All You Need to Know About Centre’s ‘Biased’ Fiscal Policies — Deepening North-South Divide

New Delhi: Centre’s alleged biased fiscal policies and devolution of taxes to Opposition-governed south Indian states seems to be intensifying the polarising debates on North-South and deepening the regional divide.

Prime Minister Narendra Modi-led government in the Centre has allegedly politicised releasing of the states’ shares in Central taxes over the past few years. Cementing the allegation, statistics suggest squeezing some states’ fiscal freedom to borrow. As a result, the states are facing a “grave financial crisis”. 

The Karnataka Congress government protested at Delhi’s Jantar Mantar on February 7. The ‘Chalo Delhi’ protest against the “injustice” and “step-motherly” treatment being meted out to the state was attended by Chief Minister Siddaramaiah, Deputy CM DK Shivakumar and all Congress’ MPs, MLAs and MLCs.

The Karnataka government — as alleged by the chief minister — has incurred a loss of Rs 1.87 lakh crores over the past six years. These losses — he claimed — are due to the reduction in Karnataka’s share in taxes devolved under the 15th Finance Commission and grants in aid given by the Centre.

The Finance Commission evaluates states’ performances on various parameters while deciding their share of taxes. These parameters include total area of a state, its population and efforts to control it and forest cover.

Deputy Chief Minister DK Shivakumar, in a brief interaction with the media, termed the undeclared and silent financial embargo imposed by the Central government as “injustice” — which they are fighting against.

“We are fighting for Karnataka; we are fighting for the people of Karnataka. We are confident that we will get justice. They have to look at the papers as they also know that injustice has been done to Karnataka. What had been promised in the budget, they did not implement it,” he said.

Several projects (such as the Kalasa-Banduri Nala project, the ethanol production project, the Upper Krishna Project, etc.) — according to him — have been pending as the Centre is not releasing funds.

The Kalasa-Banduri Nala project is related to the construction of barrages on the Banduri and Kalasa streams — the tributaries of the Mahadayi river (also a tributary of Krishna river). The barrages are designed to divert water from these tributaries into the arid districts of Gadag, Bagalkot, Dharwad and Belagavi of Karnataka to improve drinking water supply. 

The Karnataka government aims to promote ethanol production on a massive scale with special incentives by the state as well as the Central government.

The Upper Krishna Project is meant to provide irrigation water from the Krishna river to the state’s drought-prone districts of Raichur, Yadgir, Kalburgi, Bagalkot and Vijayapura.

‘For Every Rs 100 Tax, KA Gets Rs 13, While UP Rs 333’

Karnataka Minister Priyank Kharge sought to know where the state’s share of funds is going. 

“The tax devolution, which is happening, is causing a lot of financial distress. The 14th Finance Commission had devalued 4.71%, which has now been reduced to 3.6%. It is causing a loss of close to Rs 73,000 crores per year. Multiply it with five — the product will be the total loss the state will suffer over the next five years,” he told The Mooknayak on the sideline of the protest.

He said a compensatory Rs 25,000 crores, which was due to the state, was  rejected by Union Financial Minister Nirmala Sitharaman — a member of the Rajya Sabha from the state. 

“The second issue is that a sum of Rs 18,000 crores, which is required as per the norms of the National Disaster Response Force (NDRF), needs to come from the Centre. But they are not speaking about it,” he further stated.

He said when his government asked for a mandate for 150 days of work for MGNREGA workers because of the drought, they (the Central government) have chosen to keep mum. 

As per the draught manual, it is supposed to kick in immediately from 100 days to 150 days.

“All the Central government projects announced earlier have come to a standstill,” he said.

For every Rs 100 tax paid by a Kannadiga, he alleged, the state gets back a paltry Rs 13. On the other hand, for the same amount of tax paid by a person in BJP-ruled Uttar Pradesh and Madhya Pradesh, the two states get Rs 333 and Rs 279 respectively. 

Similarly, he claimed, Bihar and Odisha — which have governments of the BJP’s traditional allies, get Rs 922 and 187 respectively.

He clarified that he is not against the money going to other states, but said, it should not be done at Karnataka’s cost. 

