Why the South is angry

"Is Gujarat a beggar state? Are we beggars? People of Gujarat send Rs 60,000 crore and what comes back?” scoffed the then chief minister Narendra Modi in December 2012.

Come February 2024, Prime Minister Narendra Modi is scoffing again. This time his barbs are aimed at the Opposition for sowing seeds of disunity and at the southern states for demanding a higher share of taxes from the Centre. "PM Modi is the political opposite of CM Modi," jibed former Tamil Nadu finance minister Palanivel Thiaga Rajan.

The provocation was a day-long fast led by Karnataka chief minister Siddaramaiah and deputy chief minister D.K. Shivakumar. All the MPs and MLAs from the state gathered at Jantar Mantar in Delhi on 7 February.

BJP MP from South Bengaluru Tejasvi Surya took to X to prove that, in absolute terms, the devolution of taxes to Karnataka in the 10 years since 2014 was two-and-a-half times more than in the previous decade (2004–14). What he failed to mention was the surge in tax collection and correspondingly higher taxes contributed by the state during this decade.

“Around 4.5 lakh crore rupees will be Karnataka’s contribution to central taxes this year,” said Karnataka minister Ramalinga Reddy, but, according to the formula laid down by the 15th Finance Commission, “only Rs 50,000 crore will come back to the state from South India".

Not just Karnataka, the share of all five southern states has declined since 2020.

"States contribute to the Union so that we can all grow. But the Union also has equal responsibilities towards every state. What would PM Narendra Modi say to CM Modi on the funds due to states?" tweeted Congress general secretary K.C. Venugopal.

What triggered the outrage was a table in the interim Budget that indicated that this year, Uttar Pradesh will receive a larger share of Central taxes than all the Southern states combined. On what grounds? Yes, U.P. is the largest state with a higher population, but as per the 2011 census, the total population of the five Southern states (240 million) was higher than the population of U.P. (199.8 million). The Southern states are more efficient and have scored better on birth control and social indices. Why, then, are they being punished?

The BJP sneered at the comparisons and accused the Congress government in Karnataka of seeking an alibi for its inability to fund pre-election freebies as promised.

“For the last 30 years, tax devolution is increasing for the Northern states and decreasing for South India. While we do not grudge paying for the development of the Northern states, two issues need to be addressed. How long will the South sacrifice and why are the Northern states unable to develop despite hand-holding and a higher share in taxes? Where is the money being spent?” asked Thiaga Rajan at a panel discussion.

The controversy stoked strong feelings, with outline maps of the ‘United States of South India’ trending on social media. A sardonic post with a picture of bike riders read, ‘on our way to study and work hard, so that we can contribute more taxes to Bihar and Uttar Pradesh so that they can raise their children and send them to Bengaluru to work.’ #SouthTaxMovement became the trending hashtag on microblogging site X.

States losing financial autonomy

Historically, the South has been subsidising the North, points out Siddaramaiah. “For every one rupee of tax contributed by Uttar Pradesh, it received Rs 1.79 from the Centre as devolution, Bihar as much as Rs 7.06 while Karnataka receives just 47 paise,” he claimed.

Similarly, for every rupee that Telangana contributes to the Centre by way of direct taxes, it gets back 43 paise, Andhra Pradesh 49 paise and Tamil Nadu 29 paise.

Protests are spiralling in the South, with even Andhra Pradesh chief minister Y.S. Jagan Mohan Reddy, deemed to be close to the BJP, speaking up. Making a power point presentation at the assembly on 6 February, Reddy claimed, “When the 13th Finance Commission recommended devolution of 32 per cent of central taxes to states for the 2010-15 period, the states received, on an average, only 28 per cent of the central taxes.

The 14th Finance Commission recommended a devolution of 42 per cent for the period (2015–20) but the states received only 35 per cent on an average. The 15th Finance Commission recommended 41 per cent devolution for the period 2020–25, but states are receiving an average of 31.5 per cent”.

Ironically, Modi advocated devolution of 50 per cent to the states when he was chief minister of Gujarat. Last month, the Reporters’ Collective quoted Niti Aayog CEO B.V.R. Subrahmanyam as saying that PM Modi, in early 2015, had wanted the devolution to be pegged at 33 per cent, against the Commission’s recommendation of 42 per cent. The chairman, former RBI governor Y.V. Reddy, refused to budge, following which Modi typically took the credit for being generous to the states by increasing the devolution from 32 to 42 per cent.

The 15th Finance Commission calculated the state’s share in the divisible pool of taxes based on each state’s needs (population, area, forest and ecology), equity (per capita income difference) and performance (own tax revenue and lower fertility rate). The weightage assigned to needs was 40 per cent, equity 45 per cent and performance 15 per cent. This formula meant that Uttar Pradesh and Bihar got 17.9 per cent and 10 per cent, respectively.

