Each state a gainer as their share of Central taxes rises to 42%

NEW DELHI: With the states' share of Central taxes rising from 32 per cent in the 13th Finance Commission (FC) to 42 per cent in the 14th, no state can really call itself a loser. However, seen purely in terms of each state's share within the total kitty, the revised formula for sharing the proceeds is likely to leave states like Uttar Pradesh and Bihar quite unhappy.

UP used to get 19.7 per cent of the shared taxes under the earlier FC, its share is now down to just under 18 per cent. Similarly, Bihar's share is down from 10.9 per cent to 9.7 per cent. This is almost certainly because of one crucial change in the sharing formula. The FC has, for the first time, included forest area as a factor in determining shares. This seems to have worked against both UP and Bihar, which lost the bulk of their forested tracts to the breakaway states of Uttarakhand and Jharkhand.

One other change in the formula should really have worked in favour of the two Hindi heartland states — inclusion of 2011 population data as a factor rather than depending solely on 1971 population numbers. That also serves to explain why states like Madhya Pradesh and Chhattisgarh are such major gainers (see graph). They gain on both counts. The high population growth over the last four decades helps as also the abundant green cover.

Even states like UP and Bihar will get a higher mandated share of Central taxes under the new FC norms than they were getting so far. UP, for instance, was earlier getting 6.3 per cent of total Central tax revenue, but will now get 7.5 per cent. Similarly, Bihar's share is up from 3.5 per cent to 4.1 per cent. That's because there is so much more to be shared.

States with apparently very similar situations have been affected totally differently by the changed sharing formula. Tamil Nadu, for instance is the biggest 'loser' among the major states. But neighbouring Karnataka, often bracketed with TN, is among the biggest 'gainers'.

Shares of different states have often triggered political reactions and this time may not be very different, though the overall sense of greater freedom the states have been granted might dampen any protests by individual 'loser' states.