A week ago, Tamil Nadu Finance Minister Thangam Thennarasu accused the Union government of showing a “step-motherly attitude” towards the State over devolution of funds. Around at the same time, at a media conclave, Thiruvananthapuram Lok Sabha MP Shashi Tharoor spoke about the potential danger of political disenfranchisement in the south when the delimitation freeze ends in 2026. These statements have brought the tussle over the distribution of Central taxes as well as the delimitation of constituencies to the fore. Is the south being punished for its success? T.M. Thomas Isaac and Balveer Arora discuss the question in a conversation moderated by Jasmin Nihalani. Edited excerpts:
In the recent past, several south Indian leaders have been vocal about the share that the southern States get from Central tax kitty. Where does this view that ‘the southern States are being punished for their success’ stem from?
Thomas Isaac: The Finance Commission decides not only on how much should be devoted from the Centre to the States, but also on distribution of these proceeds among the States. These are based on certain criteria, which work against the south. Inter-State distribution is based on two factors. One, the State’s share in the total population; and two, the income distance ratio, that is, how far the State’s per capita income is higher or lower than the national average. On both these counts, the south loses out. So, you have a situation where there has been a drastic decline in the share of resources distributed to the south. For example, in the case of Kerala, it was 3.8% during the 10th Finance Commission; now, it is 1.9%. This decline has been accelerating over time.
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I accept that in any federal system, inter-State transfers would have to have a component of equity. The richer States and regions will have to contribute to the development of the States which are backward because every citizen has a right to certain minimum uniform services. But the redistributive transfers must be within certain limits. So, far the higher resource transfers to the backward States have not produced the expected improvement, either in the economy or in social welfare. This means that there is something else that you have to do in those States which are backward.
Balveer Arora: The equity principle has to be kept in the calculation in the sense that there is a certain amount of cross transfers and redistribution across the federal polity. That is part of the price that one pays for being in a union; you share some of the burden.
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I think we need a more proactive attitude. We need to identify the points where intervention is required so that the union does not veer towards an unbalanced and disastrous course of development or move in a direction which could lead to fragmentation. The terms of reference of the 16th Finance Commission are due soon. It is time that a voice is raised for involving the States. There should be a strong effort to ensure that the next Finance Commission has terms of reference which take cognisance of the problems that the federal policy is facing. For example, if the population basis is being shifted from 1971 to a new figure, the weightage of the population can be adjusted. It is not written in stone that it has to remain the same.
The weightage given to the population in determining the share of States has come down from 27.5% in the 14th Finance Commission to 15% in the 15th Finance Commission. The 15th Finance Commission also rewarded the progress that States made in reducing their population. So, why do southern States feel they are losing their share in the pie due to population criteria?
Thomas Isaac: This was the outcome of a vigorous campaign in which many States participated. In fact, the initial meeting was dubbed a meeting of the southern States. As a result, though the shift in the population base year did take place, as a compromise, the weightage for the population was reduced and a neutralising criterion in terms of demographic performance was brought in. As Professor Govinda Rao has argued in a recent paper, the overall impact of shift in the population base year on inter se distribution has been minimum. But there is a high correlation between the decline in population growth and the growth rate of the economy. That the weightage of population has come down doesn’t make the outcome different because of this close relationship. Therefore, Kerala saw a drastic reduction and so did Karnataka and Tamil Nadu. The final outcome has been negativing for the south. And this would continue to be the case in future also because the south is doing better. Yet, I will not argue for freezing inter se redistribution. But I would argue that it be kept within certain limits. Recently, Kerala’s Finance Minister stated in the Assembly that the State gets ₹35 paise for every one rupee that is contributed, while Uttar Pradesh gets ₹1.6 for every rupee collected from the State.
Comment | Is the delimitation question settled?
Balveer Arora: Yes, there have been some efforts to offset the imbalance. The poorer States are the more populated States and therefore the disadvantage accrues to those States which have taken the question of family planning seriously. I think it’s also linked to the delimitation. After all, the political power balance within the federal polity will also shift. So, I would insist that the States must get a space and voice in the decision-making of federal finance.
The rationale provided by the Finance Commission for the distribution of taxes within the States is that these transfers provide a level-playing field for the States. They are needed to enable all the States to provide comparable levels of public services. What are your thoughts on this?
Thomas Isaac: No, that is not happening. The income distance between the States has widened since 1991. In fact, the range has been widening. This raises questions regarding the development policies that are being pursued in the States. During COVID, the government relaxed borrowing limits for States, but we had a strange spectacle of unspent cash balances lying around. You have internalised this Fiscal Responsibility and Budget Management (FRBM) Act logic so much that even when permitted, States don’t want to spend money on revenue expenditure. Even before COVID, the unspent cash balances were ₹1.5 lakh crore and poorer States were the biggest depositories of these funds. So, I wonder what prevents this money from being used to build schools and hospitals.
Article 81 of the Constitution says that each State should have seats in proportion to the population and that constituencies should roughly have the same population. We are using the decades-old Census to determine seat share in the Lok Sabha and there is an imbalance in the number of constituents that an MP has in Tamil Nadu compared to a State like Uttar Pradesh. But at the same time, southern States argue that they will be penalised when the delimitation freeze ends by 2026. The Lok Sabha seats in Uttar Pradesh are likely go up to 143, but Kerala may remain unchanged at 20. So, what is the way forward?
Thomas Isaac: The southern States have complied with population norms and schemes that have been promoted by the Central government. Their success has resulted in their population share going down. The delimitation of constituencies would lead to a decline in their representation in Parliament. The States which have successfully implemented the national policies cannot be penalised for their success. There is no compulsion to change the ratio of representation in Parliament. This is a serious issue and it can have devastating consequences, marginalising the southern States in the political sphere because they have done better.
Comment | Retribution for the south, accolade for the north
Even within the existing Constitution, there is nothing to prevent the Rajya Sabha seats from remaining in the same ratio or to prevent giving an additional weightage to States whose population is going down. I would still argue that the 1971 population should be used. So far, we have continued with that. It will not be unconstitutional if it is continued for another decade or two.
Balveer Arora: The logic of one person, one vote is inescapable. A reasonable solution would be to freeze the seats of the Rajya Sabha at the level at which they are, rather than adjusting them in terms of population. There is nothing written in the Constitution about what should be the basis for the distribution of seats in the Rajya Sabha. And there is no reason to follow blindly the figures that emerge from the delimitation of the Lok Sabha to redistribute the seats in the Rajya Sabha.
Comment | Taking India back to the drawing board
After the proposed delimitation you will have hugely populous constituencies and sparsely populated constituencies because of the demographic disparities, which are inherent in our polity. But the important thing is how effective the representation is of all the vital forces of society. After all, your objective is to build a better economy, a better polity, and a better society. So, if your formula punishes those that are contributing in this direction, then obviously there’s something wrong with it.
Thomas Isaac is the former Finance Minister of Kerala and currently serves as a member of the central committee of the Communist Party of India (Marxist); Balveer Arora is the chairman of the Centre for Multilevel Federalism and former Professor and Rector at Jawaharlal Nehru University
