Fiscal federalism at a crossroads: Kerala rests its hopes on 16th FC

Much is expected from the 16th Finance Commission (FC), a constitutional body dealing with fiscal transfers crucial to India's federal setup. The Constitution's framers established the FC recognizing the need to redistribute resources from the Union to states due to disproportionate expenditure obligations and revenue-raising powers.Currently, vertical fiscal imbalances between the Union and states are worsening. Despite the 14th FC recommending 42% of Union's net tax proceeds (41% by 15th FC), states receive only 30-32% of gross tax revenue due to rising surcharges and cesses. As regards grants disbursed by the Union, a substantial portion is conditional. Resource distribution to states shouldn't be viewed as draining Union resources. In a federal democracy, all govt tiers have defined roles, with states and local govts needing fiscal empowerment to fulfill their constitutional duties. In the walk to build a strong nation, weak states and local govts cannot be equal partners with the Union.As the Sarkaria Commission noted, over-centralization leads to blood pressure at Centre and anaemia at states. The 16th FC must recommend shifting from conditional to unconditional, predictable transfers.Kerala has been working to boost revenues and rationalise expenditure while balancing infrastructure development and welfare priorities. The state has declared objectives to end homelessness and eliminate extreme poverty. We have made good strides in our efforts to achieve these goals. However, recent restrictions on open market borrowing limits by the Union govt have caused liquidity stress, forcing legal action. The state faces challenges on multiple fronts: Its share in Union taxes has reduced due to the weightage given to current population-based criteria in the distribution formula, and its clean energy policy implementation leads to revenue losses from declining fossil fuel taxation.The state's vulnerability to climate change is heightened by its long coastline, mountainous terrain, eco-fragile zones, and high population density. The gravity of the recent tragedy in Wayanad has shocked the conscience of all of us. Kerala urgently needs resources for building a disaster-resilient habitat system through its Rebuild initiatives, which it cannot finance alone. The 16th FC needs to consider these problems faced by Kerala. The 16th FC's Terms of Reference appropriately focus on the provisions of Article 280 of the Constitution, unlike its predecessor's expansive scope that sparked debate.With this good beginning, I hope that the 16th FC will take an overall view of our federal setup to address vertical fiscal imbalances, balance tax distribution between states, and provide necessary grants-in-aid. Its recommendations will be crucial for states like Kerala as Indian federalism stands at a crossroads.(The writer is chief minister of Kerala)