Karnataka Chief Minister Siddaramaiah on Thursday urged the 16th Finance Commission to address the imbalances in resource sharing between the Centre and the states, and stressed on the need for a balanced approach that rewards efficiency and performances.
“The Constitution provides for redistribution of the tax proceeds among the states. The Finance Commission, however, needs to carefully examine the impact of extremely high emphasis given to equity on the incentives of well performing states,” Siddaramaiah said.
“Moreover, the taxpayers of such states expect their taxes to work for them. This creates public trust. The Finance Commission therefore needs to do a tightrope walk while balancing equity with efficiency and performance,” he said, while addressing the meeting of the 16th Finance Commission, in Bengaluru.
He emphasised that Karnataka has been central to India's growth story and contributes 8.4 per cent to the national GDP with only five per cent of the population. “The state ranks second in total GST contribution in the country. But despite Karnataka contributing Rs 4 lakh crore to the gross tax revenue of the Centre every year, the state gets only Rs 45,000 crore as devolution and Rs 15,000 crore as grant-in-aid. This means, for every rupee Karnataka contributes, only 15 paise is returned to the state,” said the CM, who submitted the state’s memorandum to the Commission chairman Arvind Panagariya.
The chief minister reiterated that the state had been deprived of grants amounting to Rs 79,770 crore. “The 15th Finance Commission’s award had reduced Karnataka’s share sharply from 4.713 per cent to 3.647 per cent, which led to a loss of Rs 68,275 crore for the period 2021-26. The Commission was conscious of the drastic cut and recommended state-specific grants of Rs 11,495 crore. But the Centre rejected the recommendation. So, the total losses amount to Rs 79,770 crore,” said Siddaramaiah, adding that Karnataka had effectively transferred revenue of Rs 35,000-40,000 crore per year to other states, which was 1.8 per cent of its GSDP, during the 15th Finance Commission period.
The CM pointed out that the net transfers outside of Karnataka was 50 to 55 per cent of the total revenue it generated. “Karnataka and similarly placed states end up getting penalised for their good performance, both fiscally and demographically, due to the disproportionate weightage given to equity.”
Drawing attention to the cess and surcharge not being part of the divisible pool, Siddaramaiah said that, over the years, the Centre had increased its reliance on cess and surcharge, which led to the divisible pool not growing in the same proportion as the gross tax revenue and causing substantial losses to the states.
“The loss to Karnataka on account of the non-sharing of cess and surcharge is Rs 53,359 crore during the period 2017-18 to 2024-25.”
Reasserting the state’s commitment to capital expenditure, the CM said that despite the reduction in central transfers, the state had funded its flagship schemes like the five guarantee schemes, and without compromising on capital expenditure, as it recognises the multiplier effect of capital expenditure. “Karnataka’s capital expenditure is at two per cent of its GSDP since 2013-14 and ranks first in the country. However, the reduction in central financial transfers is limiting the ability of the States to invest in physical and human infrastructure,” said Siddaramaiah, adding that Karnataka recommends that 60 per cent of contribution of a state to the divisible pool, be given back to the state as devolution.
Stating that the economically advanced states were committed to supporting the poorer states, but not at the expense of their own residents or economic efficiency, Siddaramaiah urged that a larger share of the resources generated by the states be given to them. Highlighting that states face regional imbalance, the CM noted that the development of the backward Kalyana Karnataka region and the challenges of urbanisation were some of the challenges facing the state and hoped for higher devolution by the Centre.
Recommendations
The chief minister said that “Bengaluru needs an investment of Rs 55,586 crore over the next five years for its development and we urge the Centre for a grant of Rs 27,793 crore”.
“The state is investing Rs 25,000 crore for the equitable development of the Kalyana Karnataka region and we request for a matching grant of Rs 25,000 crore over five years from the 16th Finance Commission. Also, we seek a grant of Rs 10,000 crore to ensure effective disaster mitigation and timely relief and rehabilitation measures in the highly vulnerable region of Western Ghats,” he said.
Siddaramaiah, who has the unique distinction of having tabled 14 state budgets, recommended that the vertical devolution be at least 50 per cent of the divisible pool, and the cesses and surcharges to be capped at five per cent of gross tax revenue and anything exceeding that should be part of the divisible pool. “All non-tax revenues of the Centre should be included in the divisible pool of taxes by bringing the necessary Constitutional amendment.”
The meeting was attended by state representatives and 16th Finance Commission chairman Arvind Panagariya and members Ajay Narayan Jha, Annie George Mathew, Manoj Panda and Soumya Kanti Ghosh.
