Union Government Releases ₹1.73-Lakh Crore Tax Devolution: South India Gets Only 16% of Funds, Raising Concerns
On January 10, 2025, the Union Government of India released ₹1,73,030 crore as tax devolution to state governments. The move aims to accelerate capital spending and support development and welfare-related expenditures across the country. However, the allocation of these funds has sparked significant concerns, particularly in South India, which received a disproportionately low share compared to its contribution to the national economy.
Key Points of the Tax Devolution Announcement
1. Overall Allocation to South India
- The southern states of Tamil Nadu, Karnataka, Kerala, Telangana, and Andhra Pradesh together received ₹27,338 crore.
- This accounts for just 16% of the total funds, despite these states being among the highest contributors to India’s tax revenues.
2. State-wise Breakdown of Funds for South India
- Tamil Nadu: ₹7,057 crore
- Karnataka: ₹6,310 crore
- Kerala: ₹3,330 crore
- Telangana: ₹3,637 crore
- Andhra Pradesh: ₹7,002 crore
3. Comparison with Uttar Pradesh
- Uttar Pradesh alone received ₹31,039 crore, more than the combined allocation for all five southern states.
- This raises questions about the fairness of the devolution formula, especially since South India contributes significantly more to the nation’s tax revenue than the northern states.
Historical and Contextual Analysis
4. Revenue Contribution vs. Returns
- South Indian states contribute nearly five times higher tax revenue to the Union Government compared to North Indian states.
- However, the return on their contributions is far lower. For example:
- Tamil Nadu: For every rupee contributed, the state receives just 29 paise in return.
- Uttar Pradesh: Receives significantly more than it contributes, creating a stark imbalance.
5. Declining Allocations Over Time
- Under the 9th Finance Commission, states like Tamil Nadu received comparatively higher allocations.
- By the 15th Finance Commission, Tamil Nadu’s allocation had decreased by almost 50%.
- This trend of reduced funds for South India has raised concerns among state leaders and policymakers.
6. Impact of Centrally Sponsored Schemes
- The Union Government often introduces Centrally Sponsored Schemes (CSS) and mandates state governments to implement them.
- Initially, the Union Government promises a higher share of funding but gradually reduces its contribution, leaving the states to bear the financial burden.
- Many of these schemes are deemed irrelevant for South India, as they fail to consider the region’s unique cultural and developmental needs.
Consequences and Concerns
7. Disparity in Development Support
- The allocation model prioritizes less-developed northern states, which often suffer from poor governance and inefficient resource utilization.
- In contrast, South Indian states with better governance and higher economic output receive lower allocations, penalizing their success.
8. Challenges During Natural Calamities
- South Indian states frequently face inadequate support during natural disasters like cyclones and floods.
- For instance, Tamil Nadu and Kerala have repeatedly criticized the Union Government for delayed or insufficient disaster relief funds.
9. Potential Impact on National Growth
- South India is a critical driver of India’s economic growth, contributing significantly to GDP, exports, and technological advancements.
- If the region’s growth is hampered due to inequitable fund allocation, it could negatively impact the entire nation’s progress.
Political Reactions and Legal Challenges
10. Supreme Court Intervention
- Several South Indian states have approached the Supreme Court, challenging the fairness of the tax devolution formula and seeking better allocations.
- The outcome of these legal battles is awaited as states prepare for the 16th Finance Commission.
11. South Indian Leaders’ Concerns
- Leaders across South India have expressed frustration, describing the treatment of their states as that of “second-grade citizens.”
- Any criticism of the Union Government’s policies is often met with accusations of attempting to divide the nation on regional lines, further complicating the discourse.
The Road Ahead: Expectations from the 16th Finance Commission
12. Fairer Returns
- South Indian states are demanding a more equitable share of tax devolution that reflects their contributions to the national exchequer.
13. Reevaluation of CSS
- Leaders suggest that the Union Government re-evaluate centrally sponsored schemes to ensure they are relevant and beneficial for South India.
14. Unified South Indian Voice
- There is growing consensus among South Indian leaders to collectively advocate for fair treatment and equitable distribution of resources.
Conclusion: The Need for Equitable Governance
The disproportionate allocation of tax devolution funds highlights the challenges of achieving equitable federalism in India. While South India remains a powerhouse of economic growth, the lack of fair financial returns could hinder its progress and, by extension, the nation’s overall development. The Union Government must address these disparities to ensure balanced regional development and strengthen national unity.