Karnataka at the 16th Finance Commission: Concerns, Prospects, and a Way Forward

Published September 6, 2024

Introduction

The Constitution allocates tax revenue and expenditure responsibilities to the union and states based on comparative advantage. Consequently, all states face a resource-expenditure imbalance due to this constitutional design, a common feature in most federal systems. To address this, Article 270 of the Indian Constitution mandates the distribution of taxes collected by the union to the states. The manner of distribution is determined by the Finance Commission (FC). 

The current transfer of union taxes to states is based on the recommendations of the 15th Finance Commission and is valid for the period 2020-26. The 16th Finance Commission has already been constituted to define the financial relations between the union and the states for the duration of 2026-31, and various states are now preparing to present their concerns and demands to the 16th FC.

The significance of the Finance Commission recommendations on a state's economy can be understood by examining the implications of previous FC recommendations for that state. The 14th Finance Commission increased vertical devolution to states from 32% to 42%. It led to a massive 61% increase in Karnataka's revenues from tax devolution. The untied nature of this increased allocation gave states like Karnataka "larger control over their desired fiscal direction, priorities and areas of improvement". Karnataka prioritised spending on social and economic sectors and built capacity by increasing capital outlay. 

However, the 15th Finance Commission recommendations have not been as promising for Karnataka as it reduced the state’s share in the union devolution. In terms of relative share in tax devolution, Karnataka was the biggest loser among the major states. The projected transfer for Karnataka for FY 2020-21 was lower than FY 2019-20, requiring the Finance Commission to recommend a special grant of Rs 5,495 crores. However, the union government didn't accept the recommendation and asked the  Finance Commission to reconsider it. The reduced devolution has impacted the state's finances and has been a significant concern, as has been emphasised by the state leadership.

To understand this impact, we analyse Karnataka's revenue situation and recent concerns in this paper. We then examine the horizontal and vertical devolution formulas used by previous Finance Commissions and recommend five changes. Finally, we estimate the implications of these changes on Karnataka's revenue situation by considering various scenarios. We believe an analysis like this can help states present their case more favourably to the Finance Commission.

1. Karnataka’s Revenue Situation

We can summarise Karnataka’s revenue situation as follows: 

• Figure 1 shows the contribution of various sources to Karnataka’s revenues. During the 14th Finance Commission period (2015-2020), there was a significant increase in the share of the union Taxes in the state’s revenue pool. In the following period, there is a marked dip in both the share in union’s taxes and union grants.

Figure 1 - Share of various sources in Karnataka’s Revenue Receipt

(Source - 14th FC Report & 15th FC Report)

• The total resources transferred from the union to the state of Karnataka have declined over the past five years, from Rs 65,398 crore in FY 2019-20 to Rs 52,607 crore in FY 2023-24 (BE). While the devolution of union taxes has increased marginally during this period, the grants from the union have witnessed a significant decline, dropping from Rs 34,479 crore in 2019-20 to Rs 15,355 crore in 2023-24. It is worth noting that Karnataka’s share of union taxes in 2018-19 was higher than in any subsequent year between 2019 and 2023.

Figure 2 - Union transfers to Karnataka

(Source - State Finances : A Study of Budgets by RBI)

• The 14th Finance Commission allocated Karnataka a 4.71% share of union taxes, which declined to 3.64% in the 15th Finance Commission period. The amount transferred to Karnataka relative to the total amount devolved by the union to all the states is shown in Figure 3. It is worth noting that Karnataka's own tax revenues have not grown significantly. In fact, Karnataka’s own tax revenue as a proportion of all states’ own tax revenue has declined since 2016-17. This implies that while Karnataka’s own tax resources have not grown as quickly as those of other states, its ability to access the union tax pool has been further restricted.

Figure 3 - Karnataka’s own tax revenue vs share in union’s taxes

(Source - State Finances : A Study of Budgets by RBI)

• The 15th Finance Commission recommended a reduction in Karnataka’s share in the divisible pool (3.64%) compared to the 14th Finance Commission's recommendation (4.71%). The most significant reason for this substantial reduction is Karnataka's reduced score in Income Distance, i.e. Karnataka's increased per capita Gross State Domestic Product (GSDP) relative to the states with the highest per capita GSDP. 

  The formula used by the 14th Finance Commission(FC) and the 15th Finance Commission for horizontal devolution considers the criteria and weights as below (Table 1).

