As 4 South states protest against Centre’s fiscal ‘unfairness’, know what the grouses are

In an unprecedented situation, as many as three southern states have decided to take the battle to Delhi against the Centre’s alleged highhandedness in its fiscal policies related to states, while a fourth one has also raised its voice in the past on the issue. Among the major bones of contention are allegedly skewed tax devolution, relative lack of fiscal autonomy of states, and the Centre’s tight-fistedness over state projects.

While the entire Karnataka Cabinet led by Chief Minister Siddaramaiah and all the state’s Congress MLAs and MLCs staged a sit-in protest at Delhi’s Jantar Mantar on Wednesday (February 7), Kerala Chief Minister Pinarayi Vijayan and his ministers will do the same on Thursday. The ruling DMK in Tamil Nadu, which has grouses of its own, has said it will back the protests, while Telangana has also raised its voice against tax devolution in the past.

The timing of the protests is significant — not only because these come ahead of the Lok Sabha polls but also because the 16th Finance Commission has been constituted. It is the only body that can recommend changes to the tax devolution and grants policy and it will submit its report by October 2025.

While tax devolution is the major issue, some of the states have their individual complaints against the Centre as well. Here is a brief recap of what grouses each state has from the Centre.

Karnataka

Speaking to reporters at the “Chalo Delhi” protest at Delhi’s Jantar Mantar on Wednesday, Chief Minister Siddaramaiah summed up the reason for the protest: “Karnataka is number two (among Indian states) in tax collection, Maharashtra being number one. As a matter of fact, this year, Karnataka is contributing more than Rs 4.30 lakh crores as tax...But if we collect Rs 100 as tax and give it to the Government of India, we are getting only Rs 12-13 back, that is our share.”

Tax share: According to Siddaramaiah, even though the Budget size has doubled, the state’s tax share has been cut by more than half. Cess and surcharge — collected by the states — have been rising every year but not a single paisa is returning to the states.

He has also alleged that Karnataka’s tax share went down from 4.71 per cent under the 14th Finance Commission (2015-2020) to 3.64 per cent under the 15th Finance Commission (2020-2025), resulting in an estimated loss of Rs 62,098 crore for Karnataka over five years. To compensate for this loss, the 15th Finance Commission had recommended a special grant of Rs 5,495 crore for Karnataka in the Interim Budget, which Finance Minister Nirmala Sitharaman later declined, he has said.

Drought relief: Another major issue over which Karnataka has locked horns with the Centre is drought relief. According to Siddaramaiah, even as the state has been going through one of its worst droughts, with 223 taluks of the total 236 affected, 123 of them severely, the Centre is yet to release anything of the Rs 17,901 crore his government has requested as relief. According to him, the actual loss the state has incurred because of crop damage is Rs 35,000 crore.

GST: Another major grouse of states, including Karnataka, is GST. According to Siddaramaiah, because of “faulty implementation of GST” and other factors, the state exchequer suffered losses to the tune of Rs 1.87 lakh crore. Before GST, the state’s tax collection growth was 15 per cent, he said.

Schemes: Siddaramaiah has also claimed that the Centre has not released “a single rupee” for the Upper Bhadra Scheme for which the Centre had announced Rs 5,300 crore in last year’s budget, while environmental and other clearances are still pending for the Mahadayi and Mekedatu projects.

Kerala

The Kerala government, which is expected to protest at Jantar Mantar on Thursday, has alleged “neglect” of the state by the BJP-led Centre through denial of its due share of revenue and a slashing of the state’s borrowing limit, over which it has moved Supreme Court.

Fiscal freedom: In its suit filed in Supreme Court, the Kerala government has alleged the Centre’s interference in the state’s finances, because of which it says it is not being able to fulfil the commitments in its annual budgets. The dispute is essentially over the right, power and authority of the Union to interfere with the exclusive, autonomous and plenary powers of the state “to regulate its own finances under several provisions of the Constitution”.

Borrowing limit: In a statement, the LDF government has said, “The central government reduced the borrowing limit of the state with retrospective effect from 2021-22, overstepping even the approved recommendations of the Finance Commission.” According to the Kerala government, Kerala’s eligible borrowing limit fell to Rs 28,830 crore from the Rs 39,626 crore it expected. In the SC suit, the Kerala government has said the reduced borrowing limit could push the state into a grave financial crisis, adding that a sum of around Rs 26,000 crore is “imminently and urgently required”.

GST: According to the Kerala government, the state’s receipts from the Centre have fallen by Rs 57,400 crore, while there has been a shortfall of Rs 12,000 crore in GST compensation and Rs 8,400 crore cut in this year’s revenue deficit grant.

The Centre, in its reply to the Supreme Court, has claimed that Kerala is one of the most financially unhealthy states and, along with Punjab and West Bengal, has the worst financial management in the country, which is causing its financial woes. West Bengal and Punjab are ruled by opposition parties TMC and AAP respectively.

Tamil Nadu

Tamil Nadu Chief Minister MK Stalin, who has pledged to back Kerala’s protest at Jantar Mantar, wrote to his Kerala counterpart Pinarayi Vijayan on Tuesday (January 7), appreciating his efforts to draw the Supreme Court’s attention to the “pressing issue of the Union Government’s attempts to stifle State Governments by exercising arbitrary and discriminatory control over their deficit financing”.

Borrowing space: Stalin has accused the Centre of exploiting its powers under Article 293 of the Constitution to restrict the borrowing capacity of states. According to Stalin’s letter, the Centre’s intent seems to be to cripple “states’ ability to raise resources and fund crucial developmental initiatives”.

“For 2023-24, the Union Government has fixed the GSDP growth for calculating the net borrowing ceiling at a mere 8%, despite the state consistently achieving around 15% nominal growth in the last two years. This has resulted in a loss of Rs.6,000 crore in borrowing space in the current year,” his letter argues.

Second, a mandatory borrowing condition has forced Tamil Nadu to provide Rs 17,111 crore to TANGEDCO, severely constraining the state’s fiscal space this year, which is likely to affect it in future too. Third, he has alleged that the “intentional delay” in approving the Chennai Metro Phase-II as a Central Sector project has “resulted in the entire debt of Rs 33,594 crore being included within the state’s net borrowing ceiling”.

GST: According to Stalin, the Tamil Nadu government is facing a revenue shortfall of Rs 20,000 crore per annum compared to the pre-GST regime and the Centre has been refusing to extend the compensation regime.

Tax devolution: Tamil Nadu Finance Minister Thangam Thennarasu has pointed out the meagre returns the state receives compared to the tax revenues it contributes to the Centre. According to him, the state receives only 29 paise for every Re 1 it contributes to the Centre while Uttar Pradesh, a BJP-run state, gets Rs 2.73 in return for every Re 1 it contributes. According to Thennarasu, between 2014-15 and 2021-22, the state contributed Rs 5.16 lakh crore to the Centre as direct tax revenues while it got back only Rs 2.08 lakh crore.

Telangana

Tax devolution: In the past, Telangana has also raised its voice on the alleged unfairness in tax devolution.

In June 2023, then state Minister for Finance and Health T Harish Rao had argued that despite the 15th Finance Commission recommending that 41 per cent of central taxes be devolved to states, states are actually receiving only about 30 per cent since the Centre is relying more on cesses and surcharges, which it does not need to share with the states.

He had alleged that Telangana’s share in tax devolution had gone down from 2.893 per cent in 2014-15 to 2.102 per cent in 2021-22.