[This is a guest post by Devesh Kumar.]
Federal grants to states are necessary as no system of distribution can possibly meet the need for natural development and social services, which are usually the responsibility of states. In order to meet the requirements, the central government provides the finances in the form of grants to state governments. The federal structure of Indian Constitution [“Constitution”] lays down many institutional strategies for fostering intergovernmental cooperation between the centre and states. For an instance, under Article 275, the Central government shall make grants-in-aid to States as per Finance Commission’s recommendations. Such grants are given to those states which are in need of financial assistance.
These federal grants become extremely necessary for a state during emergency situations like the COVID-19 pandemic where the state government itself cannot handle such a situation. Keeping this in mind, the Central government on 3rd April 2020 released Rs 17,287.08 crore to different states to enhance their financial resources to deal with the various challenges in the fight against this pandemic. The grant includes Rs 6,195.08 crore towards ‘revenue deficit grant’ under the recommendations of the 15th Finance Commission to 14 states, and Rs 11,092 crore in advance under the State Disaster Risk Management Fund [“SDRMF”] to states to build quarantine facilities.
However, this distribution of funds is very contentious. Kerala, one of the worst affected states, received a mere Rs 157 crore under SDRMF. On the other hand, Rs 802 crore was allocated to Odisha, a state with far fewer reported cases and migrants, which is 5 times the allocation of Kerala. So, why is there such inequality and is it justified under the Constitutional framework? If not, then what must be done in order to rectify such a mistake? In this blog, I shall try to answer these questions.
Concept of Grants- in- aid under the Constitution of India
The idea of fiscal need has been borrowed from Australia. Section 96 of the Constitution of Australia provides that Special grants are justified when a state, through financial stress from any cause, is unable efficiently discharge its functions as a member of the federation. In India, the Parliament has the power to make such grants under Article 275 and 282 of the Constitution. Article 282 states that ‘the centre may make grants for any public purpose notwithstanding that the purpose is not one with respect to which Parliament may make laws.’ Such grants are used for a number of purposes like promoting state action in all significant areas of the nation; even the centre may give grants as an incentive to the states. Thus, the financial resources of the centre and states are pooled together with a view to achieve certain preferred national goals, such as fighting COVID-19 together.
Under Article 275 of the Constitution, the central government can provide statutory grants to states. Such grants are given to those states which are in need of financial assistance, in the form of unconditional grants. Currently, the central government distributed the funds to all state governments under this provision, since the SDRMF is a statutory fund provided under Article 48 of the Disaster Management Act, 2005 and the 15th Finance Commission has recommended for such grants to the tune of 28, 983 crores for the year 2020-21.
Recognizing the problem of financial imbalances, the Constitution empowers the Finance Commission to resolve such imbalances by making recommendations on tax devolution and grants in aid of revenues. The analysis of intergovernmental transfers shows that that the tax devolution and grants given on the recommendations of the Finance Commission have a strong equalizing element. However, in the case of COVID- 19 funding, the purpose of establishing the Finance Commission seems defeated. As stated earlier, the grants categorized by the Finance Commission do not seem fair and equalizing. Therefore, we need to look into the constitutionality of such grants.
The Finance Commission recommendations and test of its Constitutionality
Eminent jurists such as H.M. Seervai identified fiscal independence as one of the features of the federal character of the Constitution. The principle of federalism is well-founded in the recommendations, as under Article 280(3) it decides the share of revenue, grants, etc. The Finance Commission recommendations include both the vertical and the horizontal devolution of union revenue. In the present case of vertical devolution, the criteria adopted by the commission have caused the decrement in the transfer to a few states like Kerala. This has caused serious implications on the autonomy of states in terms of their financial powers.
The Constitution of India envisages the sharing of tax between the centre and state, where the centre has to share some portions of its tax with the states. The objective of federal transfer is fiscal equalization and the Commission (as an expert body) has to make recommendations in a fair and equitable manner. The right to equitable distribution incorporates the concept of equality, which is fundamental to republicanism and the rule of law. The recommendations, being a constitutional mandate on the Finance Commission under Article 280(3), evidently attract the principle of equitable distribution based on equality. Hence, the Commission is obligated to take into account the above principles of federalism and equality.
Where did the Finance Commission go wrong?
The total SDRMF allocation for the year 2020-21 is Rs 28,983 crore. The latest release for the response to COVID-19 is Rs 11,092 crore; this sum is split into the ratio suggested by the 15th Finance Commission. The allocation formula for the fund was changed, and the 15th Finance Commission proposed a new system before the COVID-19 crisis. The criteria inter alia include previous expenditure, population and area of the State. Unfortunately, the Finance Commission did not consider any specific criterion pertaining to COVID-1,9 like number of confirmed cases. As a result, its findings are odd in this context as Kerala receives Rs 53 lakh per patient while Odisha receives some Rs 160 crore per patient. Therefore, the after-effects of 15th Finance Commission recommendations show that the formula used by the Commission was arbitrary and results in the violation of equitable distribution of the revenue.
The Finance Commission’s goals include inter alia equity principle, efficiency, predictability and stability, where its transfers are meant to rectify the horizontal imbalances among the states. The preamble of the Constitution guarantees the equality of status and of opportunity. Therefore, D.D. Basu in his commentary on the Constitution of India (ed. 8, p. 9301) states that the Finance Commission, while discharging its duties, has to look into the needs of the states and come up with the principles to take account of various factors such as:
- The budgetary need.
- The promotion of activities of national importance.
- The special needs of a particular state, etc.
- The need of equalizing the social services and administration standards to a national level.
These transfers aimed at bringing equalization serve as a valuable aid to the stability of a federation and the citizenship rationale. The foregoing assertion is based on a premise that no matter wherever a citizen lives, she should have access to certain important economic and social rights.
Further, the doctrine of equality enshrined in the Constitution is fundamental to the rule of law and therefore is the basic feature of the Constitution. Such equality has been breached in present case since relevant considerations pertaining to pandemic are not being taken into account has led to the arbitrary decision. The funds were distributed rather taking into account the irrelevant considerations such as geographical area, population etc. Therefore, recommendations based on irrelevant parameters violate the right to equality of residents of Kerala. Now, in order to rectify the same, the Finance Commission must change the parameters and include relevant parameters like number of confirmed cases as suggested by the opposition. However, this process would be time-consuming and such delay will not serve the purpose. Therefore, the centre must adopt the other way of providing grants to the discriminated states by drawing its power from Article 282 of the Constitution.
The Way forward
In the current situation where various states are facing financial stress, it is the responsibility of the central government to provide them discretionary grants allowed under Article 282 of the Constitution. As discussed above, such grants are discretionary in nature and it depends upon the will of the central government to grant the same. However, the centre cannot do away from its responsibility by merely citing its discretion. There are many instances (here, here and here) where the Supreme Court and High Courts in India have struck down the unfettered discretion of the authority. In a democratic country like India, unfettered discretion should not exist with any organ of the state. Going by same reasoning, the central government should not be allowed to use its unfettered discretion without looking at relevant considerations. Therefore, in present situation of financial distress, discretionary grants must be provided to the States that are in need of such finances.