  While the 14th FC considered the Average Per Capita GSDP of the state from 2010-11 to 2012-13, wherein Karnataka ranked 13th, the 15th FC considered the Average Per Capita GSDP from 2016-17 to 2018-19, wherein Karnataka ranked 5th. As Karnataka's per capita GSDP has improved significantly, its Income Distance from India's wealthiest states has reduced, leading to a significant decline in its Income Distance score. Given the substantial weight (45%) to Income Distance, the share of Karnataka in union taxes reduced significantly. As Karnataka GSDP is likely to grow at a fast pace, its score on Income Distance is likely to decline further, leading to a further reduced share in the union taxes.

Table 1 - Horizontal Devolution Methodology

(Source - 14th FC Report & 15th FC Report)

2. Karnataka’s Concerns and Demands

Given the reduced devolution share and decreased transfers from the union, the Karnataka government has raised its concerns on numerous occasions. 

For instance, Basavaraj Rayareddy, the Karnataka chief minister's economic advisor, pointed out in a recent interview with the Indian Express that Karnataka's share of taxes was reduced by around Rs 65,000 crore over the past five years (15th Finance Commission period). He expressed the opinion that states should receive at least 60% of the Goods and Services Tax (GST) collected and that states should also receive a share of the cesses raised by the union government.

In the past, Karnataka Revenue Minister Krishna Byre Gowda echoed similar sentiments when he highlighted the state's annual losses due to the reduced horizontal devolution percentage allocated to Karnataka. He pointed out that while Karnataka contributes Rs 4 lakh crore annually in taxes and cess, it receives only about Rs 70,000 crore. He suggested that cess and surcharges should be included in the calculation for the devolution of funds to the states, as well as providing incentives for controlling the population and maintaining fiscal discipline.

In a conference held a few months ago, Chief Minister Siddaramaiah noted that Karnataka is the second-highest tax-paying state in the country but does not receive adequate rewards for its contribution. He suggested that the 16th Finance Commission should 'increase the weightage assigned to tax effort to incentivise efficiency and fiscal performance. In a letter to the union Finance Minister, Mr. Siddaramaiah explained how the method used to calculate income-distance for horizontal devolution puts Karnataka at a disadvantage. While the contribution of Karnataka's IT industry increases the state's per capita income, thereby reducing its share from union taxes, it does not augment the state's revenues, as IT exports are zero-rated. 

3. Recommendations

After analysing the horizontal and vertical devolution formulae used by previous Finance Commissions, we recommend the following five changes from a public finance perspective.  

These five proposals are based on certain principles. As public finance researchers based in Karnataka, our thinking is shaped by India's national and Karnataka's interests. Thus, our recommendations are grounded in principles that align with both national and state priorities. Firstly, we emphasise fiscal federalism principles, i.e., ensuring that the assignment of revenue and expenditure across various levels of government is based on comparative advantage. The intergovernmental finance mechanism should manage the imbalances that may arise from this system design.

Additionally, we are guided by the principle of subsidiarity, which dictates that authority should be matched with responsibility. Allocation decisions should be made as close as possible to where the responsibility for outcomes lies. To facilitate this, the lower level of government should have enough autonomy from the higher levels.

Moreover, we acknowledge the significant contribution of certain cities like Bengaluru to the national economy and recognise their potential to generate net positive social benefits for India. Therefore, our recommendations also consider the need to support these growth engines in realising their economic potential, thereby benefiting the national economy.

In view of the above principles, we propose the following:

3.1 The weight assigned to the income distance criteria in the horizontal devolution formula must be reduced to 30% from the current 45%

Income distance is the equity-based criterion used in the horizontal devolution formula. The intended objective of this parameter is to ensure that states with low tax capacity are adequately compensated. The 15th Finance Commission assigned 45% weightage to this criteria. The 16th Finance Commission should consider reducing the weight of income distance criteria to 30%.

While equity is an important consideration, especially given the variation in economic performance across states, we must also consider the downstream impact of providing a significantly high weight (in fact, the highest weight) to this factor. Income distance penalises the states that show better performance in terms of economic activity (i.e. per capita GSDP). States with higher GSDP per capita score low in income distance due to the 45 per cent weight, even if they rank well in terms of other parameters. 

