It was both dramatic and unprecedented. The entire Karnataka Cabinet and almost all the elected members of the Congress in the State, led by Chief Minister Siddaramaiah, staged a dharna at Jantar Mantar in Delhi on February 4 to “protest against” and “to draw the attention of the nation” to what they alleged was injustice to the State in the devolution of funds from the Centre.
The federal fiscal relationship in India has seen rough patches in the past too but this is the first time that the entire contingent of elected representatives of the ruling party of a State has staged a protest in the national capital. With neighbouring Kerala following suit the next day, the fiscal relationship between the Union and the States appears to have hit a new low.
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Karnataka’s contention is that it has lost a whopping Rs.1,87,867 crore since 2017 because of unfair fiscal devolution by the Centre. According to the figures released by the State government, this loss has the following components:
- Rs.59,294 crore because of the discontinuation of the Goods and Services Tax (GST) compensation during 2022-23 and 2023-24. Although the Centre had promised the GST compensation only until 2021-22, the State argues that it continues to incur a loss because of the GST implementation and this loss needs to be compensated. Before the implementation of the GST, the average annual growth in commercial taxes in Karnataka was around 15 per cent whereas after the implementation of the GST, the average growth in revenue from commercial taxes has been around 9 per cent. The State alleges that this is because of the unscientific implementation of the GST and the Centre must compensate the State for the loss.
- Rs.62,098 crore on account of a reduced share from the divisible pool of Union taxes under the recommendations of the 15th Finance Commission. Under the recommendations of the 14th Finance Commission, Karnataka had received 4.71 per cent of the divisible pool of Central tax revenue, but the 15th Finance Commission reduced its share to 3.64 per cent. Karnataka’s argument is if its share had not been reduced by the 15th Finance Commission, it would have received an estimated Rs.62,098 crore between 2020-21 and 2025-26 (the period during which the 15th Finance Commission recommendations are under implementation).
- Rs.55,000 crore since the Centre has increasingly resorted to additional resource mobilisation through cesses and surcharges instead of taxes. Karnataka argues that the Government of India has collected a total of Rs.27,66,588 crore through various cesses and surcharges from all States between 2017-18 and 2023-24. This, in turn, has reduced the tax devolution to States as the cesses and surcharges are not included in the divisible pool of the Central revenue to be shared with them. Karnataka has estimated that if the Centre had mobilised this additional revenue through taxes instead of cesses and surcharges, the State would have received a share of about Rs.55,000 crore.
- Rs.5,495 crore in Special Grants. The State says that the 15th Finance Commission in its interim report of 2020-21 recommended a Special Grant of Rs.5,495 crore to partially offset the impact of the reduction in the State’s share in tax devolution from 4.71 per cent to 3.64 per cent. The Centre, Karnataka says, has rejected this recommendation.
- Rs.6,000 crore State Specific Grant. According to Karnataka, the 15th Finance Commission in its final report recommended Rs.6,000 crore as a State-specific grant to Karnataka—Rs.3,000 crore each for Bengaluru’s Peripheral Ring Road and for improvement of water bodies in and around the city. However, the Centre has not yet released these grants and instead has asked the State to handle these projects with its own funds.
Demand for drought relief
These apart, Karnataka is also upset that the Centre has not responded promptly and favourably to its request for drought relief. The State has been reeling under a severe drought, the worst in 122 years. It declared 232 of its 240 talukas as drought-hit and sought Rs.18,172 crore in Central drought relief funds in September 2023 but the Centre is yet to respond. Pointing out that repeated letters and even a personal meeting with the Prime Minister have not yielded results, an exasperated Krishna Byre Gowda, State Revenue Minister, pleaded at a press conference in Bengaluru and said, “You [the Centre] may be angry with the people of Karnataka because they did not vote for your party but please do not punish them for it by not releasing drought relief on time.”
The State also pointed out that the Centre has not been cooperating with it in implementing some crucial water projects. The Union government promised in its 2023-24 Budget a grant of Rs.5,300 crore for the Upper Bhadra Project, but no money has been released so far. Central clearance for two drinking water projects, the Mekedatu project in southern Karnataka and the Mahadayi project in northern Karnataka, have also been hanging fire.
Karnataka Chief Minister Siddaramaiah, Deputy Chief Minister D.K. Shivakumar, and other State Congress leaders during the protest at Jantar Mantar in New Delhi, on February 7. | Photo Credit: Adnan Abidi/Reuters
Seemingly rattled by the nature of the protest, which attracted the attention of the nation, the Centre strongly countered Karnataka’s allegation of an unfair devolution of funds. Union Finance Minister Nirmala Sitharaman argued that the Centre had devolved the funds according to the award of the 15th Finance Commission and if the State had any dissatisfaction, it should take it up with the next Finance Commission. She said the GST compensation was paid as promised and stopped in 2022 as originally agreed. She saw no problem with the cesses and surcharges, and turned down the request to pay a State-specific special grant saying it was not part of the Finance Commission’s award. Project-specific grants, she said, would be eventually paid.
