Southern States Mount Unprecedented Fiscal Revolt, Allege Discrimination by Centre

New Delhi: A fierce political and economic confrontation is rapidly escalating between the Central government and several southern states, with Karnataka and Kerala at the forefront of what they term an 'unprecedented fiscal revolt'.

State leaders are openly accusing the Centre of discriminatory financial practices, claiming that a skewed tax devolution formula and biased grant allocations are systematically short-changing fiscally responsible states and undermining the very foundations of India's cooperative federalism.

The simmering discontent boiled over recently with protests in New Delhi and strong public statements from Chief Ministers and Finance Ministers, highlighting a widening chasm in Centre-state fiscal relations that could have profound implications for national unity and economic development.

Key points

* Southern states, particularly Karnataka, Kerala, and Tamil Nadu, allege that the current tax devolution formula, primarily based on the 15th Finance Commission's recommendations, disproportionately penalises them for their economic dynamism and successful population control measures.

* They accuse the Centre of withholding legitimate tax shares and discretionary grants, creating severe financial distress and impacting their ability to fund crucial welfare schemes and infrastructure projects.

* The cessation of GST compensation cess, coupled with stricter borrowing limits imposed by the Centre, has further exacerbated the fiscal woes of these states.

* Leaders from the protesting states argue that the Centre's approach threatens the spirit of federalism, pushing states towards financial dependency and centralisation of power.

* The Central government maintains that its policies are equitable, based on objective criteria set by the Finance Commission, and are aimed at fostering balanced national development.

Reported Detail

The heart of the contention lies in the methodology used for the devolution of central taxes to states.

Southern states argue that the criteria, particularly the weightage given to population figures from the 2011 Census and the 'income distance' factor, unfairly disadvantages them.

States like Kerala and Tamil Nadu, which have commendably controlled population growth and achieved higher per capita incomes, find themselves receiving a smaller share of the divisible pool compared to states with larger populations and lower per capita incomes.

Karnataka Chief Minister Siddaramaiah recently led a protest in Delhi, asserting that the state was losing billions of rupees annually due to these discriminatory practices. "Karnataka contributes over ₹4 lakh crore in taxes to the Union exchequer but receives only about ₹50,000 crore back in devolution," Siddaramaiah stated, presenting figures that highlighted a stark imbalance. "This is not just an injustice to Karnataka; it's an attack on every tax-paying citizen in our state.

We are being penalised for our efficiency and economic contribution."

Kerala's Finance Minister, Dr.

K.N.

Balagopal, has been particularly vocal about the state's financial crunch, attributing it to the Centre's policies. "Our legitimate share in central taxes has been consistently reduced.

The 15th Finance Commission's recommendations, while maintaining the overall share of states at 41%, have shifted the internal distribution in a manner detrimental to states like Kerala," Dr.

Balagopal told reporters.

He pointed to the cessation of GST compensation cess post-June 2022, which left a significant revenue gap for the state, alongside the Centre's tightening of off-budget borrowing limits. "We are denied the fiscal space to manage our own development priorities, forcing us to cut back on essential public services and welfare programmes," he added.

Economists and policy experts concur that the current framework presents genuine challenges for states.

Dr.

J.

P.

Singh, Senior Fellow at the Centre for Policy Research, commented, "The Finance Commission's mandate is complex, aiming for both equity and efficiency.

However, the heavy weightage to population from the 2011 Census, compared to the 1971 Census used previously, inevitably disadvantages states that have made significant strides in demographic transition.

This creates a disincentive for good governance in population control, which is a national goal."

Further grievances include the non-release or delayed release of specific grants.

Tamil Nadu, for instance, has highlighted delays in flood relief funds and grants for specific development projects, accusing the Centre of political partisanship. "Such delays are not just administrative hiccups; they severely impact our state's ability to respond to crises and implement crucial schemes for our people," remarked a spokesperson from the Tamil Nadu Chief Minister's office, preferring not to be named directly given the sensitivity.

Official Data and Numbers

The 15th Finance Commission, whose recommendations are currently in effect, suggested a 41% share of the divisible pool of central taxes to states.

While this is broadly in line with the previous commission's 42% (adjusted due to the reorganisation of Jammu & Kashmir), the internal distribution criteria have been contentious.

The key criteria and their weightage are:

* **Income Distance (45%):** Measures the distance of a state's per capita income from the state with the highest per capita income. (Benefits lower income states).

* **Population (15%):** Based on the 2011 Census population. (Benefits states with larger populations and higher growth rates).

* **Demographic Performance (12.5%):** Rewards states that have controlled population growth, using Total Fertility Rate (TFR) as a metric. (Attempts to balance the population criteria, but southern states argue it's insufficient).

* **Area (15%):** Geographical area of the state.

* **Forest & Ecology (10%):** Share of dense forest cover.