Such a structure goes against the Viksit Bharat 2047 vision as high-performing states are the ones fostering businesses, generating wealth, and creating jobs, which benefit not only the residents of the states but also people from other states, i.e. they create positive inter-state externalities. The growth opportunities in these states help generate resources to provide public goods, the benefits of which spread across the country. Further, migrants often repatriate incomes to their home states because of the incomes that are generated in the economically dynamic states. Thus, penalising the high performers reduces the extent of the net positive social benefits for India as a whole.

Beyond creating perverse incentives, the method used to compute revenue disability is flawed. The current approach assumes that per capita income (GSDP per capita) is an accurate proxy for taxable capacity, implying that as incomes rise, taxable capacity increases and vice versa. However, this method overlooks that higher incomes lead to higher savings and not necessarily high proportional consumption. Consequently, the increase in tax capacity is not proportional to the rise in income. Therefore, a state's high income does not necessarily reflect its true tax capacity.

Moreover, using GSDP per capita as a proxy has another significant limitation. A substantial component of GSDP is exports. Exports are zero-rated and exempt from Goods and Services Tax (GST).  Consequently, while exports contribute to the GSDP, they do not necessarily enhance the state's tax revenue or tax capacity. Therefore, a state with a considerable share of its GSDP derived from exports might not have a high tax capacity. As a result, such states may score poorly in terms of income distance and receive a lower devolution amount.

3.2 The weight assigned to the forest and ecology criteria in the horizontal devolution formula must be increased from the current 10%

"Forest and ecology" has been a criterion in horizontal devolution since the 14th FC. It is a need-based criterion. States that maintain a forest cover provide ecological services, the benefits of which extend beyond the state boundaries. Since there is an opportunity cost to maintaining these forests, these states need to be compensated. Thus, the 14th FC awarded 7.5% weight, and the 15th FC awarded 10% weight to this criteria. To arrive at each state's share, the FC calculated the share of the dense forest of each state in the aggregate dense forests of all the states. The forest cover data is based on the estimates made by the Forest Survey of India. The 16th Finance Commission should consider increasing the weight of Forest and Ecology criteria.

In line with its global responsibilities, India, at the 26th session of the United Nations Framework Convention on Climate Change (COP 26) in November 2021, committed to net-zero emissions by 2070. Thus, India has to chart a long-term low-carbon development path. One way to achieve this is by reducing emissions through reducing carbon-generating economic activities or upgrading technology to reduce emissions. The former is not a viable option for a country like India, which still has high levels of poverty and a low per capita income. The latter is also not preferable, given the initial high capital costs of Carbon mitigation technology that might render Indian goods uncompetitive in the global markets. 

A cost-effective alternative is carbon sequestration through forest conservation. This approach requires the states to maintain the carbon sequestration capacity of their forests by preventing deforestation and preserving the quality of existing forest cover. It is crucial to note that forest loss leads to higher carbon emissions. Additionally, the quality of forests plays a significant role; for example, new forests are not as effective as carbon sinks compared to standing old forests. Therefore, compensatory afforestation to maintain forest coverage might not offer the same benefits as preventing deforestation and degradation of forests. Beyond their role as carbon sinks, forests provide numerous biodiversity services that benefit regions beyond state boundaries.

Given the above, increasing the emphasis on forest and ecology criteria is imperative by increasing its weight from the current 10%. This measure will encourage states to enhance forest conservation efforts, which can be achieved through measures like liberalising Floor Space Index (FSI) regulations, implementing agricultural reforms, etc. While the forest cover data used by the 15th FC relies on conventional sampling techniques, the 16th FC should commission studies that employ a robust methodology. This should combine satellite imagery, extensive field surveys, and sophisticated algorithms to accurately estimate forest cover.

3.3 The vertical devolution to the states should be increased to 50% from the current 41% 

The Finance Commission mandates that union taxes be shared with the states to address the vertical fiscal imbalance. The 14th Finance Commission increased the states' share from 32% to 42%, while the 15th Finance Commission adjusted it to 41%. This sharing arrangement must be revised to reflect the spending responsibilities between the union and the states accurately.

Though the states' share in the divisible pool has increased to 41%, they still find it difficult to meet their expenditure responsibilities. States have much larger expenditure obligations compared to the union, particularly in sectors such as education, health, police, law and order, forests and environmental preservation, power, roads, social welfare, drinking water, and sanitation. The current devolution level is insufficient to cover the committed expenditures in these sectors.

