Central Transfers- Issue of shares of some States

Source-This post on Central Transfers-Issue of shares of some States has been created based on the article “Central transfers and the issue of shares of some States” published in “The Hindu” on 11 March 2024.

UPSC Syllabus – GS Paper 2 – Issues and Challenges Pertaining to the Federal Structure

Context– Sixteenth Finance Commission will have to deal with Southern States’ complaints which claim they have been facing a decline in their share of the resources transferred from the Centre to the States.

Which Indian States have been gaining and which are losing their share over time?

In the case of the southern States, there has been a steady fall in their share, from 19.785% to 15.800%.
In a comparison of these two Commissions, the northern and eastern States have also lost. The ‘gainer States’ were the hilly, central, and western States including Maharashtra.

Read more- Fiscal Centralization in India

What is the reason behind this uneven gain and loss?

1) Income distance Criterion– The main reason for the loss of the southern States is the income distance criterion (Table 1). It means that the farther a State is from the highest income State, the higher its share.

2) Forest cover– The main reason for the gain of the hilly States is area/forest criterion.

3) Population– For the Fifteenth Finance Commission, data for the population in 2011 was used (Before that population data of 1971 was used). The demographic change criterion was introduced so that states that showed better performance in reducing fertility rates are not unduly penalized.

What is the impact of these changes on Indian states?

The joint impact of these two changes, that is income distance criterion and population, has been marginal for all groups of States. For Tamil Nadu, the joint impact was marginally positive.

What should be the way forward?

1) Income distance criterion– The Sixteen Finance Commission can reduce the weight of this criterion by 5% to 10% points and increase weightage of another criterion.

2) Cess and surcharge– The Centre has increased the cesses and surcharges, thereby reducing the size of the divisible pool. This is not desirable. There is a need to limit the share of cesses and surcharges to 10% of the Centre’s gross tax revenues.

Question for practice

Highlight the concern raised by Southern Indian states so far as distribution of revenue is concerned. What steps can be taken to address their concerns?