Laggards riding piggyback on the South

The old debate on the North–South divide leapt back into life days before the finance minister presents the Union budget and reveals the recommendations of the 16th finance commission.

On 10 January, the Union government disbursed Rs 1.73 lakh crore to the state governments, a routine transfer of taxes collected by the Centre. This triggered howls of protest from the South.

They pointed out that Uttar Pradesh received the highest devolution of Rs 31,039.84 crore, followed by Bihar (Rs 17,403.36 crore) and West Bengal (Rs 13,017.06 crore). Maharashtra received Rs 10,930.31 crore and Rajasthan Rs 10,426.78 crore.

In contrast, Karnataka, an IT powerhouse, received just Rs 6,310 crore; Tamil Nadu, an industrial powerhouse, received Rs 7057 crore; Kerala and Telangana received between three- and three-and-a-half thousand crore each. Andhra Pradesh received Rs 7,002 crore, slightly less than Tamil Nadu but substantially less than UP and Bihar.

The southern states, who have been complaining of fiscal injustice and discrimination in the devolution of taxes — with backward states being rewarded and high-performers being punished — are up in arms. An upset Karnataka chief minister Siddaramaiah made no secret of his disappointment and called out the BJP’s bias in funnelling funds to “corrupt and ill-governed” states. Tamil Nadu finance minister Thangam Thennarasu also lashed out.

All the southern states together got 15 per cent of the total tax revenue while the lion’s share of 40 per cent went to UP, Bihar and MP. Despite being the second-highest in terms of tax revenue overall — second only to Maharashtra — Karnataka’s share of the central tax pool has been declining over the years: from 4.7 per cent during the 14th finance commission to 3.64 per cent today. The corresponding figures are 17.93 per cent for UP and 10.05 per cent for Bihar.

This southern discomfort was expressed most forcefully in February 2024.

Karnataka’s state ministers, led by Siddaramaiah, landed up at Delhi’s Jantar Mantar to voice their anger.

Karnataka’s protest was followed by Kerala’s, with chief minister Pinarayi Vijayan leading the charge.

Tamil Nadu’s DMK organised a ‘black shirt’ protest to mark their angst.

Telangana’s Revanth Reddy also spoke up.

The only reason Andhra Pradesh has kept mum is because the ruling TDP is allied with the BJP.

The grievance has been simmering for years, especially as the southern states developed as rapidly as their populations dropped, in sharp contrast to the populous northern states, especially UP and Bihar, whose social and economic indicators lag way behind.

The reason why the southern states are receiving less and less even as they contribute more and more by way of taxes is relatively straightforward. The taxes that the Centre collects, both indirect taxes (customs and GST) and direct taxes (corporate and income tax), go into the Consolidated Fund of India. This revenue is shared between the states (41 per cent) and the Centre (59 per cent). It is now known that in 2015, Prime Minister Modi was against raising devolution from 31 per cent to 41 per cent. He tried to prevail upon the chairman of the 14th finance commission, Y.V. Reddy, to raise it by two to three percentage points — but failed.

While the government reluctantly accepted the recommendation of a 10 per cent raise, the Centre has since progressively increased the share of central cess and surcharges.

Between 2009–10 and 2023–24, Rs 36.6 lakh crore were collected by the Union government as cesses and surcharges — not a paisa of which has been shared with the states. The finance commission, appointed every five years, uses a set of criteria arrived at after due deliberation and consultation with the states.

Under the present tax regime, the formula for tax distribution to individual states is as follows: 12.5 per cent weightage is given to demographic performance (population control), 45 per cent to income distance (relative poverty as reflected in the gross state domestic product), 15 per cent each to population and area, 10 per cent to forest and ecology, 2.5 per cent to tax collection and fiscal efforts. On paper, this looks like a transparent and efficient mechanism to achieve equitable distribution in the long run.

Budgetary support is provided to states which need them more because of their relative underdevelopment and large populations: this is the Centre’s stock reply to allegations of stepmotherly treatment, especially where an opposition party/ alliance rules. Southern states are increasingly demanding that backward states be made accountable. Why are things not improving despite higher devolutions? The funds, one suspects, are misused. Leaks aren’t plugged, and cash flows arbitrarily. If so, why should the southern states have to pay for the lapses of corrupt and inefficient states?

Tamil Nadu’s current IT and former finance minister, ex-Wall Street executive with a PhD in operations research, Palanivel Thiagarajan (also known as PTR) faults the current model on grounds of transparency, efficiency and equity. It penalises the performers and incentivises the under-achievers.

He points to the absence of any conditionality in the finance commission formula: “It is set in stone for the next five years.” What are the objectives of transfer of resources through tax devolution, he asks?

PTR calls for a calibrated approach which ties the tax sharing to concrete indicators of development sustained over time, primarily school enrolment, especially of girl children.

Several observers have also noted that the finance commission’s population weightage is skewed by the fact that the base year was changed from 1971 to 2011, thus disadvantaging those states that have handled population explosion better.

PTR and many others have objected to the mushrooming cess and surcharge income, now approaching almost a quarter of tax revenues. This does not go into the divisible tax pool — the Centre spends it as it thinks fit, which means it can be given to the states it chooses in the form of conditional grants, or simply as untied money. Generally levied for a specific time and purpose, cess and surcharge have become a permanent feature of public finance in India.

While it was the previous UPA government that introduced these, the BJP has taken it to a completely new level. A little-discussed aside is the BJP’s consistent slogan during state assembly elections asking people to vote for a ‘double-engine’ sarkar. In other words: the states which vote the BJP into power stand to gain.

A further pointer: on 20 January, home minister Amit Shah said that the Centre has helped Andhra Pradesh land Rs 3 lakh crore in investments and aid in the last six months. He especially cited the Rs 11,000 crore package to keep the Vizag steel plant going and contrasted it with the decline under the previous YSR Congress regime. It hardly needs pointing out that the TDP government in the state is a crucial alliance partner of the BJP at the Centre.

In a recent TV debate, the DMK’s Salem Dharanitharan cited some revealing figures on the BJP channelling funds to BJP-ruled states. Under the Khelo Bharat scheme, Rs 500 crore was earmarked for Gujarat which accounted for very few members of the Indian Olympics team. Tamil Nadu, with the third highest number of Olympians, received just Rs 15 crore.

The protests building up relate to five issues: a declining share in the tax pool; the end of GST compensation; curbs on state borrowing; the Centre’s refusal to help with drought, floods and other natural disasters; and the withholding of funds for infrastructural development.

The depth of discontent cannot be underestimated. Some, like Karnataka deputy chief minister D.K. Shivakumar’s brother D.K. Suresh, have gone to the extent of advocating a separate southern nation.

While this may be an extreme case, it bodes ill for India that the southern states are paying for the “profligacy and poor policies” of the north and that their constitutional rights are being denied by the Centre.