Tamil Nadu's Call for Equitable Federalism Has a Basis

The 16th Finance Commission Has an Opportunity to Rebalance Centre-State Relations for India's Sake

- DEBDULAL THAKUR

As the 16th Finance Commission (FC) begins deliberations, Tamil Nadu has made a strong case for restructuring India's fiscal federalism. Chief Minister M.K. Stalin's demand for a 50% share of central tax revenues—up from the current 41% FC recommendation and actual average devolution of just over 33%—not only reflects its financial needs, but is a clarion call to address deeper systemic imbalances and the erosion of cooperative federalism.

A case for fiscal fairness, not favor: Tamil Nadu, with its strong economic performance and high human development indicators, is perhaps penalized under the current FC formula that prioritizes equity over efficiency. Transfers are skewed in favor of fiscally weaker states, ignoring governance outcomes, but we need a framework that rewards states for responsible fiscal management and effective service delivery. The state's demand is rooted in fiscal autonomy and recognition of performance efficiency, its record on which is exemplary.

Under current FC formulae that favor equity over efficiency, Tamil Nadu receives relatively lower transfers than fiscally weaker states. This is compounded by the Centre's growing reliance on non-divisible revenues—cesses and surcharges—which rose from 10.4% of gross tax revenue in 2011-12 to over 20% in 2020-21. These funds, not shared with states, shrink the divisible pool, justifying Tamil Nadu's call for a greater share.