“Every opportunity is taken to undermine the federal system…it’s a terrible situation,” Isaac said during the fifth LC Jain Memorial Lecture on “The Challenges of Federalism: Tensions at the Negotiating Center.”

He said the center’s budget deficit has fluctuated between 3.5 and 6 percent since 2005-06.

“States should not borrow more than 3 percent of the GSDP. The government never complied… in 2005-06 the central government’s budget deficit fluctuated between 3.5 and 6 percent. That is the basic asymmetry. No rule or law, the center has to abide by it, but states are compelled to do so,” he added.

Speaking about the lack of federal flexibility for states under the goods and services tax (GST) regime, Isaac said the countervailing levy could have continued for two more years.

“There may be some federal flexibility… when the flood disaster came Kerala applied for and received a 1 per cent levy on the SGST (government GST). Nothing happened to the architecture of GST. See, you can give flexibility to the federal government by allowing the states… (some states like) want more schools, they want to break the FRBM law, those who don’t want it don’t, but even that little bit Flexibility isn’t there.

“Compensation has stopped…it’s a tax that’s levied on sin goods like tobacco…you can go on for another two years…there used to be negotiations, now that’s not the case,” he said.

Under the GST, under the Goods and Services Tax (Compensation to States) Act 2017, states were guaranteed compensation at the compound rate of 14 per cent from the 2015-16 base year for losses resulting from the implementation of the tax regime for five years since its introduction. The compensation scheme ended in June 2022.