Furthermore, the increase in the states' share from 32% to 41% has not resulted in a proportionate rise in devolution to the states. This is because the size of the divisible pool relative to the union's gross tax receipts has declined over time. (Figure 4) While the union’s gross tax revenue more than doubled between 2015-16 and 2023-24, the share of the states just doubled. The primary reason for this discrepancy is the increasing share of cesses and surcharges in the union tax pool. As cesses and surcharges are not part of the divisible pool, they are not shared with the states.

Figure 4 - Size of the divisible pool wrt Gross Tax Receipts

(Source - Author’s Calculations based on Union Budget Documents)

It may be argued that devolution is just one way of sharing resources with the states, as the union also transfers funds to the states through various Centrally Sponsored Schemes (CSS). While CSS does augment states' resources, it also influences their priorities. It compels states to commit to a portion of the CSS expenditure. Since some states lack the capacity to provide the matching funds, the actual financial transfers for CSS are often lower than the allocated amounts. For example, in 2023-24, the actual transfers were Rs 1.12 lakh crore less than the allocated transfers.

While the stated objective of specific purpose transfers such as CSS is to ensure minimum standards of public service, the inter-se allocation is not solely based on deficiency of the services. The various factors deciding the inter-se allocation are such that the devolution through CSS becomes less progressive than through FC grants. The lower absorption capacity stemming from weak governance and low GSDP of some states prevents them from deriving the benefits from the CSS. Given the process-oriented design of CSS, there is a limited correlation between scheme allocation and outcomes. Beyond these inherent limitations, another fundamental challenge of CSS is the union's interference in the states' responsibilities.
In conclusion, states have limited fiscal freedom due to insufficient devolution and the imposition of Centrally Sponsored Schemes (CSS). One potential solution would be to increase the vertical devolution share to the states to 50%. This recommendation aligns with that of Prime Minister Narendra Modi when he was the chief minister of Gujarat.This increase could be done gradually (1% per year) to make the transition easier for the union. Alternatively, cesses and surcharges could be included in the divisible pool to be shared with the states. Another approach is to reduce the number of CSS, limiting them to primary education, secondary education, healthcare, and poverty alleviation, thereby curbing the need for cesses and surcharges. These schemes can then focus on achieving a certain minimum standard of public services across the country. If none of these options are feasible, a fourth approach could be to include non-tax revenues in the divisible tax pool. The above can be visualised as a decision tree (Figure 5). We are aware that implementing some of the above recommendations will require constitutional amendments.

Figure 5 - Options to address the vertical fiscal imbalance between the union and the states

3.4 The anti-federal nature of cesses and surcharges must be highlighted

The Finance Commission must highlight the anti-federal impact of a rapid rise in union cesses and surcharges. The Finance Commission should initiate an objective analysis of the various cesses and surcharges, i.e., whether cess and surcharge collections are spent as intended, whether they meet their objective, etc. Gradually, the union should reduce its reliance on these measures (i.e. phase them down over the years). It could go hand in hand with the rationalisation of Centrally Sponsored Schemes, i.e. reduction in CSS will reduce the need to have cesses and surcharges

The use of cesses and surcharges has been on the rise, i.e. between the fiscal years 2011-12 and 2024-25, cesses and surcharges have grown at a compound annual growth rate of 16.7% (Figure 6). As a result, the size of the divisible pool has not grown as fast as the union's gross tax revenue, i.e. the size of the divisible pool relative to the union's gross tax revenue has shrunk. It offsets the potential benefits for states from the significant increase in devolution share in the 14th FC formula. Reducing reliance on these measures or bringing them under the ambit of the divisible pool will increase the states' share.

Figure 6 - Total cesses and surcharges

(Source - 15th FC Report and Author’s Calculations based on Union Budget Documents)

3.5 India’s “growth engines” must be provided special grants

Economic hubs like Bengaluru contribute significantly to revenue generation by fostering businesses and creating jobs. The Finance Commission must consider providing incentives, i.e. special grants to select growth engines, to augment their capacities so that the overall economy benefits from their agglomeration effects.

Cities facilitate productive interaction and the exchange of ideas. They create a climate for creative activity and enterprise development, leading to innovation and productivity. They generate externalities facilitating transactions, production, and distribution activities and serve as trade hubs. “Large cities in particular may achieve the critical mass required to attain high degrees of specialisation in labour, knowledge and businesses, services, infrastructure, institutions and media, all of which increase economic dynamism”. Thus, cities play a very significant role. 

