Rise in Southern States’ Share in Fund Devolution Provides Limited Relief to Tamil Nadu

Context

Despite a marginal increase in the collective share of southern States under the vertical devolution framework of the Sixteenth Finance Commission (16th FC), Tamil Nadu has witnessed only a negligible improvement in its allocation. Fiscal experts and policymakers have expressed concerns that the revised criteria and weightage for horizontal devolution have disproportionately affected high-performing southern States.

Tamil Nadu’s Revised Share: A Marginal Gain

Tamil Nadu’s share in tax devolution has increased from 4.079% under the 15th Finance Commission to 4.097% under the 16th Finance Commission, reflecting a rise of just 0.44%. This limited increase contrasts sharply with the expectation that southern States would benefit more from the revised vertical distribution framework.

Comparative Performance of Southern States

While Tamil Nadu’s gains remain minimal, other southern States have recorded comparatively higher increases:

• Telangana: 3.43% rise
• Andhra Pradesh: 4.20% rise
• Karnataka: 13.27% rise
• Kerala: 23.74% rise

At the national level, Kerala’s growth in share is second only to Haryana (24.52%), with Karnataka ranking third.

Key concerns include

• Inclusion of GDP Contribution: The 16th FC introduced contribution to Gross Domestic Product (GDP) as a criterion, which may have reduced Tamil Nadu’s relative share.
• Removal of Fiscal Effort Criterion: The criterion related to tax and fiscal effort has been dropped.
• Reduced Weightage: The weights assigned to area, demographic performance, and per-capita Gross State Domestic Product (GSDP) have been lowered.
• Population Weight Increased: The weight for population rose from 15% to 17.5%, a change that largely benefits more populous northern States rather than southern ones.

Impact on Northern States

According to K.R. Shanmugam, former Director of the Madras School of Economics, the increased share for southern States appears to have come at the expense of several northern States.

• The combined share of seven northern and eastern States — including Uttar Pradesh, Madhya Pradesh, Bihar, and West Bengal — declined from 51.20% to 49.93%.

This redistribution, however, has not translated into substantial gains for Tamil Nadu.

Disaster Response and Fiscal Preparedness

A veteran policymaker noted that existing disaster response funds primarily cover relief and temporary restoration. Drawing from Tamil Nadu’s experience after the December 2015 Chennai floods, the expert recommended that the Union government consider establishing a Project Preparation Fund at the national level.

Tamil Nadu had created a ₹100 crore fund to develop bankable project proposals for submission to funding agencies — a model that could benefit disaster-prone States across the country.

Subsidies: Southern States as Trendsetters

The 16th FC report highlights the role of southern States in shaping subsidy frameworks:

Absolute Subsidy Levels (2023–24)

• Tamil Nadu: ₹78,453 crore (highest)
• Karnataka: ₹70,149 crore
• Andhra Pradesh: ₹63,951 crore
• Telangana: ₹62,847 crore

The Commission cautions that absolute figures can be misleading due to differences in State size and economic scale.

Subsidies as a Share of GSDP

• Telangana: Exceeded 5% during 2024–26
• Andhra Pradesh: Between 3% and 5%

Use of Technology in Targeting Beneficiaries

The Finance Commission acknowledged the efforts of Andhra Pradesh, Telangana, and Tamil Nadu in leveraging IT-enabled integrated databases. These systems have helped:

• De-duplicate beneficiary lists
• Improve targeting efficiency
• Generate substantial fiscal savings

Divergence Among Southern States on Revenue Deficit Grants

Although southern States adopted a common position on several fiscal issues, differences emerged over Revenue Deficit Grants (RDGs):

• Karnataka: Expressed scepticism about continuing RDGs
• Andhra Pradesh, Kerala, and Tamil Nadu: Supported their continuation

The 16th FC ultimately recommended against the continuation of these grants.

Conclusion

While the southern States collectively appear to have secured a higher share under the new devolution framework, Tamil Nadu’s marginal increase underscores persistent concerns over the fairness and effectiveness of the revised criteria. Experts argue that the shift in weightage away from performance-based indicators continues to disadvantage fiscally disciplined and economically advanced States, raising broader questions about equity in India’s federal fiscal architecture.

Sharing is caring!