Karnataka, Kerala and Tamil Nadu got 3.65 per cent, 1.93 per cent and 4.08 per cent, respectively. Though introduction of the fertility rate in the formula was meant to reward states which had reduced fertility levels, the weightage given to the category is relatively lower than equity and need.

The Union government has since begun to rely on imposing cesses and surcharges, which are not part of the divisible pool. The share of central cesses and surcharges in gross tax revenue has risen steadily. From 10.4 per cent in FY12, their share climbed to 11.4 per cent in FY18 and 20 per cent by FY21. While the surge in cess/ surcharge revenue — largely through duties on fuel — has swelled the Union government’s coffers, it has also shrunk the divisible pool of resources.

The 15th Finance Commission had also highlighted what was problematic about the growing share of cesses and surcharges in Union revenues. A report by Emkay Global Financial Services suggested that the way to increase devolution to the states would be to bring cess-and-surcharges collections into a divisible pool.

"By this inclusion, the states will get a bigger pie of devolution from the Centre’s net proceeds to meet their expenditure commitments," the report had said.

The Goods and Services Tax (GST) introduced in 2017 increased the states’ reliance on the Union government for funds. “Once GST came into effect, everything was centralised. Now state governments hardly have any flexibility when it comes to taxation,” said Kannada activist Ganesh Chetan.

“We have been demanding that the share-able portion of GST be changed from the current 50:50 ratio to 60:40 in favour of the states,” said Kerala finance minister K.N. Balagopal.

Tara Krishnaswamy, co-founder of the non-partisan NGO Political Shakti, told The South First that the imbalance worsened with the 15th Finance Commission utilising population as a crucial factor in determining devo-lution. “This decision favoured the more populous northern states that struggle to implement family planning, while penalising states such as Tamil Nadu and Karnataka with lower fertility rates,” she explained.

By shifting the base year for determining expenditure needs from 1971 to 2011 population figures, the 15th Finance Commission introduced a change that "favoured the states which neglected birth control and family planning", said analyst and author K. Ramesh Babu.

New challenges

Meanwhile, the 16th Finance Commission, which has already been formed and will submit its recommendation towards the end of 2025, must re-prioritise the devolution formula from redistribution to incentivising growth, instead of punishing the ‘performing states’ which include Maharashtra and other states as well.

“In view of the inordinate rise in fiscal imbalances, the Commission also needs to re-examine the Union government’s 2018 Fiscal Responsibility and Budget Management Act,” says D.K. Srivastava, chief policy advisor, Ernst & Young India. Also, the performance-based incentives suggested by the Finance Commission would actually end up robbing the states of their freedom to make independent decisions.

“Any conditions on the states’ ability to borrow will have an adverse effect on the spending by the states, particularly on development. This will surely undermine the spirit of cooperative federalism,” said economist A. Srinivasa Rao. Moreover, it does not hold the Union government accountable for its own fiscal prudence and dilutes the joint responsibility that the Union and states have.

Political fault lines

A forum of southern states has been proposed, to fight for equitable distribution of resources from the Centre, including tax share from the divisible pool. “An economic alliance of south-ern states is already on the table for discussion, and stakeholders want Karnataka to take the initiative,” said Basavaraj Rayareddy, economic advisor to Karnataka.

The southern states need a powerful platform since their voices are not being heard, he said, while pointing out that the northern states have much higher political representation in Parliament by virtue of their higher population. The delimitation exercise, put on hold till 2026, is expected to further skew the position.

N. Jayaprakash Narayan, former bureaucrat and founder of Lok Satta, an NGO working in the area of democratic and electoral reforms, strikes a different note. “India is a diverse country with glaring regional inequalities within a given state. There are historical reasons for this, as well as policy mistakes made in the past. In the interest of the country’s unity and common market, India must be treated as one unit and allocation of resources should be need-based,” he argues.

The overwhelming sentiment in the South, however, is that the threat to federalism has never been as serious as it is now with the Centre systematically usurping the rights of the states and taking unilateral decisions.

Separate protests in the national capital by Karnataka Congress legislators and MPs, CPI(M) leaders from Kerala, DMK leaders from Tamil Nadu and West Bengal chief minister Mamata Banerjee in Kolkata indicate the growing frustration of states at losing their ‘tax autonomy’ to the Centre.

“After delimitation of the constituencies, the South will lose out further in terms of the number of Lok Sabha seats. This is also adding to a sense of betrayal,” says political analyst and former MLC Prof K. Nageswar.