State governments account for 60% of India’s government expenditure. And yet “more than half of their revenues are from sources (central taxes, state goods and services tax, central grants and loans) that are outside their control. After the changes in Union-state government financial relations–with the introduction of the GST and the 14th Finance Commission, which increased the share of tax devolution to states from 32% to 42%–states are losing autonomy on their finances and becoming more dependent on the Union government….”
As is increasingly well-known now, the southern states’ birth rate has for over a decade now been below the replacement rate i.e. the population of these states is shrinking: “…the combined population of Tamil Nadu, Kerala, Andhra Pradesh and Karnataka (known as Mysore until 1973) was nearly a quarter (24.7%) of India’s population as per the 1971 census. This number fell to 20.8% in 2011. (Telangana was carved out of Andhra Pradesh in 2014; hence the figures for AP include both states).” Nushaiba Iqbal of IndiaSpend explains to us how meaningful this demographic development could for the southern states:
“The five southern states–Andhra Pradesh, Tamil Nadu, Kerala, Karnataka and Telangana–have total fertility rates (TFR, or the number of children an average woman will have in her lifetime) below the national average. A low TFR is desirable, as it is linked to increased income per capita and lower poverty rates…
However, policymakers and politicians in the southern states increasingly see their lower TFRs leading to a reduction in their share of the Union government’s pool of divisible taxes. In addition, their political representation in Parliament could decline following delimitation, an exercise due in 2026 after which the new boundaries of parliamentary constituencies will be determined based on the population…”
The southern states’ looming fiscal challenge arises from how the Finance Commission’s formula for allocating fiscal resources to the state works: “The five southern states together collected more than a quarter of the country’s direct taxes and 28.5% of its goods and services tax (GST), as per data presented in Parliament. On the other hand, they get 15% of the Centre’s pool of taxes as per the 15th Finance Commission (FC)….
Population is one of the criteria that the FC considers for determining the inter-se (between states) division of taxes, according to Subhash Garg, former finance secretary and author of the book, We Also Make Policy.
The FC is a constitutional body that determines the transfer of taxes from the Union government to the states, called devolution of taxes. The term of the current one–the 15th FC–ends in March 2026.
“The central tax devolution kitty is distributed amongst the states to meet each state’s needs, taking into account their respective fiscal capacities and special cost disabilities [such as the increased spending for providing roads and electricity in hill states or special category states],” explained Garg. Any further gap between assessed needs of a state and post-devolution resources is met through a revenue deficit grant.
The highest weight (45%) in the tax transfer formula used by the 15th FC is assigned to “income distance”, which is the difference in per capita income of a state and that of Haryana, which was the richest state in the country in 2020-21 (not counting Sikkim and Goa). Population gets the second highest weight (15%) in the formula along with area.
To be fair to the states that have “done better on the demographic front”–that is, kept populations in check–the 15th FC also considered the TFR, giving states with lower fertility a higher share. Demographic performance was thus assigned a weight of 12.5%. The 14th FC used a combination of 1971 and 2011 populations to decide the tax transfer formula, a move which Garg calls an aberration.
“The whole system is designed to transfer larger resources to poorer states with higher populations. The southern states are fiscally better off and, with lower growth in population, their fiscal needs are also relatively smaller,” Garg said.
However, as Stalin wrote, fewer people of working age will result in fewer taxes being collected.
“Giving huge weightage on population (2011) will be an injustice to the states who have controlled the population,” believes Lekha Chakraborty, an economist at the National Institute of Public Finance and Policy and an expert on fiscal federalism.”
As if a reduced allocation of resources from the Centre weren’t bad above, the southern states have another challenge to cope with: ageing populations, “In addition, an ageing population results in higher costs for healthcare and social security. This is what makes the proportion of elderly in the population contentious.
Kerala had the highest proportion of people aged 60 and above (12.55%) in 2011, followed by Goa (11.21%) and Tamil Nadu (10.41%). In Uttar Pradesh and Bihar, the proportion of the elderly was 7.7% and 7.4%, respectively.”
The southern states’ second challenge is political representation. At some stage over the next decade, India will have to come to terms with ‘delimitation’ i.e. the process of translating population into Lok Sabha seats: “If the number of seats representing the southern states in Parliament falls after delimitation, they may also lose a say in how these taxes are spent. For instance, a 2019 analysis based on population projections for 2026 shows that by that year, Uttar Pradesh would be 11 seats short of the number of seats it required in parliament to adequately represent its population whereas Tamil Nadu would have eight seats in excess of that required to represent its population.
If the number of seats were to be revised such that no state has to lose any members of parliament, the Lok Sabha’s strength would be 848 seats, and Uttar Pradesh would have 143 seats (compared to 80 at present) while Kerala would have 20, the same as it has right now, the analysis shows.
If India’s parliamentary seats were to be reallocated on the basis of population, Uttar Pradesh, Bihar and West Bengal alone would make up a third of the parliament, as IndiaSpend reported in 2016.
In such a situation, the states are right to fear “taxation without representation”, believes Chakraborty.”
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