“While we support resource sharing among states within a federal structure, it’s essential not to deprive an economic ecosystem that contributes to national job creation. A more fair distribution of resources will benefit everyone,” he added.

“You (the Centre) keep the states well-nourished, while we are the ones who are creating employment, infrastructure and putting India on the world map. You cannot do this to Karnataka,” he said.

He challenged the BJP and its ally in Karnataka — the Janata Dal (Secular) or JD(S) — to counter the statistics he presented. 

Karnataka Revenue Minister Krishna Byre Gowda said Bengaluru is a “cash cow”, which should not be deprived of proper care.

“Bengaluru is an asset for the entire country. It’s an engine of growth. It is also a cash cow for the nation. It generates jobs, taxes, custom duty, foreign exchange earnings, corporate income tax, personal income tax, etc. It is generating so much cash for the country. You need to take basic care of this engine of growth and revenue. Otherwise, the cash cow will start dwindling. And if it happens, you have far fewer resources for the whole country,” he cautioned.

Kerala Too Alleges Denial of Due Share in Taxes

A day after Karnataka held the protest, the Left democratic Front-led government in Kerala too led a stir in the national capital — alleging attacks by the Centre on the federal structure of the country by “financially stifling” the state and indulging in “economic discrimination”.

CM Pinarayi Vijayan, who along with his Cabinet colleagues, MLAs and MPs took to the Delhi’s street, alleged the Centre has the state receipts by Rs 57,400 crore in the ongoing financial year (2023-24), and his government is not getting its due share from the tax collected by the Centre.

State Finance Minister K N Balagopal quoted a RBI 2021-23 statistics on state finances and said on an average, nationally, the Centre is supposed to provide Rs 35 for every Rs 65 collected by states. 

“But the Centre provides only Rs 21 against Kerala’s own tax collection of every Rs 79. That is, only Rs 21 out of Rs 100 is the Centre’s contribution. It is in contrast to Uttar Pradesh, which gets Rs 46 out of Rs 100 from the Centre, while Bihar gets Rs 70 out of Rs 100,” he said.

He went on to allege that Kerala lost Rs 12,000 crore this year as a result of the cessation of Goods and Services Tax (GST) compensation from June 2022.

After the GST was brought in 2017 and several taxes were brought under its ambit, the Centre had said states would get a compensation amount up to five years to make up for the shortfall in their revenue collection. It had also promised that an annual tax growth rate of 14 percent would be ensured under the GST to resolve the loss of tax entitlements due to the new tax regime. 

However, this growth rate has not yet materialised because of shortcomings in the GST implementation, Covid and natural calamities. The proposed GST compensation was terminated after five years. Kerala is demanding that the period be extended.

Decline in Devolution of Taxes

During the period of the 10th Finance Commission, Kerala’s share in the divisible tax collected by the Centre stood at 3.87%. It declined to 2.5% in the 14th Finance Commission and to 1.925% in the 15th Finance Commission, resulting in a massive fall in the state’s revenue.

Kerala claims that its effective birth control measures have actually contributed to the reduction in the allocation of central tax. The state wants the Centre to consider the growing proportion of elderly in the population, lifestyle diseases and second generation development problems.

Reduction in Borrowing Ceiling 

The Ministry of Finance of the Government of India determines the net borrowing (the amount that it can borrow) limit of a state for each financial year. States prepare their budget, considering the same.

Kerala is eligible to borrow up to Rs 39,626 crore, as per the Centre’s guidelines. But so far, it has been allowed to borrow only Rs 28,830 crore.

“The Centre cut our borrowing limit short in the middle of the financial year without any prior notice. It happened because of improper calculation of public account balance,” the state finance minister of the state told The Mooknayak during the protest.

He said more than Rs 600 crore under the National Health Mission and Rs 2,500 crore under Special Assistance for Capex have not been released so far.

Similar Complaints by Other States

Karnataka and Kerala are not only the two states, which are leveling the allegation of bias in distribution of state shares of taxes.

The governments of Tamil Nadu and Telangana too have accused the Centre of the same recently. The states too stressed on the need to preserve constitutionally-guaranteed state autonomy in being able to manage fiscal priorities.