Kerala vs Centre: A battle of finances and federalism

“Bharanavum Samaravum” (Administration and Agitation) was the slogan coined by E.M.S. Namboodiripad in 1967 when he was sworn in for the second time as Kerala’s Chief Minister, heading a seven-party alliance. The call for agitation was against what he saw as the Central government’s political and economic discrimination against the State. Obviously, the communist patriarch had not forgotten the experience of his first innings as Chief Minister a decade earlier.

As the first EMS Ministry of 1957 entered its second year as one of the world’s earliest democratically elected communist governments, it was summarily dismissed by the Congress government at the Centre. The reason cited was constitutional breakdown and the collapse of law and order in Kerala. EMS had known that his government’s journey would not be smooth. He had even warned his more radical comrades against proposing an “oversimplified and dogmatic conception of class war” against the “bourgeois” Central government.

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However, despite the Congress-led “liberation struggle” in the State to oust his government, EMS did not expect such a brazen move from a committed democrat such as Prime Minister Jawaharlal Nehru, who was once his hero and on whom he had written his first book in 1931. Nehru was reportedly reluctant to agree with his daughter and new Congress president Indira Gandhi’s insistence that the communist government be dismissed immediately. Indira’s husband, Feroze Gandhi, had also openly opposed her.

Yet, on July 31, 1959, President Rajendra Prasad dismissed the EMS Ministry and dissolved the State Assembly on the recommendation of the Nehru Cabinet. It was the first instance in the country when Article 356 of the Constitution was imposed.

The CPI(M) came to power seven more times in Kerala after that but never faced the first government’s predicament, and Nehru’s act was widely condemned as a blot on his democratic credentials.

And the Left never stopped fighting against the neglect and discrimination by the Union government, irrespective of the party in power. It kept harping on how the Centre violated federal principles and ignored the Justice Sarkaria Commission’s warning against making States financially dependent on the Centre.

Yet, this campaign never gathered significant political momentum in Kerala society, which is dominated by national parties and remains uninterested in issues, unlike the Dravidian identity-based, regionalist, cultural politics (anti-North, anti-Hindi) of its neighbour Tamil Nadu.

Protest against Centre

Seen in this context, the high-profile protest against the Union government’s “financial injustice” staged by Kerala Chief Minister Pinarayi Vijayan and his entire Cabinet at Jantar Mantar in New Delhi on February 8 was unprecedented. It followed a public campaign launched by the ruling Left Democratic Front (LDF) in September against the Narendra Modi government’s “economic sanctions” against the State. However, Union Finance Minister Nirmala Sitharaman rubbished the charges as the State’s attempt to hide its poor financial management and profligacy.

According to the LDF, the Modi government has pushed Kerala to its worst-ever financial crisis. In December, the Kerala government filed an original suit in the Supreme Court stating that it could not fulfil its budgetary commitments as a result of the Central government’s “unconstitutional interference” in its finances and the limits imposed on its borrowing. The State requested the court to direct the Centre to grant a sum of Rs.26,000 crore urgently. The apex court directed the Centre and the State to solve the issue through mutual discussion.

According to the State, this year alone it suffered a loss of Rs.57,400 crore owing to the Centre’s policies. It particularly deplored the Centre’s substantial lowering of its borrowing limits. According to the suit, imposing a net borrowing ceiling (NBC) on even Kerala’s extrabudgetary borrowings violated Article 293 of the Constitution.

“The ability to determine the borrowing of the State to balance the Budget and make up the fiscal deficit is exclusively within the domain of the States,” the State government said in the suit. But in its counter affidavit, the Centre charged that Kerala was one of the most financially unhealthy States. “Kerala’s financial stress is due to its mismanagement. The Reserve Bank of India has categorised Kerala as among the five highly stressed States requiring urgent corrective measures to avert a financial emergency,” it said.

