Central transfers — arresting the decline in shares of some States

Context:

The Sixteenth Finance Commission's deliberations have drawn attention due to concerns raised by several states, particularly those in southern India, regarding a perceived decline in their share of resources transferred from the Centre. This issue revolves around the criteria used for horizontal distribution, with states like Tamil Nadu, Kerala, and Karnataka expressing dissatisfaction over their diminishing allocation over successive Finance Commission periods.

Impact of Income Distance Criterion:

• Declining Share for Southern States: Analysis reveals a steady decrease in the share of southern states, from 19.785% to 15.800%, attributed largely to the income distance criterion applied by successive Finance Commissions.
• Gain for Other Regions: In contrast, hilly, central, and western states, including Maharashtra, have seen an increase in their share, highlighting regional disparities in resource allocation.
• Weight Reduction of Distance Criterion: The weight of the distance criterion, which assigns higher shares to states further from the highest income state, has been progressively reduced from 62.5% to 45%, impacting states differently based on their income levels and geographic location.

Concerns over Population Criterion and Divisible Pool:

• Controversy Surrounding Population Criterion: The use of 2011 population data, replacing the earlier 1971 data, has raised concerns, mitigated by the introduction of the demographic change criterion. However, the joint impact remains marginal for most states.
• Divisible Pool Reduction: While states' share was increased to 42% following the Fourteenth Finance Commission's recommendation, the Centre's decision to raise cesses and surcharges has diminished the size of the divisible pool, posing challenges for equitable resource distribution.
• Recommendations for Fair Distribution: Suggestions include reducing the weight of the income distance criterion by 5% to 10% and imposing an upper limit on cesses and surcharges by the Sixteenth Finance Commission, aiming to address states' concerns over declining shares while maintaining principles of fairness and equity.