However, the success of the cities in ensuring the above depends on their ability to provide adequate urban public services, which in turn depends on their access to revenue. Municipal bodies in India do not have a constitutional right to money. Thus, they find it challenging to raise their income and continue to depend on the union and the states, hindering their potential. 

Without making India’s growth engines livable, India will not be able to achieve its goal of a Viksit Bharat 2047. While India's growth engines stand out compared to the national levels, they still have a long way to go if we compare them with the global cities. For instance, Bengaluru Urban District's per capita income is 3.5 times the national per capita income, Bengaluru & Mumbai create the maximum number of jobs; Thane, Bengaluru, and Mumbai Suburban account for the largest number of migrants. However, India's growth engines still lag when compared to global cities. For instance, the GDP per capita of Indian cities is quite low compared to that of international cities. The agglomeration effect is limited to a few cities in India. Medium-sized locations in India show little evidence of urban agglomeration effects. Some studies, including a recent paper, have identified agglomeration economy effects in seven major cities in India. These urban agglomerations show increasing returns and provide employment opportunities for migrants. Cities such as these must be leveraged to help intensify economic activities and generate revenue. The Finance Commission should also commission studies on the benefits these growth engines accrue to India at large.

4. Implications for Karnataka

If the recommendations mentioned in the previous section were to be implemented, how would that impact Karnataka's finances? We analyse this by constructing various scenarios based on different proposals for horizontal and vertical devolution. For each combination, we identify what could have been the union devolution to Karnataka for FY 2023-24. We also estimate the potential increased revenue for Karnataka for each case over and above the 15th Finance Commission's recommendations. In the sections below, we first hypothesise different horizontal and vertical devolution cases and then combine them to estimate the impact of Karnataka's revenues. 

4.1 Reimagining Horizontal Devolution 

Proposal H1  - Reduced weight of Income Distance criteria and proportional adjustment of other criteria

In this proposal, the weight assigned to Income Distance is reduced from 45% to 30%, while the weights assigned to other criteria are proportionately increased to compensate for the reduction in Income Distance criteria. This adjustment, based on “Recommendation 3.1”, ensures that the high-performing states are not penalised for their high growth rates, and India benefits from the positive social benefits thus created by these high performers.

Proposal H2 - Increased weight of Forest and Ecology criteria and proportional adjustment of other criteria

In this proposal, the weight assigned to the Forest and Ecology criteria is increased from 10% to 15%, while the weights assigned to other criteria are proportionately reduced to accommodate this change. This change, based on “Recommendation 3.2”, can help India chart a long-term low-carbon development path and fulfil its global responsibilities.

Proposal H3 - Reduced weight of Income Distance criteria with increased weight to Forest and Ecology criteria and proportional change of other criteria

This proposal combines the two proposals mentioned above - H1 and H2. The weight of the Income Distance criteria is decreased from 45% to 30%, while the Forest and Ecology criteria weight is increased from 10% to 15%. The weights of the other criteria are proportionately adjusted. This proposal prioritises states that provide a higher share of biodiversity and carbon sequestration services and generate significant positive social benefits through their economic activity.

Proposal H4 - Reduced weight of Income Distance criteria with increased weight to Forest and Ecology criteria and prioritising the remaining need based criteria (i.e. Population, Area)

This proposal combines the two proposals, H1 and H2, by decreasing the weight of the Income Distance criteria from 45% to 30% and increasing the Forest and Ecology criteria weight from 10% to 15%. Additionally, it prioritises need-based criteria by increasing the weight of Population and Area criteria from 15% to 20% in both cases. This approach acknowledges that states with larger populations and areas will incur higher expenditures and thus should be rewarded more.

Proposal H5 - Reduced weight of Income Distance criteria with increased weight to Forest and Ecology criteria and prioritising the performance based criteria (i.e. Tax Effort and Demographic Performance)

This proposal is similar to the one above (H4), i.e. the weight of the Income Distance criteria is reduced from 45% to 30%, and that of the Forest and Ecology criteria is increased from 10% to 15%. However, it differs from H4, prioritising the performance-based criteria by increasing the weight of Tax Effort and Demographic Performance criteria to 7.5% and 17.5%, respectively. This approach awards states for achieving better human capital outcomes and for higher tax efficiency.

The table below (Table 2) shows how Karnataka’s weighted score (i.e., share in the divisible pool) would be for the above mentioned proposals. Karnataka’s share would be highest (4.40%) for proposal H5, where the Income Distance weight is reduced, the Forest & Ecology weight is increased, and performance-based criteria are prioritised. Among all the cases, the weighted score is lowest for H2 (3.81%), but it is still higher than the 15th Finance Commission’s recommended devolution (3.64%).