According to Kerala’s Finance Minister K.N. Balagopal, the details of the revenue denied to Kerala under Central transfers and loan approvals are as follows: whittling down borrowing limits (Rs.17,000 crore); reduction in revenue deficit grants (Rs.8,400 crore); a cut in GST compensation (Rs.12,000 crore); arrears in funds for Central schemes (Rs.4,200 crore); and a fall in the State’s tax share from the divisible pool (Rs.18,000 crore), from 3.88 per cent during the Tenth Finance Commission to 1.93 per cent now after changes in the Financial Commission’s norms of devolution.

Kerala believes that the changes in norms that favoured the more populous States have led to the Centre punishing it for bringing down its population growth.

The State informed the apex court that the Centre’s policies had resulted in huge arrears of social security pensions to the poor and vulnerable sections, allowances to State employees and pensioners, and dues to its State-owned enterprises. According to reports, the State owes Rs.50,000 crore in arrears to various schemes, projects, and departments.

At a protest by members of the Kerala State Service Pensioners Association, whose demands included the release of arrears, in Thrissur on May 31, 2023. Pensioners are badly affected by the State’s stressed finances. | Photo Credit: K.K. NAJEEB

Pending payments

The hallmark of the famed “Kerala development model”, which helped the State record the country’s highest human development indices and the lowest poverty figures, has been its phalanx of social security payments. As many as 60 lakh people belonging to vulnerable sections benefit from them.

These payments, however, have been pending for more than six months, with mounting arrears totalling more than Rs.4,600 crore. Pending payments to private hospitals under Karunya, the State’s free healthcare scheme, have crossed Rs.2,000 crore. Hospitals are now denying treatment to beneficiaries and are approaching the court to recover pending payments. Other significant dues include dearness allowance payments to staff and pensioners (Rs.23,000 crore) and money owed to government contractors (Rs.12,000 crore).

The Centre has also withheld more than Rs.5,000 crore meant for Central schemes being implemented in the State, citing the State’s refusal to add branding such as Central department logos and Prime Minister Modi’s image. This has put in limbo projects under the Pradhan Mantri Awas Yojana, Swachh Bharat Mission, Ayushman Bharat, National Health Mission, and Poshan Abhiyaan. The State government has questioned the rationale of displaying only Central government branding, stating that it shares the costs of these projects.

Moreover, in the case of the Awas Yojana, the State requested the Centre to refrain from displaying branding on the constructed houses, as it would “compromise the dignity of beneficiaries because safe living space is their fundamental right and not a gift”.

The Centre has sent posters of the Antyodaya Anna Yojana, with Modi’s picture, to be displayed near 14,000 ration shops in Kerala, with instructions to set up “selfie points” near 550 select shops. Chief Minister Vijayan called it an election gimmick and announced in the Assembly that the State would approach the Election Commission against the directive.

The Centre has also refused to disburse its share of Rs.750 crore towards salary arrears to college teachers after the Seventh Pay Commission passed the updated University Grants Commission’s pay scales. Sitharaman said that the amount was withheld because the State had not submitted the required documents.

A highly distressing facet of the Kerala economy has been its mounting debt, which rose from Rs.1.86 lakh crore in 2016-17 to Rs.3.38 lakh crore in 2022. According to the RBI, Kerala is among the 12 States whose debt-to-GDP ratio has crossed 35 per cent. The Centre stated in the Supreme Court that Kerala’s borrowing had to be capped because its mounting debt burden was affecting the country’s credit ratings.

Cap on borrowings

The Kerala government was particularly irked by the Centre’s decision to cap off-Budget borrowings of State-backed statutory bodies constituted to fund infrastructure and social security payments. This has stalled nearly 1,000 ongoing infrastructure projects with a total outlay of Rs.74,000 crore, and pension payments. The LDF government is worried that this could affect its prospects in the coming election.

On the cap on borrowings, the State government said that it was a case of the pot calling the kettle black because the Union government accounted for 60 per cent of India’s total debt or outstanding liabilities. “Kerala accounts for only 1.70-1.75 per cent of the total combined debt of the Centre and the States for 2019-2023,” said Balagopal.

