As States begin their annual budget-making exercise, they are increasingly faced with a daunting task in managing their finances. With the spending on social welfare schemes taking precedence ahead of the elections and States’ own tax and non-tax revenues growing at a sluggish pace, attention inevitably turns to their share in the divisible pool of union taxes, grants, and loans from the Centre.
The debate over inequity in how revenue is shared between States has become quite loud of late with some Southern States recently protesting in the National capital. States such as Karnataka, Kerala and Tamil Nadu have been especially vociferous in criticising the formula used by the finance commissions, which perversely incentivises states which have not checked their population growth or achieved a brisk pace of growth.
We did a deep dive to see if the revenue-sharing formula is really equitable. We find weights given to population and area have been going up since 2005 and share of all four southern states have fallen over the last two decades. While criteria such as demographic performance and income distance have been introduced, they are not enough.