Southern states cry foul as finance panel recommends fund cut

The 15th Finance Commission on Saturday recommended a marginal reduction in the devolution of funds from the Centre to State (allocation in the divisible pool of central taxes) by a percentage point. The share of states in net proceeds of tax revenues were reduced to 41 per cent from the earlier 42 per cent.

The government cited security and special needs of newly formed union territories of Jammu and Kashmir, and Ladakh as the reason for this reduction.

But the larger concern is that the allocations recommended in the 15 Finance Commission are based on the 2011 population census with greater emphasis on the demography of the state. This would further impact the state finances, particularly the southern states. The previous commission’s reports were based on the 1971 census with a lesser emphasis on demography.

This ideally means all the southern states, which mostly performed better by controlling the population growth over the past four decades and which are demographically smaller in size compared to some of the northern states, tend to lose more.

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The 14th Finance Commission had increased the share of states in the divisible pool from 32% to 42% with the emphasis that states should have greater control over their finances.

Prof Abhijit Sen, former member of Planning Commission of India, told The Federal the Centre was anyway not giving the state’s share as prescribed under the 14th Finance Commission and it was no surprise that they reduced it further.

Estimates indicate all the five southern states would lose two per cent of the overall share in the central fund allocation. Karnataka will be the most affected while Tamil Nadu will gain marginally by 0.17 per cent. States like Bihar, Maharashtra and Madhya Pradesh tend to get a bigger share of the pie.

State-wise share in divisible pool of Union Taxes
	14 Fin Comm 2015-2020	15 Fin Comm 2021-2025	Difference
Karnataka	4.713	3.646	-1.067
Tamil Nadu	4.023	4.189	0.166
Andhra Pradesh	4.3	4.11	-0.19
Telangana	2.437	2.133	-0.304
Kerala	2.5	1.943	-0.557
Sum total	17.973	16.021	-1.952

The move will severely affect the state finances and force them to look for alternative financing modes like Foreign Direct Investment (FDI), said Dr Elumalai Kannan, associate professor, Centre for the Study of Regional Development, Jawaharlal Nehru University.

“But the sluggish economic growth… even that would be difficult. This would result in sharp reduction in social schemes and affect infrastructure and education schemes in various states,” he said.

For instance, in the interim budget tabled in February last year, the Karnataka government had estimated ₹39,806 crore as devolution from the central government. But the Union Budget presented in July indicated a devolution of only ₹38,134 crore to Karnataka.

Now, for 2020-21, if calculated, Karnataka would get ₹31,180 crore, about ₹5,500 less than the previous fiscal. Similar is the case with Telangana. But, only for 2020-21, the Centre plans to give a special grant to Karnataka and Telangana as the allocation would fall short of what was allocated in the previous fiscal.

Leaders of the southern states had raised this concern long ago. Telangana Finance Minister T Harish Rao had last year asked the Finance Commission to increase the devolution to states. Congress leader Siddaramaiah has often criticised the Centre for allocating lesser funds for the southern states. While he recognised the need for correcting regional imbalances, he opined the reward for development was lacking.

“Historically, southern states have been subsidising the north. Southern states contribute more in taxes but get backless. For every rupee of tax contributed by Uttar Pradesh, it receives ₹1.79. But Karnataka receives only 0.47 paise,” Siddaramaiah had stated in 2018.

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The delay in GST compensation payout by the Centre, and the states’ revenue deficit would make it harder for some of the southern states. Politically, the allocations are seen as biased towards northern states or those ruled by the BJP but economists point out the Centre wants states performing better to seek lesser central assistance.

“At the beginning of his first term, Prime Minister Narendra Modi said there he would lay more emphasis on cooperative federalism as if they never existed before. But, the reverse happened over the years during his tenure. The Centre, in a way, is not flexible with devolution as it wants financial centralization,” said M Devendra Babu, professor at Centre for Decentralisation and Development (CDD), Institute for Social and Economic Change.