Financial Relationship between Union and State Governments.
GS PAPER 2
THE HINDU EDITORIAL ANALYSIS
- Borrowing Limits: The Union government imposes a borrowing limit of 3% of State income or Gross State Domestic Product (GSDP).
- Debate on Federalism: Kerala contests this limit, asserting it undermines financial obligations and federalism principles.
State vs. Union Government Spending:
- Taxation and Spending Powers: Union government handles tax collection while State governments manage significant spending.
- Responsibility for Social Services: States bear the primary responsibility for sectors impacting daily lives.
- Disparity in Spending: State governments collectively spent significantly more than the Union in social services, education, and health.
Budget Expenditure Analysis:
- RBI Classification: Expenditures classified into developmental and non-developmental categories.
- Trend in Developmental Expenditures: State governments' developmental spending increased from 8.8% (2004-05) to 12.5% (2021-22) of GDP.
- Union Government Spending Trends: Developmental spending remained relatively stable with intermittent fluctuations.
- State Government's Role in Livelihood Crisis Alleviation: State spending crucial in mitigating livelihood crises due to sluggish rural growth.
Kerala's Spending Patterns:
- Historical Perspective: Kerala historically allocated 40-50% of spending to education, health, and social sectors.
- Continued Emphasis on Social Spending: Kerala maintained high social sector spending compared to other states until the mid-2000s.
- Allocation for Personnel and Pensions: Significant portion directed towards salaries, especially for female government employees, and pensions for retirees and disadvantaged groups.
- Concerns over Capital Expenditure: Only a small fraction of Kerala's budget directed towards capital expenditure (10.6% in 2022-23), hindering infrastructure development.
Financial Challenges and Responses:
- Sources of Funds: States receive funds from own revenues, Union transfers, and market borrowings.
- COVID-19 Response: Kerala increased spending during the pandemic, supported by relaxed borrowing norms.
- Decrease in Union Transfers: Union transfers to Kerala reduced, prompting increased borrowing to meet budget expenditure (3.4% of GSDP in 2023-24).
- Legal Challenge: Kerala's plea for additional borrowing referred to a Constitution Bench by the Supreme Court as Union government imposes a borrowing limit of 3% of State income or Gross State Domestic Product (GSDP).