Imagine seeing your hard-earned taxes lining the pockets of politicians and going to states with little-to-no economic growth whatsoever with money, as once described, ‘being thrown into a well’. If you think that sounds like a rip-off, you’ve just stepped in the shoes of close to 280 million people and 5 state governments or at least, that’s what South Indian leaders allege has happened to them. But, do they have a case? Here’s why they do.
In an infographic by the Ministry of Finance (Department of Revenue), they describe how taxes are redistributed between states (which forms the majority of the state’s budget to finance its operations and fund multiple programs) as a proportion of what they give to the central government in taxes.
- Credit: X.com (anshgupta64)
The disparities are stark: for every 100 rupees that the state of Tamil Nadu gives to the central government, it only receives 29.7 rupees in return (which translates into huge losses because of negative cash inflows for the Tamil Nadu government). Even more disturbing is the disparity for the state of Karnataka, which only receives 13.9 rupees for every 100 rupees it sends to the central government in taxes.
On the other hand, when we compare it to states in North India, the difference is completely lopsided. For instance, Bihar receives 922.5 rupees for every 100 rupees it gives to the central government in federal taxes, with Uttar Pradesh receiving 333.2 rupees for the same. This revelation by the Ministry of Finance has led to massive political protests from politicians in South India regarding tax allocations, with many politicians citing it as ‘financial discrimination towards South India.
In this article, I’d like to break down the budget allocation system put in place by the 15th Finance Commission (this will be very important later on) and later slightly modified by the 16th, talk about how this policy implicates state funding, and how can we tweak the policy to reconcile differences between the South and the North.
First off, why would South India take offense at North India receiving more funds? Even if the South is receiving less money overall, they’re performing better on almost every single human development index indicator in the country, whether it be education levels, infant mortality rates, or female participation in the economy. If extra money is funneled into poorer states in the North (for instance) to help them develop economically, why would the South begrudge them?
To sum up the South’s arguments in a nutshell, here’s an excerpt of an interview that the-then Finance Minister of Tamil Nadu (Dr. Palanivel Thiagarajan) conducted in which he stated his fiscal position:
To understand what’s even going on, we must understand what the bone of contention is between the South and the North. For that, let’s look at the breakdown that the 15th Finance Commission proposed to decide how the tax revenue would be divided amongst the states.
- Credit: Drishti IAS1
The issue that most South Indians have is the factor of population, which is given 15% in the criteria. They do not have a problem with the factor as per say, but their contention is that the data from the most recently collected census at the time (2011 data) was considered instead of 1971 census data. Why is this a problem?
To give you context, there was a constitutional amendment that was passed known as the 42nd Amendment which mandated that all major government decisions that had anything to do with population could only use the 1971 census data (which included political representation and tax distribution). Why? That’s because between 1961-71, India’s population exploded to grow by 24.8%. In order to prevent growth from spiraling out of control which would have increased the liability of India’s already humungous population, the prime minister at the time (Indira Gandhi) asked all states to limit their population growth. South Indian states were afraid that if they became successful in this endeavor, they would lose out in political representation & greater tax inflows. To quell those worries, Indira Gandhi agreed to only use 1971 census data to prevent penalizing South India for controlling its population.
That’s why the South Indian states felt offended when the 15th Finance Commission used 2011 census data in place of 1971 census data, because they felt cheated by the government. They stood to lose tax revenues to the tune of $2.7B per state, whilst North Indian states would gain up to $3.9B per state simply because they failed to control their population. What’s even worse is that North Indian states now had a sketchy incentive to continue growing their population so that they would receive more funds & representation, whilst South Indian states would lose out in the long run.
The commission did try to defend itself by stating that it included a new parameter called ‘demographic performance,’ which tried to reward states that performed well on human development index indicators like healthcare and education access. But considering that this factors only for 12.5% and population clocks in at 15%, South Indian states stand to lose a lot of revenue. It also doesn’t help that 45% of the calculation was based on income distance (national per capita income – state per capita income) which made South Indian states lose even more since they already have hit/exceeded the national average income whilst North Indian states sometimes even earn as low as half the national average, making them gain way more in the process. That’s the reason for the tax divide in India: there’s a lot of taxes coming from South Indian states, but not a lot of coming in.
In the next part, we’ll explore how the government has systematically targeted South India products and how we can tweak this policy to benefit both North & South India.