Potentially disruptive north-south divide

For national harmony, allocation of revenues and parliamentary seats to states should continue to be based on the 1971 census

Over the past three decades, since the economic reforms of the early 1990s, per capita incomes in south Indian states have risen substantially faster than in the larger north Indian states. In 1990-91, per capita income in Karnataka was 1.7 and 1.3 times higher than that of Bihar and Uttar Pradesh, respectively. By 2017-18, the same numbers were much higher at 4.7 and 3.3 times and that trend has continued. Table I provides a listing of per capita incomes, populations and the numbers of seats in the Lok/Rajya Sabha for several states. 

Allocation of tax revenues by successive Finance Commissions has been invariably correlated to populations of individual states. For instance, paragraph 4 of the 14th Finance Commission’s terms of reference (ToRs) stated that “the Commission shall generally take the base of the population figures as of 1971 in all cases where population is a factor for determination of devolution of taxes and duties and grants-in-aid; however, the Commission may also take into account the demographic changes that have taken place subsequent to 1971 (emphasis added).” Chapter 8 of the 14th Finance Commission’s report is titled “Sharing of Union Tax Revenue” and mentions that “though we are of the view that the use of dated population data is unfair, we are bound by our ToRs”. 

Illustration: Binay Sinha

Individual state governments have had their differences with the central government about sharing of tax revenues between them and the Centre. The change in the ToRs of the 15th Finance Commission to carve out a portion of total revenues for external defence and internal security expenditures prior to allocation of funds to states was criticised by some state governments. It is not clear why this specific change in the ToRs was necessary. Past Finance Commissions have taken threats to India’s security into account in apportioning resources between the Centre and states. More recently, states have asked for a share out of the amounts collected through cesses and surcharges levied by the central government even though the Centre can retain such revenues fully under existing provisions of the Constitution. In December 2019, there was a lack of consensus in the GST Council and a decision on taxation of lotteries was put to vote — a first for this Council as previous decisions were taken by consensus. 

The 15th Finance Commission ToRs mention that it “shall use the population data of 2011 while making its recommendations.” Using the 2011 census numbers, per capita incomes in northern states are substantially lower than those for southern states. This could result in higher proportions of overall revenues to be allocated to northern states by the 15th Finance Commission compared with allocations made by the 14th Finance Commission and could potentially cause disaffection in southern states. My understanding is that linking 1971 population numbers to allocations made by Finance Commissions is not necessarily unfair to the northern states. If the large northern states had managed development efforts better, the faster rise in their populations would have been to their advantage. States need to be treated fairly but poor past economic performance should not be the basis for preferential treatment. In any case, many from UP and Bihar move temporarily or even permanently to higher per capita income states. Maybe the following methodology that is mentioned in the 14th Finance Commission’s report could be adopted by the 15th Finance Commission. Namely that the “weight assigned to the population should be decided (as per the 1971 census) and an indicator for demographic changes (since then) be introduced separately”.

For some time now there has been concern in south Indian states about how their numbers of seats in the Lok Sabha would decrease once the next delimitation exercise is done. According to the 84th Amendment of the Constitution in 2002, this reallocation of parliamentary constituencies is to be done as per the 2031 census (India’s Emerging Crisis of Representation by Milan Vaishnav & Jamie Hintson, Carnegie Endowment, March 2019). The speculation is that south India may lose as many as 45 seats to north India. Clearly, this would not be acceptable to southern states. 

The disquiet about the current central government’s motivations may not be warranted. However, the reality is that recommendations on allocation of funds across states by the 15th Finance Commission based on the 2011 census may roil the waters. Ten years from now, post 2031 southern states are likely to be highly agitated if their numbers in the Lok Sabha were to decrease. Although the reaction of the lower per capita northern states may be shrill citing unfairness, it would be better for national harmony to base allocation of revenues across states and the numbers of members of parliament from the various states on the 1971 census for another 30 years. 

The writer is a former Indian Ambassador and World Bank Treasury  professional; j.bhagwati@gmail.com