The lower allocation is a blow to those states that suffered a serious reduction in the tax share because of the population factor, Kerala finance minister Thomas Isaac tweeted on Monday.  (Photo: Ramesh Pathania/Mint)
The lower allocation is a blow to those states that suffered a serious reduction in the tax share because of the population factor, Kerala finance minister Thomas Isaac tweeted on Monday. (Photo: Ramesh Pathania/Mint)

Lower allocation for revenue deficit grants may hit states

  • Budget allocated just 40% of the 74,340 crore state revenue deficit grants that the FFC recommended
  • The 15th Finance Commission suggested 74,340 cr as revenue deficit grants to states

NEW DELHI : The finances of revenue-deficit states may be hit as the finance minister in her budget allocated only 40% of the 74,340 crore revenue deficit grants for FY21, which was recommended by the 15th Finance Commission (FFC), despite having accepted its proposal.

“15th (UFC) Union Finance Commission, it is informally learnt, awarded 74,000 crore as revenue deficit grants to states. In an unprecedented move, the Centre has slashed it down to 30,000 crore. It is a serious blow to those states who suffered serious reduction in tax share because of population factor," Kerala finance minister Thomas Isaac tweeted on Monday.

The Commission had recommended post-devolution revenue deficit grants for 14 states in 2020-21. Of the 74,340 crore revenue deficit grants, 37,917 crore was meant for Andhra Pradesh, Kerala, Punjab, Tamil Nadu and West Bengal. The remaining 36,423 crore was for Assam, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.

“The government has accepted the above recommendation of the Commission," the finance ministry said on Sunday.

As per FFC estimates, 25 of the 28 states face a total pre-tax devolution revenue deficit of 6.43 trillion in 2020-21. After accounting for the projected tax devolution to the states of 8.55 trillion, 14 states garner post-tax devolution revenue surplus of 3.08 trillion, while the remaining 14 face a combined post-tax devolution revenue deficit of 74,340 crore. These states have been compensated by the FFC. The largest beneficiaries of the recommendation are Kerala ( 15,323 crore), Himachal Pradesh ( 11,431 crore), Punjab ( 7,659 crore), Assam ( 7,579 crore), Andhra Pradesh ( 5,897 crore), Uttarakhand ( 5,076 crore) and West Bengal ( 5,013 crore).

D.K. Srivastava, chief policy adviser, EY India consultancy, said the finance ministry, having accepted the recommendation of the FFC on revenue deficit grants, should have allocated the full amount in the budget. “If it has not been provided for in the budget right now, the finance ministry has to allocate it through a supplementary demands for grants," he added.

Since the FFC used 2011 Census data, the tax share of most southern states with low population growth rates, such as Andhra Pradesh, Kerala and Karnataka, has come down, while the share of Bihar, Madhya Pradesh, Punjab, Maharashtra and Gujarat has gone up. The FFC assigned 15% weight to the population of a state, down from the 17.5% allocated by the 14th Finance Commission, while raising the weight under demographic performance from 10% to 12.5%.

The finance ministry has also asked the FFC to review its recommendations on special grants and nutrition grants to the states.

The commission had recommended special grants of 6,764 crore for 2020-21 to ensure that no state receives less than what it received in FY20 on account of tax devolution and revenue deficit grants.

However, the Union finance ministry has requested the FFC to reconsider the recommendation, holding that “it introduces a new principle". The beneficiaries of the proposal were Karnataka, Mizoram and Telangana.

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