In the North and South of India, the money struggle for central finances is centered on population and GST

In the North and South of India, the money struggle for central finances is centered on population and GST

In the North and South of India, the money struggle for central finances is centered on population and GST

One of the main causes of the North-South conflict over central funding is the low percentage of transfers to the southern states, who are stronger financially and have less population.

Tamil Nadu, Kerala, and Karnataka are not the only states that have voiced concerns about the falling percentage of payments from central levies.

The North-South split storyline has acquired traction with just a few months till the general elections; this time, it mostly concerns the distribution of federal monies among the states.

While southern states like Karnataka argue that they are not receiving their fair part of national revenues, the Center defends the present levels of transfers by pointing to Finance Commission standards.

The Karnataka Congress administration, headed by Chief Minister Siddaramaiah, is scheduled to stage a demonstration against Prime Minister Narendra Modi's "unfair practices in tax distribution" in the heart of Delhi on February 7. This is anticipated to intensify the dispute. The central government was headed by Modi.

Siddaramaiah's anti-Center march has been dubbed the "South Tax Movement" since it asserts that the state would get an estimated Rs 62,098 crore in tax share out the divisible pool over a five-year period as a result of the 15th Finance Commission's sharing pattern. A sum of Rs has been lost.

"Under the 14th Finance Commission (2015-2020), Karnataka obtained 4.71 per cent of the tax share, which has been lowered by the 15th Finance Commission (2020-2025) to 3.64 per cent, an improvement of 1.07 per cent," wrote Siddaramaiah. X.com is a social networking website on February 5.

Similar assertions made in Parliament on February 5 by Congress MP Adhir Ranjan Chowdhury were denied by Finance Minister Nirmala Sitharaman at the Center. According to Sitharaman, the central government has no "discretion" in how tax money is distributed and that "transfers to states are as per the suggestion made of the Finance Commission".

It is not new to debate reduced payments to states, particularly because of the Center's increased reliance on cesses. However, the heightened fervor of this discussion is crucial since general elections are scheduled for April and May of 2024.

The transfer argument seems to be centered on two main problems. First off, in comparison to the amounts suggested by the 15th Finance Commission, the payments to states throughout the years have been quite little.

Second, certain northern states that are poorer on these indicators get a bigger part of central taxes, while less populous and financially stronger southern states receive a smaller share of transfers.

Issue

Tax devolution is the process by which the federal government distributes to the states the net revenue from federal taxes and charges, enabling them to allocate funds to priority-sector projects and initiatives, welfare, and development. As of right now, 41% of the Center's divisible tax pool is distributed to the states in 14 equal payments over the course of five years, from 2021–2022 to 2025–2026, under the suggestion of the 15th Finance Commission.

In a report dated February 6, India Ratings and Research said that tax transfers to the states are far less than what the 15th Finance Commission had recommended.

The central government has planned to distribute 35.5% of the proposed 41 percent divisible tax pool, which is the gross tax income of cesses and surcharges (excluding the GST Compensation Cess and taxes of Union Territories), to the states in FY2015. is not more than %. The remark has been updated to reflect the trend of states' share of central taxes declining, from 39.8% of the divisible pool during FY16–FY20 to an average of 35.4% during FY21–FY20.

This was emphasized in the Reserve Bank of India's most recent publication, State Finances: A Study of the Budget 2023–24, which was made available on December 11, 2023. "Despite a ten percentage point spike in tax devolution as suggested by the 15th Finance Panel, the fractional share has declined form 88.6% of gross tax revenue in 2011–12 to 78.9% in 2021–22 due to an increase in cess as well as surcharge."

The central bank recommended that states strengthen their fiscal capability and lessen their reliance on transfers as real tax transfers are heavily dependent on cesses and surcharges imposed by the Center.

The portion of central taxes that states get as a proportion of the divisible pool has remained essentially constant over the last four years, ranging from 35 to 36 percent. The fact that cess and surcharge account for more than 10% of total tax income is one explanation for this. Thus, it is shrinking the pie as a whole. Additionally, the states get a smaller portion of that total share, which is why some states are requesting a larger revenue share from the Center, according to Devendra Pant, chief economist at India Ratings, who spoke with Moneycontrol.

North against South

Even before 2020, when the 15th Finance Commission released its recommendation on utilizing the 2011 population census to determine the transfer of revenues from the federal government to the states, along with certain steps being done to regulate their population, the southern states expressed concerns. In rewarding, another force was at play.

This was a departure from the previous Commission's approach, which included the macro-indicators from the 2011 and 1971 censuses, giving the 1971 census a much higher weightage in the equation formula. States that have successfully reined in population expansion have been rewarded for their efforts.

One of the factors used to determine the pattern of devolution was the 2011 census, which was extensively redesigned by the NK Singh-led committee to make it more relevant to current population levels.

This implies that a state will get more funding from the federal government to meet its spending demands the more people it has according to the results of the most recent census. As a result, the divided income pool will not benefit India's less populated states.

This is where the argument over the North-South split arises. Due to revisions from the previous 15th finance panel, North Indian states like Uttar Pradesh and Bihar, whose populations have increased significantly since 1971, naturally get a substantially bigger part of the cash.

For instance, the population of the southern state of Karnataka increased by 15.60 percent between 2001 and 2011, whilst the population of the northern state of Uttar Pradesh increased at a pace of more than 20 percent.

