New Delhi: A political storm is brewing in South India over what is normally a largely unnoticed bureaucratic exercise undertaken once in five years to determine how India distributes its pooled tax revenues among its many states.

Several chief ministers and opposition leaders of southern states have expressed vehement opposition to one particular mandate of the present Fifteenth Finance Commission: to use 2011 census population figures instead of 1971 for the purpose of tax devolution.

It makes sense to use the most recent data which would give a snapshot of the nation as it stands today. But the Indian union made a compact with all its states in the mid-1970s to freeze federal allocations based on population size at 1971. This was done to ensure states which had managed to tackle their population growth were not penalized by way of lower allocations.

The move worked—to an extent. While India’s population stabilization programme is the oldest in the world (launched in 1951), the real impact was visible only after 1970, particularly in South India.

The growth rate in population dropped uniformly across all states, but the fall in South India was rapid, creating a distinct divergence between the number of people in the North versus the South (See Chart 1). For example, while there were 12 Malayalis and Tamils for every 100 Indians in 1951, the share had dropped to 8 by 2011.

Thus, a demographic transition over the past 40 years has created a union of states characterized by fewer, more affluent people in the South and poorer, greater number of people in the North. The political compromise to freeze population figures at 1971 took the population divergence out of the picture, while allowing the Indian union to focus on economic disparity.

Redistribution of pooled taxes has been progressive for years, ensuring poorer states get a larger share, both per person and in absolute terms (See Chart 2). Since the present finance commission has a mandate to use newer population figures, which brings both economic and demographic divisions into the picture, the fear among southern states is that the degree of redistribution would increase.

Karnataka chief minister Siddaramaiah said as much in a recent Facebook post, in which he wrote: “The states of the South have nearly reached replacement levels of population growth. Yet, population is a prominent criterion for devolution of central taxes. For how long can we keep incentivizing population growth? While I recognize the need for correcting regional imbalances, where is the reward for development?"

While the politics of the moment, with a neat split in the political landscape between a Bharatiya Janata Party (BJP)-ruled North and a non-BJP ruled South, may have amplified the grievance, significant sums of money are involved. Preliminary estimates show if the previous finance commission had used 2011 population figures entirely —instead of as a sub-component —southern states would have received about Rs20,000 crore less over the 5-year period from 2015-2020 (See Chart 3). To put that in context, Tamil Nadu’s flagship health insurance programme which covers roughly 60% of the population costs the state about Rs1,000 crore per year.

The dispute over revenue sharing is only setting the stage for a larger fight in 2026, when India’s Lok Sabha seats will be reallocated among states for the first time since 1971. The share of political representation among states was frozen at 1971 for the same reasons as given above. If, in 2026, population figures from upcoming census 2021 are used without considering any other factor, southern India will lose political representation even as it remains the dominant source of the country’s tax revenues.

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