'The govt cannot release funds to states on request'

'If such a practice were feasible, every state would seek additional funds, posing a significant risk to the overall health of the economy.'

On the March 13, 2024, the Centre told the Supreme Court that it would only provide a one-time offer of Rs 5000 crore to Kerala to tide over its financial problems.

But the Kerala government rejected the offer saying what they needed was Rs 10,000 crore.

This will result in a legal battle, perhaps a prolonged one between the BJP ruled Centre and the Left ruled Kerala.

The north-south political divide has been a topic of discussion for some time.

With the south Indian states of Kerala, Tamil Nadu, Karnataka, Andhra and Telangana being ruled by non-BJP parties, not just political divide but economic divide also has become an issue between the Centre and the states.

These states have been complaining about the Centre's stepmotherly treatment in the allocation of funds.

For example, the south Indian states contribute 31% of India's GDP but get only 18% of funds allotted back.

For every rupee given to the Centre, when Bihar gets Rs 7.06, UP Rs 2.73, Karnataka gets back just 15 paise, Tamil Nadu 29 paise and Kerala 25 paise.

Sarthak Pradhan, an assistant professor at the Takshashila Institution specialised in Economic Reasoning and Public Finance, analyses this tricky situation in an interview with Rediff.com's Shobha Warrier.

The south contributes 31% of India's GDP but gets only 18% of the funds allotted back from the Centre. This has resulted in a lot of bad blood between the Centre and the south Indian states which incidentally are ruled by opposition parties.
Just because the south has only 20% of the total population, can the Centre reduce funds?
Will this not affect the present growth of the southern states?

There is a concern among the southern states that their share in Union taxes may be reduced compared to the previous Finance Commission periods.

We must see why some states like Karnataka might have a reduced share in the Union taxes. The Constitution assigns specific responsibilities to the Union and the states based on who can perform which task better.

For instance, broad-based taxes like income taxes and corporation taxes are assigned to the Union, while states are responsible for providing various services, ie, health and education.

Thus, the Union has a larger revenue share, while the states are more responsible for incurring expenditures.

The Finance Commission is the institutional (and constitutional) mechanism to address these imbalances between the Union and the states.

The Finance Commission is constituted every five years and decides how to distribute the Union taxes with the states.

The aim is to provide comparable levels of public service to ensure balance and stability in the Indian federation.

One of the factors that is used to decide this is income distance. The poorer a state, the larger the share.

As states like Karnataka have done well in the last few years and have moved up the income hierarchy, their score in terms of income distance has reduced, resulting in fewer resources mandated by the Finance Commission.

Another factor that reduces the share is the population. It is a need-based criterion -- the higher the population, the higher the amount of resources required to provide various services.

As the population of the southern states has stabilised or become lower, they score low in terms of the population factor, reducing their share in the Union taxes.

Per capita income of the southern states is 50% more than the northern states. The per capita income of Tamil Nadu, in fact is double the national average.
What should the north do to catch up?

The southern states generally outperform most northern states.

Leading among the southern states is Karnataka, with an 2021-22 NSDP per capita (external link) of Rs 164,471, followed by Telangana (Rs 158,202), and Tamil Nadu (Rs 154,557).

However, it's noteworthy that states like Haryana (Rs 172,657) and Gujarat (Rs 170,384) surpass Karnataka.

The difference between Uttarakhand (Rs 149,015) and Kerala (Rs 148,810) is marginal.

Himachal Pradesh, Maharashtra, and Punjab outperform Andhra Pradesh.

However, there is a significant concern regarding the per capita income of states such as Bihar, Uttar Pradesh, Jharkhand, Madhya Pradesh, and the north eastern states.

So, the point being:

1. There are states in the north that have performed well.
2. There are states in the south that exhibit comparable incomes to some northern counterparts
3. A cause for significant concern arises from the poor performance of certain states, extending beyond north India (for instance Manipur, Assam, Meghalaya, Nagaland etc in the north east).

Different states in India have their own unique challenges, constraints and opportunities etc.

A one-size-fits-all solution is impractical and fraught with problems.

A nuanced approach is crucial, addressing region-specific problems with tailored solutions

Do you think there is something fundamentally wrong with the way the northern states are managed?

I think it is inappropriate to lump all the states in the north together, as notable social, cultural, and economic differences exist among them.

These variations are reflected in various socio-economic indicators.

For example, the total fertility rate (TFR) of Himachal is comparable to that of Karnataka and Andhra Pradesh.

The TFR is even lower for Punjab.

Conversely, the rates are considerably higher for both Uttar Pradesh and Bihar.

There are parameters where you will find divergence between northern states, and similarly, there are parameters where some northern states converge with their southern counterparts.

Therefore, it is not accurate to assert that there is a single, overarching issue with the management of the northern states.

Gujarat and Maharashtra have the wealthiest capitalists in the country but why are these states not as developed as the southern states?

The idea of development is a bit subjective, ie, what parameters do we intend to consider as part of development?

If we consider per capita income, Gujarat (Rs 170384) does better than any southern state.

Also, Maharashtra (Rs 138490) does better than Andhra Pradesh (Rs 117464) while it lags behind other southern states.

However, a different picture might emerge when we broaden our perspective to include parameters such as health and education under the umbrella of development.

Merely having a few wealthy individuals in a region does not guarantee improvements in education, health, or standard of living.

Instead, what matters is the state's commitment to providing "meritorious" services like education and public health.

States like Kerala and Tamil Nadu seem to have prioritised these human development parameters.

Do you feel the Gujarat model which the Prime Minister Narendra Modi talks about is actually not the real development model?

There is usually this debate between the Gujarat and Kerala model.

These two are carefully constructed narratives that refer to a market-friendly, growth-focused approach and a state-led human development parameters-focused approach, respectively.

The success of both approaches ignores the historical underpinnings (ie, the role of mercantile communities in the Gujarat region and the role of the Travancore princely state even before the corresponding states were formed).

Instead of looking at it as "either or", it makes sense to look at each approach's benefits and shortcomings and incorporate it in future policy design.

IMAGE: Sarthak Pradhan

If it is the strong southern economy that has made India the fastest growing economy in the world right now, is it not a mistake by the Centre not releasing the funds the southern states ask for?

As mentioned earlier, the primary concern of southern states revolves around the potential reduction in their share of Union taxes, not the cessation of funds by the Union. The latter can be legally challenged.

Moreover, the Union cannot freely release funds upon request from any state.

If such a practice were feasible, every state would seek additional funds, posing a significant risk to the overall health of the economy.

Thirdly, it's noteworthy that the southern states have played a significant role in India's economy, putting the country on the global map.

It also implies they can augment their "own resources" and not just remain dependent on the Union.

The Constitution provides various heads under which states can generate their "own tax revenue".

The states can also generate their "own non-tax revenues" by charging for the goods and services they provide. Currently, these sources are underleveraged.

The focus of the states should be on reducing their dependence on the Union.

It would be advisable for southern states to ally with other states to demand a higher share in the Union tax pool from the current 41%.

They should also demand, including cesses and surcharges, from the Union tax tool.

This will ensure higher resources for each state, closely following their expenditure requirements.

Feature Presentation: Aslam Hunani/Rediff.com