Thiruvananthapuram: Kerala Government on Tuesday submitted a new tax devolution formula to the 16th Finance Commission (16th FC) in which the state's share from the central divisible pool will be proportional to its share in the country's total population. Kerala's share in the total population is 2.68%. The new devolution formula Kerala had recommended would take its share in the divisible pool to the 2.7%-2.9% range. As it stands, per the award of the previous 15th FC, Kerala's share is 1.925%. In short, Kerala has sought a nearly 1% jump in its share of the divisible pool. 

(Divisible pool is the common pool into which most taxes collected by the government goes. This includes income tax, corporation tax, customs duties and also the share of the Centre in the GST collected. This does not include cesses and surcharges imposed by the centre or the sales tax on petroleum and excise duties on liquor charged by state governments. The divisible pool is divided among the 28 states in the country based on formulae drawn up by finance commissions.) 

The horizontal devolution, the sharing of the divisible pool among the 28 states, is done on the basis of certain indicators and the weightage given to each of these indicators or criteria.

Rich state's burden
The Kerala government this time adopted a 'give and take' strategy. It sought a significant reduction in the weightage of the indicator that would hurt it the most (income distance or per capita income) and a seemingly magnanimous increase in the weightage of an indicator that is equally troublesome (population).

It is for the 'income distance' criteria that finance commissions traditionally had given the highest weightage.  The 15th FC had given it 45%. 

This equity-based indicator favours the poorer states. Higher the per capita income, lower the devolution. Kerala - along with Gujarat, Maharashtra, Telangana, Karnataka and Tamil Nadu - has high per capita income, and therefore stands to lose. 

"Kerala government said this will go against Kerala. It was also said that the state is performing well, and therefore performance ought to be important as well," 16th FC chairman Arvind Panagariya said after holding discussions with representatives of the state government, local bodies and political parties in Thiruvananthapuram on Tuesday.

Kerala has now recommended to the 16th FC that the weightage of the 'income distance' criteria should be pared down to 30%.

One step backward...
On the other hand, Kerala has recommended a generous increase in the weightage of the ‘population’ criterion. This too is an equity-based criterion that is harsh on states like Kerala that had brought down its population growth below replacement level and favours states with high population growth like Uttar Pradesh and Bihar.

Curiously, Kerala has recommended that its weightage be raised from 15% to 32.5%. "We cannot realistically recommend a weightage that will violently affect the devolution to states like Bihar and UP. The finance commission will throw out our recommendations. We need to keep a balance," a top government source said.

... two steps forward
So to make up, in addition to a lower weightage for 'income distance', Kerala has made two more recommendations.
One, it wants the weightage of 'demographic performance' (total fertility rate - TFR) scaled up. Two, Kerala has recommended the introduction of a new variable: population density.

Lower the TFR, higher the devolution. Kerala stands to gain. 'Demographic performance' was a performance-based variable introduced by the previous 15th FC when the 1971 census data was junked for the latest 2011 census data. The 15th FC had felt that the use of the 2011 census data would be unfair on states like Kerala that had performed well on the national objective of demographic management. 

The 15th FC had given 'demographic performance' a weightage of 12.5%. Kerala now wants it to rise to 22.5%.

For the new criterion of 'population density', Kerala wants a weightage of 2.5%. If the 16th FC accepts this, Kerala will gain as it has the third highest population density in the country after Bihar and west Bengal.

While recommending the introduction of this new indicator, Kerala has also suggested that another indicator 'tax efforts' be dispensed with.

Area and forest cover
There were two other criteria for which Kerala wanted a reduction weightage. Area is one. This indicator has been considered since the time of the 10th FC. The larger the area, the larger the devolution.  Panagariya said that the logic was that a greater area would require a higher expenditure for providing comparable services, like say power lines or roads. "Cost of infrastructure is higher, so area is given some consideration," Panagariya said.

The 15th FC had given it a weightage of 15%. Kerala, being a small state, wants it shrunk to 5%.  
The other criterion whose weightage Kerala wanted lowered was 'forest cover'. 15th FC had recommended a weightage of 10%. Kerala wants it down to 7.5%.

If the 16th FC accepts Kerala's recommendations in full, Kerala's share in divisible pool will increase to between 2.7-2.9% from the existing 1.925%.