Understanding financial emergency from the standpoint of law and policy

The World Health Organization declared COVID-19 a Pandemic and India declared COVID-19 as a Notified Disaster on 14.03.2020. The Prime Minister of India on 24.03.2020 announced a complete nationwide lockdown for three weeks explaining that it was the perfect way of breaking the Covid-19 infection cycle which led to cessation of work at various Governmental offices, Courts, Industries which has been further extended twice till 31.05.2020.

The Ministry of Home Affairs notified Covid-19 as a disaster, in a move that enabled the state government to spend a larger chunk of funds from the State Disaster Response Fund (SDRF) to fight the pandemic. The SDRF has an allocation of around Rs 29,000 crore in fiscal year 2020-21 out of which Union Minister of Home Affairs (MHA) approved the release of ` 11,092 crore under the State Disaster Risk Management Fund (SDRMF) to all the States to take measures for containment. The Prime Minister even incorporated a separate fund as PM Cares to tackle Coronavirus.

Due to the growing number of positives cases and lockdown, the business establishments were forced to shut their factories, offices taking their revenue and trade to almost nil and migration of workers from one state to another across India. The International Monetary Fund (IMF) chief said that the coronavirus pandemic has hit the global economy so hard that the world has entered into a recession forcing many corporations to deduct salaries and wages and even terminating employees. Even the Economic stimulus as announced by the Finance minister of INR 20 lakh crore for Covid-19 relief may not help the vulnerable sections of the population and business entities in distress.

If the situation continues or worsens, the Union may perhaps consider the Financial Emergency route as envisaged under the Constitution of India, in order to revive the economy. Understanding Financial Emergency under Article 360

Part XVII of The Constitution of India talks about three types of Emergencies;

1. National Emergency under Article 352,

2. Case of Failure of Constitutional Machinery in a State under Article 356

 3. Financial Emergency under Article 360,

If the President of India on the advice and recommendation of the council of Ministers is satisfied that a situation has arisen whereby the financial stability or credit of India or any part of its territory is threatened, the president may issue proclamation and declare Financial Emergency. A proclamation of financial emergency must be approved by both the Houses of Parliament within two months from the date of its issue. A resolution approving the proclamation of Financial Emergency can be passed by either House of Parliament by a simple majority. Once approved by both the Houses of Parliament, the Financial Emergency continues indefinitely till it is revoked and there is no maximum time limit prescribed for the operation of financial emergency.

Effects of Financial Emergency

The powers of the Union under Article 360 are vast such as, 1. The Union can give direction to any State to observe any such canons of financial propriety as may be specified in the directions. 2. All money bills or other financial bills passed by the state legislature that come up for the President’s consideration, can be reserved. 3. Issue directions for the reduction of salaries and allowances of all or any class of persons serving in connection with the affairs of the Union including the Judges of the Supreme Court and the High Courts Article 360 of the Constitution of India v. Disaster Management Act,

The National Disaster Management Act empowers the National executive to lay down policies, plans and guidelines for disaster management and to ensure timely and effective response to a disaster and including powers to penalize any person including companies and corporations for non-conformity of the orders or directions by any person passed by the authorities. The DM Act gives directions to the concerned Union Ministries, UT/State Governments regarding measures to be taken by them in response to any threatening disaster situation or disaster itself but does not direct the states on how to handle its finances.

In a nutshell, Disaster Management Act can at best direct the States in the management and handling of the disaster, whereas, on the other hand, during the operation of a Financial Emergency, the Union gets full control over states in financial matters. The States Government and their depleting coffers have begun cutting costs, shelving expensive projects to the extent that the Kerala State Government promulgated Kerala Disaster and Public Health Emergency (Special Provision) Ordinance, 2020 to defer payments of up 25% of monthly salary of its employees, though the Union Government may not find this enough. To put it simply, during the operation of a financial emergency, the Union gets complete control over states in financial matters, which is a threat to the state’s financial sovereignty and federalism. The state legislatures have exclusive power to levy taxes on the subjects mentioned in the State List in the Seventh Schedule in the Constitution. The proclamation of financial emergency may cause a serious threat to the financial autonomy of the states that is against the federal structure of the country. Some may also argue that if a state breaks financially, it will affect the finances of the Centre: if the Centre experiences financial hardship, all the states will start to fall apart. Therefore the interdependency of the States and the Centre has to be supreme that the whole financial integrity of the country is one, at the same time keeping in mind that the States are going to be the first responder of any emergency. If the situation arises, the States must acknowledge that unitary control may be absolutely necessary.

Though no Financial Emergency under Article 360 has ever been issued so far, back in 1991, a situation arose where the union could have moved a proclamation of financial emergency when India landed itself in twin deficit, low trade balance and large fiscal deficit but even then financial emergency was not announced.

ABHIMANYU A. WALIA is an Advocate practising before the Supreme Court of India and Delhi High Court and is the Co-founder of WM Law Chambers.

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