Increase the vertical devolution to states from 41% to 50%. Cap cesses and surcharges that are exceedingly being resorted to by the Centre at 5% of the Centre's gross tax receipts. Revert to the 1971 census figures to decide fund transfers so that social progress and efficiency are not penalised and return to a state 60% of what it contributes to the national divisible pool.

These were the major demands put forward by five non-BJP states (Kerala, Telangana, Tamil Nadu, Karnataka and Punjab) at the Conclave of Finance Ministers held in Thiruvananthapuram on September 12.

It was Kerala finance minister K N Balagopal who set the tone for the Conclave inaugurated by the host Chief Minister Pinarayi Vijayan. "While the states account for nearly 62% of the total public expenditure in the country, their revenue entitlement is only 37%," Balagopal said.

Centre's widening cesspool
He said the imbalance had worsened in the last decade. "The Centre is cutting down the size of the divisible pool (portion of gross tax revenue which is distributed between the Centre and the States) using various means. It is mobilising revenue from sources that are not divisible," the Kerala FM said.

He was referring particularly to cesses and surcharges, especially the ones imposed on fuel, that the Centre was under no obligation to share with the states. "Though states are supposed to receive 41% from the divisible pool, Balagopal said what the states in effect received by way of vertical transfer had dwindled to 30%. Tamil Nadu finance minister Thangam Thennarasu said the effective devolution, as a result of the collection of cesses and surcharges, was 31.42% of the Centre's gross revenue.

Therefore, to make up for the shortage caused by the growing proportion of cesses and surcharges, both the Kerala and TN finance ministers urged the 16th Finance Commission (16th FC) to scale up the share of states in devolution to 50%; the 15th FC had fixed it at 41%.

Telangana Deputy Chief Minister Bhatti Vikramarka Mallu said that the growing reliance on cesses and surcharges "significantly reduces resources available to states." "These cesses and surcharges, which need not be shared with states, have swollen to 28% of the Centre's gross revenue," he said.

Karnataka revenue minister Krishna Byre Gowda said that in the last ten years, the Union Government has "usurped a lot of the indirect tax base of the states through cesses and surcharges." Byre Gowda said that earlier, there was just a 3-4% fall in the proposed and the actual devolution. "Now, there is a full 10% fall in devolution (proposed - 41%, actual: 31.41%)," he said.

Karnataka, therefore, has put forward a suggestion to the 16th FC. "The FC should cap cesses and surcharges at 5% of the centre's gross revenue, and anything above that should be made divisible," Byre Gowda said. Telangana, too, had wanted it capped at 5-10%.

Junk Robin Hood's wisdom
The ministers were also of the opinion that the income criterion for devolution should be recalibrated. The FC strategy has always been to distribute more funds to the poorer states.

Kerala FM Balagopal said that the "fiscal equalisation" strategy had turned out to be inimical to the state. He said the state's share had shrunk from 3.8% during the 10th FC to 1.92% during the 15th FC period.

He said higher-income states were given a lower share on the presumption that they had the higher tax revenue potential necessary to provide the basic minimum public goods. "But studies have shown that there has been a steady decline in the tax base of higher income states. It is a double whammy for them. As their tax base declined, their share in the divisible pool has also declined," Balagopal said. Kerala's opposition leader, V D Satheesan, too, called it a flawed concept. He said its weightage should be reduced to 10% from the existing 45%.

The Karnataka revenue minister, too, felt that the 'cross transfer' strategy was not working. He said in the sixties, the poorest state was 30% below the national median and the richest 30% above the median. "Now, after 50 years of unquestioned redistribution, see where we have ended up. The richest state is 90% above the median and the poorest 60% below the median," Byre said.

"Clearly, this emphasis on redistribution and equity has not really improved living conditions; the gap between states has only increased," he said. 'In the light of this experience, we appeal that progress, performance, and efficiency should not be penalised as it is happening now," he said. If there is an unchecked reward for poor performance, Byre said that it would create a "perverse incentive" for not making progress.

Karnataka's suggestion: Either quantify a state's GST contribution or its contribution to the national GDP and make sure that 60% of this contribution is given back to the state. "The remaining 40% can be redistributed to states in need," he said.

Looming threat of irrelevance
Telangana deputy chief minister Bhatti Vikramarka said that the adoption of the 2011 population in determining devolution was penalising states with successful population control. This, he said was "discouraging social development and good governance."

It was the last FC, the 15th, that junked the 1971 census and adopted the 2011 figures. This mocked at a political consensus that no state would ever be punished for achieving demographic progress and, cementing this pact, the seats in Parliament were frozen on the basis of the 1971 census. Even the previous BJP government led by A B Vajpayee had deferred to this consensus.

The delimitation is about to happen in 2026, and if it happens according to the 2011 census or the latest census that would be carried out, Byre Gowda said that "it is very much possible that all of us will lose our representation in Parliament. While our economic contribution goes up, we will soon see our political contribution going down," he said.