Udayan Hazarika
(The writer can be reached at udayanhazarika@hotmail.com)
Very soon the 16th Finance Commission will submit its report recommending the transfer of central funds to the states for which the state governments are waiting eagerly. As per the terms of reference, the Commission is to cover eight major subjects concerning Centre-State economic relations—and more specifically the transfer of funds to the States under two broad heads: devolution of States’ share of central taxes and grants-in-aid to the States.
This time the government has entrusted the Commission to handle, analyse and suggest only the core issues that a Commission is mandated to constitutionally. During the time of the 14th FC, the government had to agree reluctantly to their suggestions of devolving as much as 42 per cent as against 32 per cent of the previous commission from the divisible pool of taxes to neutralise to some extent the loss incurred by the states due to the withdrawal of plan funds. From then onwards, the government has been attempting to reduce the transfer of funds to the states. The last Finance Commission has recommended that, although 42 per cent devolution to the States had kept aside one per cent for adjusting the same later against the share of the newly established Union territory of Kashmir. The transfer of central funds to the states is done using various means from various sectors. Usually, of the Commission transfers, more than 80 per cent constitute the states’ share of central taxes, and the remaining amount is the grants-in-aid. If we look at the issue the other way round, it can be said that the share of central taxes comprises a major part of the state’s total revenue receipts. For example, the total fund devolved by the 12th Finance Commission (2005-10) comprised 22.03 per percent of the states’ total revenue receipt, and thereafter the proportion gradually increased until the 14th FC, when it reached 35.17 per cent, but a marginal fall was estimated by the 15th Finance Commission, i.e., the 15th FC, when it was estimated to reach 34.29 per cent.
At present the awards recommended by the 15th Finance Commission are under implementation, which will be finally terminated on the 31st of March 2026, and thence commence the 16th Finance Commission awards, i.e., with effect from the 1st of April 2026 for the next five years. The 15th FC had recommended vertical devolution of 41 per cent from the divisible pool of taxes. As the devolution is made depending on the actual collection of revenues (tax revenue, non-tax revenues, etc.), the Commission estimated that the gross tax revenue for the five-year ’period of the 15th FC will be around Rs 135.2 lakh crore, from which an estimated Rs 32.2 lakh crore will be deducted in terms of cess, surcharges, and the cost of collection, resulting in a balance of Rs 103 lakh crore, which will constitute the States ‘divisible pool of resources. The Commission suggested that 41 per cent from this pool will be transferred (an estimated Rs 42.2 lakh crore) to the States for the period from 2026 to 2031. Apart from this, the total amount of the grant recommended by the Commission was to the tune of Rs 1033062 crore, of which Rs 294541 crore was allocated for revenue deficit grants, Rs 456361 crore was for local government grants, Rs 122601 crore was for disaster management grants, Rs 129987 crore was for sector-specific grants, and Rs 49599 crore was for state-specific grants. The total transfer to the state during the five-year period proposed by the 15th Finance Commission was to the tune of Rs 5241422 crore.
This time the states have demanded the enhancement of the proportion of the state’s share of central taxes from the present 41 per cent of the 15th FC to 50 per cent. In a recent move, the Tamil Nadu Chief Minister, Mr M.K. Stalin, while attending the 10th General Council Meet of the NITI Aayog, placed before PM Modi that the centre must consider the devolution of at least 50 per cent of the central taxes. Enhancement of the devolution proportion has been a cause of concern for many other states as well, especially when the approved proportion is also not devolved by the centre under the pretext of a shortage of funds. However, the states’ expectation of devolution of 50 per cent of the divisible pool may not be forthcoming. Because the Union Government has already made it known that they will be submitting a proposal before the Commission to reduce the state’s share to 40 per cent. In view of this, Chairman of the 16th FC, Mr Panagariya, may not be too enthusiastic to devolve more funds to the States over and above what the States are getting today, i.e., 41%. In fact, recently in a press meeting, Mr Panagariya categorically stated that “Practically speaking, I can’t tell you (the press) what the commission will do because I also don’t know it yet, as it’s a decision of the full membership of the commission. What I can speculate, though, is it is not going to be 50 per cent because that would be too large a jump, and such a large jump would upset too many cards.”
In respect of the demands of the States concerning rationalisation of the share of each State in the divisible pool of taxes, it would perhaps be a difficult proposition to change the criteria of determination of the share of each State. The present Finance Commission (15th FC) gave 45 per percent weightage to deviation from the highest per capita income, 15 per percent weightage to population, 15 per percent weightage to the area, 12.5 per percent weightage to demographic performance (newly introduced), 10 per percent weightage to the forest and ecology, and 2.5 per percent weightage to tax and fiscal efforts. With this formula, the allocation made by the 15th FC in respect of some high-performing states appears to be much lower than some states which are hardly performing anything. These states are now claiming a fair deal in terms of the fixation of the proportion at which they get their share, which, according to them, is not rational. In fact, they feel that they are deprived of this count. However, a change in the criteria would require a much more in-depth exercise and the participation of all stakeholders. However, sooner or later, the government would be forced to come out with a new set of criteria to reduce the gaps convincingly.