Highlights
- Led by Chief Minister Siddaramaiah, the Karnataka Cabinet and the majority of Congress members in the State staged a dharna at Jantar Mantar in Delhi on February 4, protesting what they alleged was unjust treatment by the Centre regarding funds allocation.
- Karnataka asserts it has suffered a loss of Rs.1,87,867 crore since 2017 due to what they deem unfair fiscal devolution by the Centre. BJP leaders countered, suggesting the Congress-led State government mismanaged funds for its welfare programmes and is deflecting blame onto the Centre.
- The timing of the state-sponsored dharna, coinciding with the constitution of the 16th Finance Commission, highlights the necessity for a thorough reassessment of the current revenue distribution scheme between the Centre and the States.
Where is the problem?
With both sides making strong cases, it is difficult for the common observer to see where the problem is. Federal fiscal relations have, however, been a sore point for a long time and Karnataka is not the only State to raise the issue. While it is opposition-ruled West Bengal, Tamil Nadu, Kerala, and Karnataka that are at the forefront of alleging unfair distribution of funds between the Centre and the States, Prime Minister Narendra Modi himself raised the same issue when he was Chief Minister of Gujarat. He went to the extent of challenging the Centre not to pay any tax share to Gujarat on the condition that the Centre should stop collecting all taxes from his State. Post-GST, things have taken a turn for the worse. So, it is difficult to dismiss the issues raised by Karnataka as merely political.
That said, two aspects in the BJP’s response to Karnataka’s protest show that politics takes precedence over a balanced consideration of complaints about the federal fiscal relationship. BJP leaders both in Delhi and in Karnataka argued that the Congress government in the State had squandered funds for its five guaranteed welfare programmes and that it was blaming the Centre to cover up its financial mismanagement. Further, the BJP, including Prime Minister Modi, accused Karnataka of indulging in a “poisonous narrative” and in the “language of separatism”. This was in response to a comment from D.K. Suresh, the lone Congress MP from Karnataka. While responding to the Union Budget, he had said that “the Centre through its bias for Hindi-speaking States is forcing Karnataka to raise the demand for a separate country”. However, both the Karnataka government and the Congress quickly disassociated themselves from the MP’s opinion and Suresh himself clarified that he had only expressed his fear that discriminatory treatment meted out to States such as Karnataka might fuel separatism in the south. Despite the clarification, the MP’s statement gave enough ammunition to BJP leaders to corner Karnataka and accuse it of pursuing a divisive agenda.
Members of the National Students’ Union of India clashed with police near the office of Union Minister Pralhad Joshi in Hubballi, during a protest seeking the funds allocated to the State from the tax pool. | Photo Credit: Kiran Bakale
One can certainly see politics in Karnataka’s dramatic move. The timing of the protest also suggests that the Congress wants to make it a potential issue for the general election, with the BJP consistently outperforming the Congress since 1996, with the only exception being in 1999.
A problematic argument
However, the BJP leaders’ argument that it was the additional burden on the State exchequer caused by the Congress government’s welfare schemes that led Karnataka to press for funds from the Centre is problematic. The alleged injustice in the fiscal devolution to Karnataka should be considered separately from the alleged fiscal profligacy that the State might have resorted to in launching its welfare programmes. The point at issue here is whether the State has been getting its rightful share in the constitutional scheme of devolution of funds between the Union and the States. Whether the State is using the funds available with it judiciously or not is a matter for another debate.
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The two need not be linked, nor can the unbridled welfare spending by the State be a justification for any distortions in the federal fiscal devolution scheme. And, finally, to see a secessionist move in Karnataka’s demand seems to be an attempt to digress from the main debate. Karnataka made it clear from the beginning that it did not question the equity principles governing the devolution scheme which enables channelisation of funds from better performing southern States to relatively backward northern States. What Karnataka has been asking for as its just share may be a matter of scrutiny and debate but to conflate the demand for fiscal justice with secessionism is more dangerous to the integrity of the country. Politics apart, the State-sponsored dharna in Delhi at a time when the 16th Finance Commission has just been constituted underlines the need for a comprehensive relook at the existing scheme of distribution of revenue between the Centre and the States.
A. Narayana is a professor of policy and governance at Azim Premji University, Bengaluru.
