Data | Friction over revenue sharing formula: Why some States get more money from Centre Premium

With population given a higher weightage over performance, the revenue-sharing formula has created friction between States and the Centre

For every one rupee that Tamil Nadu gives the Centre, it gets back 29 paise. On the other hand, Uttar Pradesh gets ₹2.73, and Bihar gets back ₹7.06, as shown in  Chart 1.

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The Centre’s tax collections are pooled-in from States and a part of it is distributed among them, based on the Finance Commission’s (FC) formula. The Fifteenth Finance Commission’s (XVFC) formula is skewed in favour of some States, resulting in wide inter-State variations. As population is given a higher weightage, it tilts the balance in favour of some northern States. This has been a bone of contention between the Centre and the affected States.

Tamil Nadu’s Finance Minister P.T.R. Palanivel Thiagarajan, in a discussion with Congress leader Shashi Tharoor, said, “The notion to allocate funds based on the population, it rewards those who have not been able to achieve population control.”

The Centre, on the other hand, has been defensive. In an event in Chennai, Union Finance Minister Nirmala Sitharaman said, “If every State thinks I am giving so much, I should get so much, it’s just not going to work out… Will a country prosper if it constantly draws this artificial line?”

The XVFC had arrived at the States’ share in the divisible pool of taxes based on each State’s needs (population, area and forest and ecology), equity (per capita income difference) and performance (own tax revenue and lower fertility rate). The weight assigned to needs was 40%, equity 45%, and 15% for performance. This formula meant that Uttar Pradesh and Bihar got 17.9% and 10%, respectively in the XVFC. Karnataka, Kerala and Tamil Nadu got 3.65%, 1.93% and 4.08%, respectively.  Chart 2 shows that in successive FCs, the share of southern States has seen a consistent decline.

Notably, the XVFC introduced the fertility rate in the formula to reward States which had reduced the fertility levels. While this does favour the developed States which have pushed their TFR below replacement rate as shown in  chart 3, the weightage given to the component is relatively lower than equity and need.