Fiscal Federalism: Why Southern States Are Unhappy With Union Government’s Fiscal Distribution?

Context: 

This editorial is based on the news “North-South divide: Decoding unfair tax devolution to southern states” which was published in the Business Standard. Recently, the Karnataka Government highlighted concerns over fiscal distribution among states in the recent budgetary allocations, sparking debate over the equitable distribution of national resources.

Fiscal Federalism: Fiscal Distribution Among States and Injustice Claims 

• Budgetary Allocations: The claim centers around the perceived imbalance in the distribution of the central tax pool, with a single North Indian state (Uttar Pradesh) receiving a significantly higher percentage compared to all five South Indian states (Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Telangana) combined.
• Contributions vs. Returns: Southern states are believed to contribute more to the national tax contribution but receive less in return, raising concerns over fiscal federalism and the principle of equity in the distribution of national resources.

Fiscal Federalism Is Not Unjust

• Rationale for Fiscal Transfers: The Indian Union’s policy aims to uplift poorer states by redistributing resources from wealthier states, based on criteria set by the Finance Commission.
• Criteria for Distribution: The Fiscal distribution is done on the basis of the recommendation of the Finance Commission.
  • The Fifteenth Finance Commission used criteria such as- income distance, population, area, forest and ecology, demographic performance, and tax effort to determine the distribution, with certain criteria rewarding states for better performance.
• Historical Subsidization: It is highlighted that North Indian states had historically subsidized the development of Southern and Western states, emphasizing a long- standing tradition of cooperative nation-building.

Political And Economic Implications

• Migration and Labor Dynamics: The demographic shifts, with southern states experiencing lower fertility rates, necessitate labour migration from more populous North Indian states to sustain economic growth in the South.
• Market Integration: North India serves as a growing market for goods produced in the Southern states, illustrating the interdependence of regional economies within the country.
• Political Representation: The impending delimitation exercise raises concerns in Southern states about potential losses in political representation, despite their contributions to growth and development.

Way Forward to Fiscal Federalism

• Rethinking Allocation Criteria: There is a call for the Sixteenth Finance Commission to reconsider the weightages of the allocation criteria to possibly give more importance to demographic performance and tax efficiency.
• Addressing Political Fears: The fears of reduced political representation for Southern states post-delimitation based on population criteria need to be addressed thoughtfully to ensure good governance is not penalised.
• Enhancing National Dialogue: A more nuanced and granular debate on the redistribution of national resources is essential, moving beyond rhetorical positions to uphold the principle of equity.

Conclusion

• Unity in Diversity: India’s strength lies in its ability to balance diversity with unity, ensuring equitable growth and development across its varied regions.
• Cooperative Federalism: The debate over fiscal federalism underscores the need for a cooperative federalism model that respects the contributions and needs of all states.
• Sustaining Growth and Equity: Ensuring that growth and development are inclusive and equitable remains a cornerstone of India’s policy-making, requiring continuous dialogue, adaptation, and consensus-building among its diverse states.

News Source: Business Standard