In 2015, the Kerala government constituted the fifth State Finance Commission. The commission’s report dealt with issues such as the devolution of taxes to local bodies. However, the state government delayed presenting the report in the legislative assembly by two years. It also rejected most of the recommendations on devolution. This is not the only instance when a state government has rejected the recommendations of a state finance commission. The Maharashtra government also rejected the recommendations of the fourth state finance commission.
There is a deep chasm between the functioning of the state finance commissions (FC) as envisioned and the reality on the ground. Studies have shown that state finance commissions are not set up in a timely manner, and their reports as well as the action taken reports are often marked by significant delays. This has meant that recommendations of commissions are in effect for only a fraction of the award period. This, as an RBI study also points out, implies little stability in the transfer of resources to the third tier of government.
Centralising impulses are not just limited to the Union government. State governments have also constricted devolution of resources and functions to the third tier of government. As Raja Chelliah once observed, “everyone wants decentralisation, but only up to his level”.
This, however, is not to deny the legitimacy of concerns raised by southern states over their falling share in central taxes. The share of the southern region (Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Kerala) in the divisible tax pool has declined from 21.1 per cent during 2000-05 (the award period of the 11th Finance Commission) to 15.8 per cent during 2021-26 (under the 15th Finance Commission). However, over the same period, northern states like Uttar Pradesh (including Uttarakhand) and Bihar (including Jharkhand) have also seen a fall in their share, though in lesser magnitude. Odisha, too, has seen a decline in its share. Among those who have gained are high income states like Gujarat and Maharashtra, low income states like Madhya Pradesh (including Chhattisgarh), Rajasthan and the Northeastern states, with the exception of Assam. This is not really a North-South divide as it is made out to be.
The poorer northern states, however, are undeniably more dependent on transfers from the Centre. For instance, transfers from the Centre — share in central taxes and grants in aid — account for 75 per cent of Bihar’s and 53 per cent of Uttar Pradesh’s total revenue receipts. The comparable figures for Tamil Nadu and Karnataka are 31 per cent and 27 per cent respectively (2022-23 BE).
One could argue that transfers from richer southern states to poorer regions are in some sense similar to those from rich urban centres such as Mumbai and Gurugram to the lesser developed parts of their respective states. For instance, Mumbai accounts for around 40 per cent of Maharashtra’s GST revenues, but just under 9 per cent of district expenditure. But, fiscal transfers are needed to ensure uniformity of public services across the country, given the varying levels of development. However, it must be asked if the increase in transfers to the poorer regions is actually helping minimise the gap.
The issue is not only of the horizontal distribution (between states) of tax revenues, but also of the vertical distribution (between the Centre and the states). That’s because even as the states’ share in the divisible tax pool (tax collected by the Centre and shared with the states) has gone up from 29.5 per cent under the 11th FC to 41 per cent under the 15th FC, the divisible tax pool itself has shrunk.
With the Union government relying more on cesses and surcharges to raise resources — revenue from these sources is not shared with the states — the divisible tax pool has shrunk from 88.6 per cent of Centre’s gross tax revenues in 2011-12 to 78.9 per cent in 2021-22 as per the RBI. As a result, states’ share has averaged just about 34 per cent of gross tax revenues.
This sequestering of revenue through cesses and surcharges is, in part, a consequence of the Centre spending in areas that fall on the State and Concurrent lists through centrally-sponsored schemes or centre sector schemes. These leave it with little funds to spend on items in the Union list such as defence. Paradoxically, this has also meant aggregate transfers from the central government to the states through various channels such as devolution, finance commission grants and other transfers/grants are higher when compared to the pre-14th Finance Commission period.
There are ways to address the financial concerns of the southern states.
When deciding on the horizontal distribution of taxes (between states), the 11th FC had assigned weights to parameters such as tax effort, fiscal discipline and infrastructure (to encourage less developed states to come up). The 14th FC did not give any weightage to these parameters, while the 15th FC assigned a weight to tax and fiscal efforts.
While equity considerations (greater devolution to poorer states) are still likely to dominate the commission’s thinking — though the weight attached to this parameter has declined from 62.5 per cent under the 11th Finance Commission to 45 per cent under the 15th Finance Commission — perhaps a higher weightage could be assigned to parameters such as demographic performance, tax efforts and fiscal position, taking into consideration the state’s debt-deficit trajectory.
Doing so would perhaps help impart a greater focus on improving performance on socio-economic parameters, and incentivise more prudent fiscal policies. It could also assuage, to an extent at least, the concerns of the southern states. However, it’s not just a fiscal problem. It’s also a political problem. States south of the Vindhyas also fear a loss of political power when the delimitation exercise is carried out. Losing both financial resources and political muscle is a bitter pill to swallow.
ishan.bakshi@expressindia.com
There is a deep chasm between the functioning of the state finance commissions as envisioned and reality on the ground
7
1
26.02.2024
In 2015, the Kerala government constituted the fifth State Finance Commission. The commission’s report dealt with issues such as the devolution of taxes to local bodies. However, the state government delayed presenting the report in the legislative assembly by two years. It also rejected most of the recommendations on devolution. This is not the only instance when a state government has rejected the recommendations of a state finance commission. The Maharashtra government also rejected the recommendations of the fourth state finance commission.
There is a deep chasm between the functioning of the state finance commissions (FC) as envisioned and the reality on the ground. Studies have shown that state finance commissions are not set up in a timely manner, and their reports as well as the action taken reports are often marked by significant delays. This has meant that recommendations of commissions are in effect for only a fraction of the award period. This, as an RBI study also points out, implies little stability in the transfer of resources to the third tier of government.
Centralising impulses are not just limited to the Union government. State governments have also constricted devolution of resources and functions to the third tier of government. As Raja Chelliah once observed, “everyone wants decentralisation, but only up to his level”.
This, however, is not to deny the legitimacy of concerns raised by southern states over their falling share in central taxes. The share of the southern region (Andhra........
© Indian Express
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