New Delhi: The simmering fault line between BJP-led Centre and non-BJP governments in states came to a boil this week. On Wednesday, chief minister Siddaramaiah and his deputy D.K. Shivakumar led an agitation against the Centre’s alleged “financial injustice” towards Karnataka. A day later, the Kerala government led by chief minister Pinarayi Vijayan staged a similar protest in the heart of the national capital.
Vijayan was also accompanied by Delhi chief minister Arvind Kejriwal, his Punjab counterpart Bhagwant Mann, and DMK minister P. Thiagarajan. The chief ministers of Andhra Pradesh and Tamil Nadu, YSR Jagan Mohan Reddy and M.K.Stalin, also protested against the unfair devolution of taxes to states that have contributed the most to the state’s exchequer.
This is the first time that all these states have taken to popular protests on these issues, moving the question of partisanship over resources out of discussion rooms. The Bharat Rashtra Samithi-led Telangana government had also agitated over the issue in 2023.
The argument
Both Karnataka and Kerala governments are demanding that their share in the devolution of taxes to states by the Union finance ministry should be greater than what they currently receive, given their share of contribution to the exchequer is also greater than most other states who receive a better share. Moreover, they have said that even the mandated devolution of taxes to Karnataka and Kerala has not been fulfilled by the Union finance ministry, and has created a backlog in the development goals of the states.
There are allied issues, too. The Karnataka government alleged that the Centre has not released special grants worth Rs 5495 crores, as recommended by the 15th Finance Commission, and also denied the promised grant of around Rs 6000 crores for drought-hit Karnataka which it could have used for infrastructure development of water bodies and irrigation projects.
The Finance Commission is the Constitutional body to devise a formula for devolution of taxes on the basis of demographic performance, demographic performance, area, income distance, tax and fiscal efforts, forest cover and so on. The highest weightage is given to the population of states, which has meant that states which have been able to contain their population spiral eventually end up at the bottom of the ladder of beneficiaries. The southern states have historically done better than north Indian states in almost all the criteria of development indices and emerged as the highest contributors of taxes to the exchequer.
Yet, their share in the devolution of taxes is the least. The charts shared on X by DMK’s Rajya Sabha MP P.Wilson post on X gives a fair idea of the devolution of taxes.
Please find the flow chart provided below to assist with better understanding.#BJPLootingOurTax pic.twitter.com/089YuHP7O3
Advertisement— P. Wilson (@PWilsonDMK) February 8, 2024
The finance commission’s formula has dis-incentivised states to excel, as that may also result in a dramatic slashing of their share in tax revenues. For instance, if Maharashtra shares Rs 1 with the Centre, it is eligible to get back only Rs 0.08 paise. Similarly, Karnataka will get back Rs 0.15 paise, while Gujarat will receive Rs 0.08 paise and Tamil Nadu Rs 0.29 paise. On the other hand, states whose governments have performed poorly to control their population and made least tax and fiscal effort get the maximum share of tax revenues. Thus, Uttar Pradesh gets Rs 2.73 for every rupee it shares with the Centre, while Bihar gets Rs 7.06.
Over the years, the southern states have performed better than most others on all fronts, while in the north of the Vindhyas, only Maharashtra, Gujarat, and Haryana match up to them. The anomaly stands to only deepen with subsequent census exercises, and is crying out to be addressed.
The 14th Finance Commission increased the vertical devolution of taxes to states to 42%, while the 15th, currently in action, decreased it by 1% to 41% However, the subsequent horizontal devolution is where states like Maharashtra and Karnataka, which are at the top of the pyramid as far as their contribution to the central pool is concerned, believe that they are getting a poor deal. To placate states which have performed historically well, the 15th Finance Commission recommended special grants, which the Karnataka government said to have not received, and termed it as Centre’s “injustice” towards non-BJP states.
The BJP-led Centre, however, has denied all charges. The Union finance minister Nirmala Sitharaman said that her ministry has processed all dues, according to the rules of the 15th Finance Commission, and asked the protesting governments to appeal to the Finance Commission instead of demonstrating against the Centre. But she remained silent on the question of special grants.