Table 2 -  Karnataka’s Share in Tax Devolution

(Source - Author’s Calculations based on 15th Finance Commission Report)

4.2 Reimagining Vertical Devolution 

In Section 3.3, we identified potential vertical devolution approaches to enhance the fiscal freedom of the states. Below are the listed approaches and the corresponding amount of additional fiscal space each can generate.

Proposal V1 - Increased vertical devolution share to the states to 50% 

If the vertical devolution share to the states increased from 41% to 50% (i.e. recommendation 3.3), the states would get additional fiscal space. If this had been implemented in FY 2023-24, the states’ share would have increased by Rs 2.24 lakh crores. (For calculations, please refer to Appendix 1.1) 

Proposal V2 - Inclusion of cesses and surcharges in the divisible pool  

The total amount of cesses and surcharges for the fiscal year 2023-24 was around Rs 5.01 lakh crores. If cesses and surcharges had been included in the divisible pool (i.e. recommendation 3.3), the fiscal space for the states would have increased by Rs 2.06 lakh crores for FY 2023-24. (Appendix 1.2) 

Proposal V3 - Rationalisation of Centrally Sponsored Schemes limiting the same to only education, healthcare (both preventive and curative) and social assistance

If Centrally Sponsored Schemes were limited to sectors such as education, healthcare (both preventive and curative), and social assistance, and the union transferred the additional fiscal space created to the states, the states could have received an additional Rs 1.69 lakh crores in FY 2023-24. The states could have deployed these funds according to their specific needs. (Appendix 1.3) 

Proposal V4 - Inclusion of non-tax revenues in the divisible pool

The union’s non-tax revenue collection for FY 2023-24 was Rs 3.01 lakh crore. If this non-tax revenue had been included in the divisible pool, it would have led to an increased devolution of Rs 1.24 lakh crore to the states. (Appendix 1.4)

4.3 The intersection of proposals as outlined above

When the different horizontal and vertical devolution proposals, as outlined above, are considered together, the devolution amount from the union's divisible tax pool to Karnataka for FY 2023-24 would appear as shown in Table 3. The figures in brackets indicate the increased revenue over the 15th FC recommended devolution share (Rs 37252 crores, i.e. Karnataka's share in the Union Tax Revenue for FY 2023-24).

Table 3 -  Devolution to Karnataka (Amount in Rs Crores) 

(Source - Author’s Calculations based on 15th Finance Commission Report and RBI’s State Finances : A Study of Budgets)

The various combinations highlight that union devolution to Karnataka will be maximum when vertical devolution follows proposal V1 (i.e., increased vertical devolution share to the states to 50%) and horizontal devolution happens as in proposal H5 (i.e., Reduced weight of Income Distance criteria with increased weight to Forest and Ecology criteria & prioritising the performance-based criteria). The least improvement in devolution is where vertical and horizontal devolution align to proposals V4 and H2, respectively.

The different scenarios, as illustrated above, can help guide Karnataka in its approach to the 16th Finance Commission.

Conclusion

In this paper, we examined how Karnataka’s revenue position has been affected by the reduced devolution share during the 15th Finance Commission period. After analysing the 15th FC horizontal and vertical devolution formulas, we identified five potential changes that Karnataka should propose to the 16th Finance Commission. We based these recommendations on the principles of fiscal federalism and subsidiarity. We then estimated the fiscal implications of these recommendations by constructing various scenarios based on different proposals for horizontal and vertical devolution. We hope that the range of scenarios considered and the illustration of their corresponding fiscal implications will aid Karnataka in deciding its approach to the 16th Finance Commission. This approach can also be utilised by any state to present its case to the Finance Commission.

Appendix

1. Calculations for the Section “Reimagining Vertical Devolution”

1.1 Proposal V1 - Increased vertical devolution share to the states to 50% 

1.2 Proposal V2 - Inclusion of cesses and surcharges in the divisible pool 

1.3 Proposal V3 - Rationalisation of Centrally Sponsored Schemes limiting the same to only only education, healthcare (both preventive and curative) and social assistance

1.4 Proposal V4 - Inclusion of non-tax revenues in the divisible pool

2. Centrally Sponsored Schemes pertaining to education, healthcare, social assistance and rural employment guarantee.

Authors