* **Tax and Fiscal Effort (2.5%):** Rewards states with higher tax collection efforts.

Southern states argue that the 15% weightage to the 2011 population data significantly overrides the 12.5% for demographic performance, negating their success in population control.

For instance, Karnataka's share in central taxes declined from 4.71% under the 14th Finance Commission to 3.64% under the 15th.

Similarly, Kerala's share dropped from 2.5% to 1.92%.

These reductions, combined with the end of GST compensation, represent hundreds of crores in lost revenue annually for each state, severely constraining their budgets.

According to data from the Comptroller and Auditor General (CAG) and state budget documents, the dependence of states on central transfers has remained significant, but the perceived 'fairness' of these transfers is now heavily questioned.

While the Centre points to the overall increase in absolute transfers, states highlight the shrinking percentage share relative to their own contributions to the national economy and their increasing expenditure responsibilities.

A senior official from the Union Ministry of Finance, speaking on background, dismissed the allegations as "politically motivated rhetoric." He stated, "The Finance Commission is a constitutional body, and its recommendations are meticulously crafted after extensive consultations with all states and experts.

The criteria chosen are designed to ensure balanced regional development and address disparities across the nation.

Claiming discrimination based on a single factor ignores the holistic approach and the overall increase in transfers to states over the years."

Background

Fiscal federalism has been a cornerstone of India's constitutional framework, with Finance Commissions playing a critical role in mediating financial relations between the Centre and states.

Historically, states have often expressed concerns about their fiscal autonomy and adequate resource transfers.

However, the current intensity of pushback from economically advanced southern states marks a notable shift.

The adoption of the Goods and Services Tax (GST) in 2017 promised to streamline indirect taxation but also brought new challenges.

While GST compensation was guaranteed for five years to protect states from revenue losses, its discontinuation in 2022 left states like Kerala and Karnataka, which were net consumption states, with a substantial revenue shortfall that they claim has not been adequately addressed by other mechanisms.

Furthermore, the Centre's increasing reliance on cesses and surcharges – which are not part of the divisible pool and thus not shared with states – has been a long-standing grouse.

States argue this practice further erodes their rightful share of central revenues.

What it means

The escalating fiscal tensions pose a serious threat to the spirit of cooperative federalism, a principle championed by the current government.

If states feel continually short-changed, it could lead to:

* **Widening Regional Disparities:** Economically dynamic states may feel stifled, potentially hindering national economic growth by dampening their investment capabilities.

* **Strained Centre-State Relations:** A breakdown of trust on fiscal matters could spill over into other policy areas, making consensus-building difficult and exacerbating political divisions.

* **Impact on Public Services:** States, facing revenue shortfalls, may struggle to adequately fund essential services like education, healthcare, and infrastructure, directly impacting citizens.

* **Challenges to Democratic Governance:** Reduced fiscal autonomy can undermine states' ability to respond to their unique regional needs and electoral mandates, centralising power in the Union government.

* **Re-evaluation of Federal Structure:** The current debate could force a deeper re-examination of India's federal structure, including the role and methodology of future Finance Commissions.

Reactions

The protests by southern states have garnered significant attention, with opposition parties across the political spectrum expressing solidarity.

Leaders from various regional parties have echoed similar concerns about fiscal centralisation and alleged discrimination.

"This isn't just a southern states' issue; it's a national issue concerning the health of our federal democracy," commented a senior leader of the Trinamool Congress, indicating broader discontent among non-BJP ruled states.

Congress President Mallikarjun Kharge stated, "The BJP government is systematically weakening states, turning them into mere supplicants.

This federal structure is under severe strain."

BJP leaders, particularly those from the southern states, have largely defended the Centre.

Union Minister of State for Finance, Dr.

Bhagwat Karad, stated that the Finance Commission's recommendations are unbiased and transparent. "Any allegations of discrimination are baseless and are being used for political mileage.

The Centre is committed to the welfare of all states and ensures equitable distribution of resources as per constitutional mechanisms," he affirmed.

Industry bodies have expressed concern, urging both the Centre and states to resolve their differences through dialogue. "Fiscal stability and predictability are crucial for investment," said the president of a prominent chambers of commerce. "Persistent friction on financial matters can create uncertainty and deter businesses."

What happens next

The current wave of protests and public statements is likely to intensify, especially as state elections approach in various regions.

Southern states are expected to continue lobbying the Centre, potentially forming a united front to amplify their demands.

There is also a possibility of legal challenges or formal representations to the President of India.

The upcoming 16th Finance Commission, which is expected to be constituted soon, will be under immense pressure to address these contentious issues.

Its terms of reference and recommendations will be scrutinised closely to see how it balances the competing demands of equity, efficiency, and fiscal prudence while upholding the federal spirit of the Indian Union.

The resolution of this fiscal stand-off will be a critical test for the strength and resilience of India's federal governance model.