Context: The report of the Fifteenth Finance Commission, along with an Action Taken Report, was recently tabled in Parliament.

How revenue has been divided?

• FC has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes.
• In order to reward population control efforts by states, the Commission developed a criterion for demographic effort — which is essentially the ratio of the state’s population in 1971 to its fertility rate in 2011 — with a weight of 12.5%.
• The total area of states, area under forest cover, and “income distance” were also used by the FC to arrive at the tax-sharing formula.

Key recommendations:

• The Commission has reduced the vertical devolution — the share of tax revenues that the Centre shares with the states — from 42% to 41%.
• The Commission has said that it intends to set up an expert group to initiate a non-lapsable fund for defence expenditure.

State- wise distribution:

• Shares of the southern states, except Tamil Nadu, have fallen — with Karnataka losing the most.
• Shares of states like Maharashtra, Himachal Pradesh and Punjab, along with Tamil Nadu, all of which have fertility rates below the replacement level, have increased slightly.
• On the other hand, Andhra Pradesh, Kerala, Karnataka, and West Bengal’s shares have fallen, even though their fertility rates are also low.
• Incidentally, Karnataka, the biggest loser in this exercise, also had the highest tax-GSDP ratio in 2017-18, as per an RBI report on state finances.

Criticisms:

• The population parameter used by the Commission has been criticised by the governments of the southern states.
• The previous FC used both the 1971 and the 2011 populations to calculate the states’ shares, giving greater weight to the 1971 population (17.5%) as compared to the 2011 population (10%).
• The use of 2011 population figures has resulted in states with larger populations like UP and Bihar getting larger shares, while smaller states with lower fertility rates have lost out.
• The combined population of the Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan and Jharkhand is 47.8 crore.
• This is over 39.48% of India’s total population, and is spread over 32.4% of the country’s area, as per the 2011 Census.
• On the other hand, the southern states of Tamil Nadu, Kerala, Karnataka and undivided Andhra Pradesh are home to only 20.75% of the population living in 19.34% of the area, with a 13.89% share of the taxes.
• This means that the terms decided by the Commission are loaded against the more progressive (and prosperous) southern states.