The BJP machinery has gone ahead to canvas that the non-BJP governments are attempting to divide the country along North-South lines and that the protests advocate separatism and even a split of the country.
Chief minister Siddaramaiah vehemently denied the accusation and said that India is a united country, but argued that Karnataka has continued to get a poor deal over the years. He said that the Karnataka government was promised a drought relief package by both Narendra Modi and Amit Shah, which has still not been finalised, despite the fact that 223 of the 236 taluks of the state are reeling under conditions of a severe drought. He said that the state government is demanding its just GST dues and special grants that have still not been released by the Centre, while also appealing to the 16th Finance Commission of fixing a more fair deal for states which are taking the effort to improve conditions in the states.
He also said that the 14th Finance Commission had fixed the share of taxes for Karnataka at 4.71%, while the 15th decreased it further to 3.65%, representing a speculative loss of around 1.87 lakh crores. “Put together, the state’s losses amount to around Rs 62,098 crore. Should we keep quiet,” he asked, adding that his protest was for Karnataka and its people, and that he had also invited the BJP, and its Karnataka leaders like Tejaswi Surya, Nirmala Sitharaman, Pratap Simha and others to join the cause.
He appealed to the 16th Finance Commission to decide states’ share on the basis of the 1971 Census to prevent such “injustice” towards Karnataka which has controlled its population through better implementation of birth control and economic parity measures over the years. Why should we be penalised for doing our work sincerely, he asked.
Similarly, the Kerala government also alleged that it has not received dues worth Rs 57,400 crores in the current fiscal. Citing figures from a RBI report, it said that the Centre has continuously not met the requirements of even the “unjust” devolution of taxes to opposition-ruled states. It said that it was denied Rs 12,000 crore this year scheduled to have come from GST compensation from June 2022. Chief minister Vijayan said that while Kerala received 3.87% in the devolution of taxes during the period of 10th finance commission, it came down to 2.5% in the 14th and 1.925% in the 15th finance commission, leading to huge losses for the state every subsequent year.
All grieving states have complained about the Centre releasing only an average of only 35% as share to the states, as opposed to the mandated 41% recommended by the 15th finance commission. Moreover, they said that the special grants as capital expenditure and capacity of states to borrow have also taken a hit because of the “unfair” devolution process. The anomalies in the promised GST compensation and failure to disburse the recommended special grants by the Centre to states have only escalated anger among opposition parties. They also believe that the share of tax revenue collected as “cess” or “surcharge” has grown dramatically during the Modi regime, from 10% during the UPA era to over 26% now, but is not shared with the states.
Asking for their due
The BJP’s charge that the opposition-ruled states are trying to balkanise India lacks merit against such a backdrop.
Even states like the BJP-ruled Gujarat and Haryana face the same problem and have raised their voices from time to time. Given the criteria of devolution and future census exercises, the gap between states like Maharashtra, Karnataka and poorly-performing Uttar Pradesh and Bihar, which receive the highest share of taxes despite contributing the least, may only increase. This may lead to further escalation of the problem.
Economists have long debated the issue. While some believe that the weightage of population could be decreased to prevent future fights between states and the Centre, some say that the devolution formula could be done on the basis of one of the pre-2011 census data. Many others believe that a variable component could be introduced that takes into account the efforts made by states to close the huge gap between states, like Tamil Nadu and Bihar, and given more weightage in the devolution of taxes. They say that if the effort by states is not visible, then the whole purpose of supporting poor states to bring them at par with those with a good track record is defeated.
The tussle over “fiscal injustice” has already begun to intensify the politics around it. This has made the Modi government uncomfortable as it is an agenda set by the opposition, that Modi knows will divert from issues he wants to fight on.
Andhra Pradesh chief minister Jagan Mohan Reddy, seen usually to be ‘soft’ on the BJP and more anti-Congress than anti-Centre has gone to the extent of saying that no political party should get a full majority at the Centre, and that only a coalition government can meet the aspirations of varied democratic voices within the country.
Subsequent finance commissions and the central government will have to eventually address the uneven situation at hand through wide consultations without making it sound like yet another opportunity for a political dogfight, like the way the Modi-led BJP just did.
