TAX DIVIDE: WHY ARE SOUTHERN STATES UPSET?
Karnataka, Tamil Nadu and Kerala aren’t happy with the share of funds they receive from the Centre
mission to 58.7% in the 14th and 15th finance commissions (2015-20 and 2020-25).
“The central government has always argued before the Finance Commissions that it needs more resources to meet expenses on defence, internal security, foreign affairs and interest obligations but it actually spends a lot on areas such as education, agriculture, health and social welfare that fall under the state subject through centrally sponsored schemes,” said Neelakantan. Opposition ruled states resent them as it infringes on their rights.
Centrally sponsored schemes have other shortcomings too. “They are tied funds and states do not have the freedom to spend as they want. Most of the time, they are poorly designed and one-size-fit-all schemes that are ineffective,” said PTR.
Isaac agreed. “Kerala has built very strong social infrastructure, especially schools and higher education institutions. What is the point in centrally sponsored schemes like Sarva Siksha Abhiyan for us? We want to build roads and other hard infrastructure,” he said, stressing that Kerala needs untied funds. “The Centre-state fiscal relationship has indeed sunk to an alltime low,” Isaac added.
Sarva Siksha Abhiyan is the Indian government’s programme aimed at elementary education.
Ramakumar studied different Finance Commission recommendations and concluded that successive governments have fallen short in implementation.
“During the 13th Finance Commission period, the total funds transferred was only 31% of the divisible pool as against 32% recommended. For 14th and 15th Finance Commission period, it was 40.3% and 38.1% respectively, as against 41%,” he said.
Finance Secretary T.V. Somanathan dismissed this claim. “Devolution to the states is done every month exactly as per the norms. There is no deviation at all. Initial devolution is based on budget estimates, and it is modified after revised estimates are available. Final adjustments are made after CAG (Comptroller And Auditor General Of India) audit becomes available. Every rupee is completely accounted for,” he said.
HORIZONTAL DEVOLUTION
The biggest responsibility of the Finance Commission, when it comes to horizontal devolution, is equity. An important criteria is ‘income distance’ or
how far is a state, in terms of per capita income, from the richest state. The further the state (which means less developed), the higher the devolution. This explains why Bihar receives a lot more than Kerala and Tamil Nadu. Over the years, this approach has reduced what better developed states get from devolution (see chart).
However, the union finance minister, Nirmala Sitharaman, has denied that better developed states are receiving less. Speaking in the Parliament, she said that tax devolution for Kerala increased 224% between 2004-14 (period when the United Progressive Alliance was in power) and 2014-24 (period of the National Democratic Alliance government, led by the BJP). Grants, she said, increased by 458%. These absolute numbers are misleading and belie the fact that gross tax revenue grew at a much higher rate, countered PTR. In the last five years alone, the Government of India’s tax revenue jumped from ₹11.55 trillion to ₹32.62 trillion, he pointed out.
Meanwhile, Sushil Kumar Modi, former deputy chief minister of Bihar, believes that the contention of the southern states is untenable. “If Finance Commissions were to distribute the divisible pool of taxes among states matching their contributions to it, ignoring the needs of different states, it would not be necessary to have a Finance Commission at all,” he wrote in an article in the Times of India, on 3 May 2018.
“As long as disparities remain, the devolution pattern should favour the poorer states. Just as it is desirable for the state governments to reduce inter-district disparity, it is equally desirable for the Centre to reduce inter-state disparity,” he further wrote.
“We are not against redistribution. All we are asking is what is the outcome of decades of redistribution? Hindi-heartland states continue to remain underdeveloped, both socially and economically,” said Isaac.
“Why have their (states getting more funds) debt levels risen so sharply despite such high transfers from the central government? It is because they are inefficient,” said R. Srinivasan, member, Tamil Nadu Planning Commission. “Tamil Nadu’s total expenses to GSDP (gross state domestic product) ratio is around 11% while that of Bihar and Uttar Pradesh are about 17%. Spendthrift states are given more resources,” he added. Short of funds, developed states are borrowing more. In the long run, this could hurt their growth.
THE WAY FORWARD
The 16th Finance Commission, therefore, has a difficult task. It has to come up with innovative parameters to ensure that better developed states get enough funds without depriving the less developed ones of their needs. It should also recommend ways that can push the less developed states to grow faster.
PTR suggested that there be no fixed ratio for five years. “Instead, change it every year based on performance on various social parameters. This will ensure that there is a good feedback loop,” he said.
Rangarajan suggested that a sunset clause on the ‘income distance’ parameter could motivate the less developed states to reform faster. But will such a clause work? The mandate for a Finance Commission is only for five years.
An ideal mathematical devolution formula would be impossible to arrive at, Neelakantan said. If the Centre stays away from spending on state subjects—such as education, healthcare, agriculture and social welfare—the money it gets from the current devolution ratio is sufficient to meet its needs. There will be no need for cess and surcharges at all. However, the reality is that no central government wants to give up spending on social needs. It is a political necessity, other experts Mint spoke to said. Gopal Krishna Agarwal, an economist and a national spokesperson of the BJP, sounded hopeful things could be sorted out soon. “The 16th Finance Commission will take into cognizance the states’ concerns,” he said.
Jayaprakash Narayan, general secretary of Hyderabad-based Foundation for Democratic Reforms views the problem differently. The political parties in the south are setting the stage for hard negotiation on fiscal and other issues, going forward. “Like always, a reasonable compromise will be found,” he said. But, he added: “Our bark is always worse than our bite.”