued that devolution suggested was not friendly to local governments. After the elections, the LDF government was sworn into power in 2016. Fifth SFC's first part of the report containing devolution recommendations, which was submitted in December 2015, did not promptly reach the assembly.  The action taken report was placed in Kerala State Legislature in February 2018. That means the state government did not implement the Fifth SFC report for two years (2016-17 and 2017-18). The state government was not prepared to devolve funds to local governments based on SFC recommendations for five years (2016- 17 to 2020-21). As a result, the local governments got only a lower amount than the amount recommended by the Fifth SFC. And the 1200 local governments in Kerala were denied their legitimate right to receive their due share of taxes recommended by Fifth SFC," he said.

Interestingly, Prakash also did a comprehensive analysis, examining five SFC reports and scrutinising their implementation. The findings, published in EPW, reveal crucial insights into the fiscal decentralisation of the state. The major findings about fiscal decentralisation are as follows:

• Kerala's successive governments have consistently pursued anti-decentralisation policies, limiting local governments' ability to mobilise their own resources.
• Local governments are required to seek government permission for borrowings, hindering their financial autonomy.
• The state government retains the authority to appoint staff, consolidating control over crucial decision-making processes.
• Financial powers, including the ability to revise rates and make periodic adjustments to taxes, have not been transferred to gram panchayats and municipalities, contributing to a lack of fiscal flexibility.
• Over the past two decades, rates for taxes and non-tax items have not been periodically revised, exacerbating the financial challenges faced by local governments.
• Rural and urban local governments have given low priority to mobilising their own resources, further increasing dependence on transferred funds.
• The assignment of agency functions without adequate administrative support has shifted the priorities of gram panchayats and municipalities, resulting in a decline in the quality of civic services.
• Instead of granting financial autonomy, the state government has compelled local governments to divert funds for specific state schemes, adding to their financial burdens.
• Serious fiscal problems afflict municipalities due to the diversion of funds for retirement benefits and pensions, impacting their financial stability.

What local body representatives say

TK Narayanan P, President of the Congress-led Kallar Panchayat in Kasaragod, expressed dissatisfaction with both the state and central governments, citing delays in fund releases. "Regarding the Centre, only funds for pensions, MGNREGA, and Swachh Bharat Mission are available. The panchayat lacks access to other critical funds, including those recommended by the Union Finance Commission, both untied and tied. Regarding the state government, the panchayat has not received the general purpose fund for three months, amounting to nearly Rs 27 lakhs. Similarly, the panchayat has not received the third instalment of funds allocated for the financial year 2023-24, ending this March 31," he said.

Narayanan alleged that neither the state government nor the Centre is concerned about the timely availability of funds. "Sometimes they allocate funds at the last minute of the financial year, seemingly unconcerned about our practical ability to use the funds. Waiting for treasury bill conversion is another ordeal," he said.

Bhavadasan K, Finance Standing Committee member of the BJP-led Palakkad Municipality, noted an undeclared treasury ban, stating instances where even Rs 5,000 treasury bills were not cleared. According to Bhavadasan, the lack of own funds and the delayed and meagre allocation of the plan fund pose challenges. However, he acknowledged that the Centre has a better track record concerning the Palakkad Municipality.

Noushad A, Finance Standing Committee member of the CPM-led Kollam Corporation, highlighted the burden placed on the state government due to the Centre's non-timely release of its share of funds. "While the Centre claims direct transfers to beneficiaries, these transfers do not reach beneficiaries on time. Even when the state government releases its share, the beneficiaries do not receive the union government's share. This condition ultimately leaves many schemes in limbo," he said.

Noushad added that the state government would scrutinise the fund utilisation of local governments, and improper utilisation could potentially affect subsequent fund transfers.