The scenario would be different if the Finance Commission continued to utilize the census share from 1971 as a criteria since Uttar Pradesh's population growth rate between 1971 and 1981 was more than 25% more than that of the other two states. Karnataka, however, had a rise of more than 26%.

The situation is the same when comparing any other southern state to its northern equivalent. Between 2001 and 2011, the population of Tamil Nadu increased by more than 15 percent, while the population of Bihar increased by more than 25 percent.

The consequence of this demographic disparity is made clear by the statement that displays the net revenue of central taxes and duties distributed across the states according to Budget Estimates 2024–25. While the northern states of Bihar as well as Uttar Pradesh alone have a share of about, the five southern states of Andhra Pradesh, Karnataka, Tamil Nadu, Telangana, as well as Kerala would get 15.8% of the total sum allotted for devolution for the next fiscal year. 28%.

While specifics about this idea are still pending, it is noteworthy that the Center established a powerful committee for "comprehensive consideration of the challenges related to rapid population growth" in the Budget 2024–25. declared to be produced. and demographic shifts. It is unclear how this may affect the measurements that Finance Commissions use.

The majority of the states with low per capita income are also overpopulated, as the 15th Finance Commission noted in its report, which further complicates the situation.

Because of the income distance criterion—an additional criteria the Finance Commission uses to determine the pattern of transfers between states—many southern states that do well on this metric would get a smaller share than states with lower per capita income.

Congress leader Praveen Chakraborty fueled the debate by bringing up the issue of double counting. "There is an issue of double counting since when a state is away from the national average in terms of prosperity, it typically possesses a higher population and a lower Human Development Index," he said. "The farther a state situates itself from the national average of prosperity, the greater the number of transfers it receives. Bihar, which is farthest coming from the national average, will get much more than Kerala."

States that rank higher in population as well as lower in development will primarily receive a larger share in the transfer, according to India Ratings' Pant, because the two indicators that determine the sharing pattern are the state's population and its economic growth parameters compared to the national average.

since of this, several southern states have claimed throughout the years that they are being penalized rather than rewarded for successfully managing the population since they are getting a lesser portion of tax money.

The budget target of Rs 10.21 lakh crore, which has been mandated to be released in FY2014, has been revised to Rs 11.04 lakh crore, as per the modified estimates. The transfer of states' share for the next financial year has been boosted to Rs 12.20 lakh crore, which is 3.7 percent of GDP. In the current financial year, the Central Government is giving away Rs 8.20 lakh crore of shared revenue in 12 installments (including two move forward installments) to the states till January 2024.

southern gathering

Tamil Nadu, Kerala, and Karnataka are not the only states that have voiced concerns about the falling percentage of payments from central levies.

Kerala Finance Minister KN Balagopal made this observation in his address for Budget 2024–25: "The state fiscal numbers are facing a cut. Decline in share from central revenue," he said, even if it is possible that their own tax revenue would almost quadruple the 2020–21 figures by the conclusion of the following financial year.

According to RBI data for 2021–2023, "the Center will provide Rs 35 for every Rs 65 collected by the respective states. However, the Center supplies only Rs 21 against Kerala's tax collection of every Rs 79. The truth means out of Rs 100, only Rs 21 is the Center's contribution. Uttar Pradesh receives Rs 46 out of Rs 100 from the Center, and Bihar receives Rs 70 out of Rs 100. Our total tax revenue includes Kerala's eligible tax share compared to the tax collected by the Center." Balagopal stated, "Do we need any better evidence than the RBI data?"

The Dravida Munnetra Kazhagam (DMK) government in Tamil Nadu has also asserted that the state receives a smaller portion of the central tax revenue. According to reports last month, Finance Minister Thangam Thennarasu noted that the state receives only 29 paise for every rupee that is given to the Central government. Although Tamil Nadu accounts for 6.1% of the nation's population, its share of the tax revenue pool is 5.30 percent, having declined from 4.07 percent under the 12th and 15th Finance Commissions.

The southern states argue, according to Chakraborty, that "their share of contribution has been increased but in the northern states they haven't noticed good utilization of those funds." Since the goal is to close the gap, when will this disagreement come to an end?

The characteristics of the Goods and Services Tax (GST) have made state issues worse. The advent of the Goods and Services Tax (GST) in July 2017 has further reduced the capacity of some states to manipulate tax rates and collect money, leading some to claim that they are losing control over their revenues.

Of sure, the issues have become worse with the GST. According to Chakraborty, the GST has undoubtedly rendered the southern states in India less appealing for fiscal planning.

the path ahead

Nonetheless, an alternative perspective argues that the Center's influence on this matter is little, considering the Finance Commission's autonomy.

The 16th Finance Commission may take this demand into consideration since it has been made for a while, but the result is unpredictable. The Central government has complied with all previous recommendations made by the Finance Commission, including raising the transfer percentage, according to Pant.

Thus, it is evident that the newly established 16th Finance Commission is in control of the situation.

According to Paras Jasrai, a top India analyst, "Since states take into consideration more than 60 per cent of general government expenditure, less than what is the recommended share of states in central taxes including cesses as well as surcharges will remain a significant issue under the 16th Finance Commission." The Rating.

Arvind Panagariya, the chairman of the 16th Finance Commission as well as a former vice-chairman of NITI Aayog, will lead a group that will determine the new tax revenue sharing formula between the federal government and the states for a certain length of time. commencing on April 1, 2026, and lasting for a duration of five years.