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The GST (Compensation to States) Act, 2017 guaranteed States compensation for revenue loss due to GST implementation for five years (2017-22). When compensation fell short due to economic slowdown, the Centre borrowed on behalf of States. This reflects:
- Violation of federal principles as Centre cannot borrow for States
- Cooperative federalism with flexible mechanisms to address unforeseen challenges
- Permanent transfer of State taxing powers to Centre
- Elimination of State fiscal autonomy
Answer: Cooperative federalism with flexible mechanisms to address unforeseen challenges
GST compensation case study: (a) Legal framework: GST Act guaranteed 14% annual revenue growth compensation to States for 5 years, funded by GST compensation cess, (b) Challenge: Economic slowdown (2019-20) 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: (i) Honored commitment despite fiscal stress, (ii) Flexible mechanism preserved State revenues without amending Constitution, (iii) Dialogue through GST Council resolved crisis. Illustrates cooperative federalism in practice: institutional mechanisms enabling adaptive problem-solving while respecting fiscal autonomy.