Finance Commission: Inter-State Shares

As the Sarkaria Commission on centre-state relations noted, given the division of taxing powers between the centre and the states under the Constitution, it was inevitable that “substantial transfer of resources” must take place from the centre to the states. It is to determine the extent of resource transfer and its inter-state distribution that the Constitution enjoins the appointment of a Finance Commission every five years or even at a shorter interval. Resources transferred to the states under the awards of the Finance Commissions have become a major source of revenue for the state governments. Thus, generally speaking, for every three rupees raised in revenue from a state’s own taxes and duties, one rupee accrues to a state as its share of central tax revenues. With grants-in-aid included, the dependence of states on financial devolution under the Finance Commissions’ awards becomes even more important. So it is extremely important for a state government to know what would accrue to it by way of its share of devolution under a Finance Commission’s award.

It is in the above context that the award of the Eleventh Finance Commission assumes importance for all the states. They are bound to be sensitive to the changes made in the share of central revenues fixed for the states as a whole and even more to the inter-state distribution of the total amount to be devolved including both tax-share and grants-in-aid. For this purpose, inter-state distribution under the award of one Finance Commission is bound to be compared with that under the award of preceding commissions. Thus if a state’s share of the total devolution to the states has been fixed by EFC at a level which is lower than what was fixed by the TFC, the new award would naturally be found disappointing, specially if the state thus affected is not among those with particularly high per capita incomes and has, in fact, been arguing its case to be rewarded for performance with regard to socio-economic achievements. Andhra Pradesh and Kerala have raised the banner of revolt against the EFC’s award precisely on these grounds. Andhra Pradesh’s share has been brought down from 7.98 per cent under TFC award to 7.13 per cent under EFC award and Kerala’s from 3.4 to 2.83 per cent. On the other hand, the share of an economically advanced state such as West Bengal has been raised from 6.61 to 8.1 per cent. Both Andhra Pradesh and Kerala feel aggrieved that instead of being rewarded for their progressive achievements, they have been penalised.