States shall continue to receive 41% of funds from the Union government’s divisible pool of taxes for the next five years, as per the recommendations of the 16th Finance Commission (FC) published in its report on Sunday, February 1.
Among the states, Uttar Pradesh will continue to receive the highest share of 17.61%, marking a minor fall from the 17.94% prescribed by the 15th FC. Bihar gets the second highest share, at 9.95%, falling from its previous 10.06%.
The top three states with the highest gross domestic product, Telangana, Karnataka, and Haryana, will get 2.17%, 4.13%, and 1.36% respectively.
MoneyControl reports that Karnataka stands to gain the most, followed by Kerala. On the other hand, Madhya Pradesh stands to lose the most.
The central divisible pool is determined after excluding cost of collection, and cesses and surcharges, from the gross tax revenue collected by the Union government. The 41% from the divisible pool will, however, not be divided equally among all states. Instead, Finance Commissions devise formulae based on several variables.
While now states’ collective share remains the same as that received during the 15th FC period, the 16th FC has made changes to the criteria for awarding the funds to individual states.
The 16th FC recommends that each state be evaluated on the basis of six parameters: income distance, population as per the 2011 census, demographic performance, area, forest, and contribution to GDP.
The 16th FC scraps the 2.5% weightage given to tax and fiscal efforts, and adds a 10% weightage to a state’s contribution to the GDP. This is what favoured high GSDP states like Karnataka.
While the 15th FC placed 15% weightage on a state’s population based on the 2011 census, the 16th FC has now increased it to 17.5%. This means that states with higher populations will receive larger shares of the divisible pool under the population parameter.
At the same time, the 16th FC has also brought down the weightage attributed to demographic performance of individual states to 10%, from the 12.5% allotted by the 15th FC.
A major point of disagreement between the Union and “high-performing” states over the 15th and 14th FC’s fund division criteria was their dependence on the 2011 census for population numbers. While the 14th FC had relied on both 2011 and 1971 census, preceding Commissions had relied on the 1971 census for population data.
The 15th FC’s dependence on the 2011 census, as TNM has reported earlier, had a detrimental effect on states like Kerala, Karnataka, and Tamil Nadu, that had effectively implemented population control measures. At the same time, it was seen as rewarding states like Bihar and Uttar Pradesh that had made little progress on population control.
Despite hearing such concerns from states, the report indicates that lower population growth will be further disincentivised in the future. The Commission’s report considers “fears of an aging population,” and favours a gradual phasing out of rewards for states with lower population growth. It says, “[A]s India travels on the growth path, it faces the risk of aging before it becomes rich. This could adversely impact the country’s growth prospects,” adding, “[A] reward for the lower population growth through TFR or other indicators must be phased out in due course from the devolution criteria, we have opted for a gradual transition.”
As the 16th FC report explains, the parameter of demographic performance ensures that each state receives an amount “in proportion to the inverse population growth between 1971 and 2011. The higher the population growth, the lower the proportionate per‑capita amount.” This is different from the 15th FC’s calculation of demographic performance, which had depended not on comparative census data, but on changes to states’ total fertility rate (average number of children that would be born to a woman if she experiences the current fertility pattern throughout her reproductive span).
The 16th FC also stipulates that 42.5% weightage be given to each state based on income distance (per capita GSDP distance). This parameter was given 45% weightage by the 15th FC.
According to the 16th FC’s definition, income distance is the difference between a given state’s per capita gross state domestic product (GSDP) and the average of the per‑capita GSDPs of Telangana, Karnataka and Haryana, the three large states with the highest per‑capita GSDPs.
This, as PRS Legislative Research explains, ensures that states with a lower per capita GSDP will receive a higher share on this parameter, to maintain equity among states.
While the weightage on forest cover has been retained at the 10% recommended by the 15th FC, the 16th FC has reduced the weightage on total area from 15% to 10%.