Kerala demands equity; says Finance Commission formula hurts high-performing states

Kerala demanded that population density be considered as a criterion among others to the 16th Finance Commission while deciding the distribution of devolution.

In a memorandum submitted by the ruling CPI(M) to the Finance Commission—which completed its three-day visit in Kerala—the party noted that equity should be an important factor in determining inter-se distribution. “The advanced states contribute a major portion of the central government tax resources. A portion of these resources would have to be transferred to less developed states through central government devolution so that they may catch up and provide minimum and equal basic services to the citizens. But the problem is that the backward states have not been catching up and every Finance Commission is forced to redistribute higher amounts so that the financial situation of some of the states like Kerala has been put to serious pressure,” said the memorandum.

Both the ruling and opposition front in the state had submitted to the Finance Commission that the income distance and 2011 population criteria unwittingly penalised a state like Kerala for its performance and its share has continuously declined from 3.8 per cent in the report of the 10th Finance Commission to 1.92 per cent in the 15th. The recommendations submitted by the UDF observed that the state finances have taken a serious hit due to the disproportionate vertical and horizontal allocation of resources by the Finance Commission.

The CPI(M) suggested that while doing horizontal allocation of resources, the 16th Finance Commission should put a state-specific floor rate for Kerala and other similar states that have faced a continuous decline in tax share. “The floor rate may be determined as the average of ratio of the previous three finance commission awards,” says the memorandum.

The party also suggested adjusting the weight of population and income distance, and also to use post-devolution grants under Article 275 to compensate for the loss. It further demanded that the states that lose out following the adoption of a particular formula by the Finance Commission should be given grants for the entire award period to cushion the loss arising from the share falling below a threshold. The red party had suggested that along with population, demographic performance, income distance and area, forest cover and population density also be considered while setting up criteria for inter-se distribution.

In the 15th Finance Commission, per capita income distance was taken as a key criterion for devolution, giving it 45 per cent weightage. The UDF memorandum noted that as the GDP/GSDP used in the calculation of per capita income is calculated mainly on the basis of estimates, the per capita income distance criteria will not be an appropriate measure for devolving tax share. And, the UDF recommended that the weightage for per capita income distance should be limited to 25 per cent. The UDF recommendation demanded that Kerala should be incentivised for its proactive measures to control population, and had demanded that weightage for demographic performance should be increased from 10 per cent to 25 per cent in the 16th Finance Commission.