Dividing the Pie: The debate between Budget 2020 and 15th Finance Commission over sharing finances

The 2020-21 Union budget and the 15th Finance Commission report have reignited the debate over the relationship between the Centre and states on sharing finances.

Revenue Source & Outflow
States contribute funds to the Centre by levying central taxes such as GST within their borders and receive funds from the Centre in a variety of ways.

States’ Revised Shares
The 15th Finance Commission (FC) has slightly modified the formula for distributing states’ share of central taxes — the largest component of transfers to states.

Top Tax Collectors
When it comes to generating tax revenue, the most populous states are not on top, meaning smaller southern states have to subsidise the larger but less productive northern states

Population & Devolution
FC’s new tax revenue devolution formula relies a lot on states’ population.

Cash Crunch
A big issue affecting the finances of states is revenue crunch. With GST, loan waivers and income support schemes, most states are cashstrapped, forcing them to borrow more.