Kerala Finance Minister K.N. Balagopal presenting the State Budget 2024-25 in Thiruvananthapuram on February 5. | Photo Credit: PTI

According to him, Kerala’s debt declined to Rs.2.38 lakh crore in 2022-23 from Rs.3.32 lakh crore in March 2022. The US credit rating agency Fitch also revised its outlook on Kerala to “stable” from “negative” last year, while retaining a “BB” rating for the State’s long-term foreign and local currency issuer default ratings.

The protest at Jantar Mantar was turned into a collective show of the opposition’s strength. Besides Chief Ministers such as Delhi’s Arvind Kejriwal and Punjab’s Bhagwant Mann, those present to express solidarity included the National Conference’s Farooq Abdullah, Rajya Sabha member Kapil Sibal, and the Dravida Munnetra Kazhagam’s P. Thiaga Rajan. The Chief Ministers of Tamil Nadu, M.K. Stalin, and Mizoram, Lalduhoma, sent messages expressing support.

However, the Congress kept away from the protest in deference to its Kerala unit’s decision (although Karnataka’s Deputy Chief Minister D.K. Shivakumar publicly supported Kerala’s agitation). With mutual hostilities soaring in the run-up to the Lok Sabha election, Kerala’s Congress leaders pooh-poohed the LDF protest as drama to hide financial mismanagement and corruption. A day earlier, Karnataka’s Congress leaders, led by Chief Minister Siddaramaiah, had held a protest at the same venue, also against the Centre’s alleged neglect of the State.

Criticism of Kerala govt

The LDF can ignore its political opponents, but criticism from even pro-Left economists is causing it some embarassment. Speaking to a newspaper, Dr K.P. Kannan, former Director, Centre for Development Studies, Thiruvananthapuram, said: “It is incorrect to put the entire blame for Kerala’s economic troubles on the Central government. The State government has failed miserably in improving tax mobilisation. Transferring your inefficiency to the Centre or accusing the Centre is a politically convenient shortcut. You have got to put your house in order and then argue with the Centre for a more State-friendly redistribution of revenue.”

However, Kannan did admit that Kerala’s economy had maintained a decent annual growth in real terms of around 6 per cent, close to the national average, which is among the best globally. According to him, the economy and society were doing remarkably better than other States thanks mainly to foreign remittances.

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Balagopal refuted the criticism of financial mismanagement. “The State’s own tax revenue registered a robust growth in the past couple of years. It grew by 23.4 per cent from Rs.47,661 crore in 2022-21 to Rs.71,968 crore in 2022-23. Revenue deficit and fiscal deficit also came down from 2021-22,” he said. But Kannan said that this was “much below the potential capacity”. As protests from southern States grew shriller, Sitharaman claimed that the Modi government had allocated much more to them than the previous United Progressive Alliance (UPA) governments. According to her, nearly Rs.2,93,257 crore was given to Kerala as its share in taxes and Central grants between 2014 and 2023 compared with Rs.72,000 crore disbursed between 2004 and 2014 under UPA rule.

Balagopal questioned this logic, pointing out that the comparison between the two periods should be based on percentages, not absolute figures. He also pointed out that the share of Central cess and surcharges in the gross tax revenue, which need not be shared with the States, rose from 10 per cent in 2010 to 28.1 per cent last year, resulting in a loss of Rs.20,000 crore to Kerala. According to him, although the Centre’s discrimination seriously stresses the State, it will not affect his government’s plans to improve the lives of people through revenue or capital expenditure, both of which have increased this year. But what about the money for it? “If the Centre continues like this, we have a Plan B,” he said in his Budget speech in the Kerala Assembly on January 31. That plan has not been unveiled yet.

M.G. Radhakrishnan, a senior journalist based in Thiruvananthapuram, has worked with various print and electronic media organisations.