Friction over formula: why some States get more from Centre

Source: The post is based on the article “Friction over formula: why some States get more from Centre” published in The Hindu on 16th March 2023

What is the News?

The 15th Finance Commission has given the population (Census 2011) a higher weightage over performance. This revenue-sharing formula has created friction between States and the Centre.

What is the revenue-sharing formula adopted by the 15th Finance commission? 

The Centre’s tax collections are pooled from States and a part of it is distributed among them based on the Finance Commission’s (FC) formula. 

The 15th Finance Commission had arrived at the States’ share in the divisible pool of taxes based on each State’s needs (population, area and forest and ecology), equity (per capita income difference) and performance (own tax revenue and lower fertility rate). The weight assigned to needs was 40%, equity 45%, and 15% to performance. 

As the population was given a higher weightage, it tilted the balance in favour of some northern States.

This meant that Uttar Pradesh and Bihar got 17.9% and 10%, respectively in the 15th FC. Karnataka, Kerala and Tamil Nadu got 3.65%, 1.93% and 4.08%, respectively. 

Due to this, for every one rupee that Tamil Nadu gives the Centre, it gets back 29 paise. On the other hand, Uttar Pradesh gets ₹2.73 and Bihar gets back ₹7.06.

This has been a bone of contention between the Centre and the affected States.

What are Southern states demanding now?

According to an economist from Tamil Nadu, southern States have grown faster and contributed larger revenue to the central pool. He said southern states are not against the U.P. getting one rupee for every 10 paise it contributes. But it also wants states like Tamil Nadu should also get the same.