When GST compensation to States fell short due to economic slowdown (2019-20), the Centre borrowed on behalf of States to meet compensation commitments. This reflects which federal principle?
- Violation of federal principles as Centre cannot borrow for States
- Cooperative federalism with flexible mechanisms to address unforeseen challenges while honoring commitments
- Permanent transfer of State taxing powers to Centre
- Elimination of State fiscal autonomy
Answer: Cooperative federalism with flexible mechanisms to address unforeseen challenges while honoring commitments
GST compensation case study (2019-2022): (a) Legal framework: GST (Compensation to States) Act, 2017 guaranteed States 14% annual revenue growth compensation for 5 years (2017-22), funded by GST compensation cess, (b) Challenge: Economic slowdown reduced cess collections; compensation shortfall threatened State finances, (c) Solution: Centre borrowed ₹1.1 lakh crore on behalf of States (back-to-back loans) to meet compensation; States repaid from future cess collections, (d) Federal principles demonstrated: (i) Honored commitment despite fiscal stress: Centre prioritized State revenues, (ii) Flexible mechanism: Borrowing arrangement preserved State fiscal autonomy without amending Constitution, (iii) Dialogue through GST Council: Consensus-building resolved crisis without litigation, (e) Broader implications: (i) Trust in cooperative federalism: States confident Centre will honor commitments, (ii) Institutional resilience: GST Council mechanism adapted to unforeseen challenges, (iii) Fiscal responsibility: Balance between State revenue protection and Centre's fiscal constraints, (f) Illustrates cooperative federalism in practice: Institutional mechanisms enabling adaptive problem-solving while respecting fiscal autonomy; flexibility within constitutional framework.