Don’t punish well-performing states for sake of equity: Siddaramaiah to Finance Commission

Complaining that Karnataka was penalized for its good performance, chief minister Siddaramaiah has urged the 16th Finance Commission to urgently address the cut in Central financial transfers to help states invest in physical and human infrastructure.

The chief minister on Thursday (August 29) also urged the Commission to address the vertical and horizontal imbalances keeping both equity and efficiency principles in mind as people in economically well-performing states expect their taxes to work for them.

“The Finance Commission needs to carefully examine the impact of extremely high emphasis given to equity on the incentives of well performing states,” he said. “(It) needs to do a tightrope walk while balancing equity with efficiency and performance.”

Karnataka’s fiscal recommendations

After underlining Karnataka’s role in India’s growth story, Siddaramaiah urged the Commission that vertical devolution should be at least 50 per cent of the divisible pool and that cesses and surcharges, which the Union government is increasingly resorting to, should be capped at 5 per cent of the gross tax revenue.

“Anything exceeding that should be a part of the divisible pool,“ he said.

“All non-tax revenues of the Centre should be included in the divisible pool of taxes by bringing the necessary Constitutional amendment.”

Karnataka recommends that 60 per cent of the contribution of a state to the divisible pool, for allocation among states, should be given to that state, the chief minister said.

Declining Central finances

He pointed out that Karnataka contributed some 8.4 per cent to the national GDP with only about 5 per cent of the national population. The state ranked second in the total GST contribution to the country.

But despite Karnataka's substantial contribution of about Rs 4 lakh crore to the Gross Tax Revenue of the Union every year, the state got only about Rs 45,000 crore in the form of devolution and about Rs. 15,000 crore as grant-in-aid.

“This means that for every rupee Karnataka contributes, only 15 paise is returned to the state.”

Karnataka’s mounting losses

Siddaramaiah complained that the 15th Finance Commission’s award reduced Karnataka’s share sharply from 4.713 to 3.647, causing a loss of Rs. 68,275 crore in 2021-26.

Conscious of the drastic cut, the Finance Commission recommended state-specific grants of Rs 11,495 crore. But the Centre did not accept this, resulting in total losses worth Rs 79,770 crore for Karnataka.

The chief minister said Karnataka saw a revenue transfer of Rs 35,000-40,000 crore per year to other states, amounting to 1.8 per cent of its GSDP, during the 15th Finance Commission period.

Penalizing well-performing states

“The figure is astounding because the net transfers outside of Karnataka amount to about 50-55 per cent of the total revenues it generates,” he said.

“Due to the disproportionate weightage given to equity, Karnataka and similarly placed states end up getting penalized for their good performance, both fiscally and demographically.”

Siddaramaiah said the loss to Karnataka on account of the non-sharing of cesses and surcharges from the divisible pool was Rs 53,359 crore from 2017-18 to 2024-25.

Karnataka faces severe strains

Despite such a reduction of central transfers, Karnataka had kept its commitment to its flagship schemes and also maintained its capital expenditure at 2 per cent of its GSDP since 2013-14. The state ranks number one in terms of capital expenditure.

“However, the reduction in central financial transfers is placing severe limitations on the ability of the states to invest in physical and human infrastructure. This issue must be addressed urgently,” he said.

The chief minister said that while economically advanced states were committed to supporting poorer states, this should not come at the expense of their own residents or economic efficiency.

What Bengaluru needs

“A larger proportion of resources generated by the states should be shared with them.”

Karnataka, he said, also faced regional imbalances, especially in the Kalyana Karnataka region, and the challenges of urbanization. Both required greater devolution by the centre.

Bengaluru alone needed an investment of Rs 55,586 crore over the next five years, and so the Karnataka government had sought a grant of Rs 27,793 crore.

Reward efficiency, CM says

Similarly, for the equitable development of the Kalyana Karnataka region, the state was investing Rs 25,000 crore and wanted a matching grant of Rs 25,000 crore over five years from the Commission.

Siddaramaiah also sought Rs 10,000 crore to ensure effective disaster mitigation and timely relief and rehabilitation measures in the Western Ghats.

The chief minister urged the Commission “to take a bold view and approach, whereby equity considerations are balanced with sufficient reward for efficiency and performance”.