Editorial. States of the Union

Three southern States — Karnataka, Kerala and Tamil Nadu — have raised a red flag against the Centre over revenue sharing by the latter. Some of the complaints of the States – the higher share of cesses and surcharges in gross tax revenue shrinking the divisible pool, the revenue sharing formula of finance commissions rewarding States which have not controlled population or raised their incomes – are not without merit. That said, the 15^th finance Commission did well to introduce a weightage of 12.5 per cent for ‘demographic performance’, to offset to some extent the weight of 15 per cent and 45 per cent for population and ‘distance’ from highest per capita income, respectively. There is scope for these issues to be resolved amicably, without irresponsibly upping the ante. The States can make a representation before the 16th Finance Commission, which has just been constituted.

The total transfers to States (devolution plus grants) was estimated by the 15^th Finance Commission three years back at over half the divisible pool for the 2021-26 period (41 per cent ‘untied’ devolution and the rest grants). Fiscal stress in crisis years may have impacted grants, for which the Centre cannot be blamed. States also need to realise that release of grants or loans can be done only after following due processes. They need to monitor the end use of performance-linked funds better. States also need to improve their own revenues, besides cutting down on irresponsible expenditure, be it unfunded subsidies, freebies or promises such as shifting to the old pension scheme, which will hit future fiscal capacities.

States can look at measures to augment their own taxes wherever there is room to do so, including a review of motor vehicle taxes, including green tax. States’ inability to increase their own non-tax revenue has been a constant pain point. While mineral-rich States such as Chhattisgarh, Jharkhand and Odisha have a non-tax revenue between 4 and 6 per cent of GSDP, larger States such as Tamil Nadu, Karnataka, Maharashtra and Gujarat earn less than 1 per cent of their GSDP from non-tax revenue. According to RBI, share of States’ non tax revenue share in their total revenue has declined from more than 12 per cent in the period between FY04 and FY09 to 7.6 per cent in the period between FY21 and FY23. Water and electricity tariff reforms could boost non-tax revenues.

The southern States feel unrewarded for achievements in population control and income growth, and understandably so. But it is wrong for them to argue that they get far less by way of taxes than what they contribute to the Union, because a Union is based on resource-sharing between strong and weak regions. Besides, the southern States have benefited from the north by way of cheap labour supply and even minerals. But there are some specifics here that can be addressed. For instance, Karnataka’s share has fallen the most steeply of all States between the 14^th and 15th Finance Commission, from 4.7 per cent to 3.6 per cent of the divisible pool. This can be debated, but not in rhetorical terms. Contentious issues regarding devolution can be brought up before the new finance panel.

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