Fiscal injustice is the charge, and sentiments matter more than logic

Does Narendra Modi remember that in June 2008, as Chief Minister of Gujarat, he had kicked up a storm by his remarks on fiscal injustice in the devolution of funds from the central kitty?

Protests by the southern states about fiscal injustice in the devolution of taxes seem to have caught the Union government by surprise. Already there has been one march led by Karnataka Chief Minister Siddaramaiah and another by his Kerala counterpart Pinarayi Vijayan in Delhi, opposing ‘economic discrimination’ against south Indian states.

The protests have cut the government to the bone. Prime Minister Namenda Modi fulminated against the Congress at the end of the Budget Session of Parliament alleging that it was “trying to divide the north and the south”. He exclaimed, “What language is being used in the country today? Our taxes, our money? Stop searching for new narratives to break the nation”.

Finance Minister Nirmala Sitaraman replied against charges of discrimination against the South that she had no “discretion” in allocating tax revenues as “devolution to states... happens as per Finance Commission recommendation". Finance Secretary T V Somanathan was roped in on television to explain that financial allocations to states are based on uniform guidelines that left no room for discrimination.

Referencing the rules set by the Finance Commission is hardly likely to soothe agitated sentiments. The Bharatiya Janata Party (BJP) government should know better than anyone else that sentiment cannot be trumped by logic. It has whipped up sentiments unwarranted by logic against its adversaries, more often, than any other political party. It has from its inception accused the Congress of ‘minority appeasement’ — whereas the last nation-wide study of Indian Muslims, the Sachar Committee report of 2006, concluded that the condition of Muslims was worse than that of the Scheduled Castes and the Scheduled Tribes.

One might also wonder what is the contribution of the BJP in agitating southern sentiments by provocative statements on Hindi by its leaders, and the imposition of untranslatable Hindi names to the three criminal codes it has passed in Parliament. Several of its Governors in the Opposition-ruled states are seen as the Centre’s instruments to harass the elected non-BJP governments in the South. The people of the southern states and their elected governments can, therefore, be forgiven for their resentment against the Centre in general, and the BJP in particular.

Admittedly, the principles of a federal union demand that the total tax kitty be distributed equitably between the less industrialised and urbanised states and the more advanced ones. However, there is nothing wrong in asking that the principles of distribution of the tax pool be looked at again transparently to make them acceptable to all.

Does Modi remember that in June 2008, as Chief Minister of Gujarat, he had kicked up a storm by his remarks on fiscal injustice in the devolution of funds from the central kitty? He had claimed that while the Centre collected Rs 40,000 crore in taxes from Gujarat, it gave only 2.5 per cent of central funds to the state. He had dared the Centre to pay nothing to Gujarat for a year but also forgo taxes from the state. In October 2013, Chief Minister Modi suggested to the 14th Finance Commission that the Centre ought to provide 50 per cent of the total tax revenue to the states instead of only 32 per cent.

It may be time to relook at adjusting the criteria for devolution of funds to the states. Data from the reports of the various finance commissions shows that the devolution of central taxes to the five southern states — Andhra Pradesh, Telangana, Tamil Nadu, Karnataka, and Kerala — came down from 18.62 per cent in 2014-2015 to 15.8 per cent during 2021-2022 and 2024-2025. In the very first year of the 15th Finance Commission, a perceptible fall had already begun with the share of the five southern states at 18.04 per cent in 2015-2016. It prompts questions about the weightage formulae used by the commission.

Each finance commission decides on a formula for devolution based on several criteria to balance needs, equity, and performance. Different weightage is given to each criterion such as the difference between the income level of the state with the highest income level state, its population, and area to demographic performance and tax collection efficiency. The major difference in the devolution criteria used by the 14th and 15th Finance Commissions was in the weightage given to population and in the Census data used.

In the 14th Finance Commission, the population weightage was 17.5 per cent with the 1971 Census data being used, while in the 15th Finance Commission the weightage was 15 per cent with the 2011 Census. In addition, the latter introduced a new criterion, ‘demographic performance’ (i.e., population control) with a weightage of 12.5 per cent. The southern states opposed the use of 2011 Census figures as they feared the 15 per cent weightage would skew the devolution in favour of states with larger populations, while it was unclear whether the absolute size of the population would be adequately neutralised by the 12.5 per cent demographic performance parameter.

Perhaps it did not do so sufficiently which might explain the falling share of the southern states with their decreasing populations. In this year’s Interim Budget, Uttar Pradesh received 18 per cent of the total share of the funds devolved to the states, while Andhra Pradesh and Tamil Nadu 4 per cent, Karnataka 3 per cent, Telangana 2 per cent, and Kerala 1 per cent. These numbers feed the sentiment of discrimination.

It also happens that most of the North Indian states are ruled by the BJP either directly or with alliance partners. While Sitharaman may declaim in Parliament about being bound by the recommendations of the finance commission, the sentiment (not the logic) would suggest that she was favouring the laggard states at the cost of the better performers, urging altruism in the name of national unity. Altruism will work only if those on whom demands are being made believe that these are just and fair.

The general elections are only weeks away, and an anti-Centre agitation in the South can stymie the chances of Modi making any effective inroads into the southern states. The southern states have got hold a stick and there is no reason why they should not wield it.

(Bharat Bhushan is a Delhi-based journalist.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.