Balance equity with efficiency performance, says Karnataka CM to 16th Finance Commission

Economically advanced States are committed to supporting poorer States, but this should not come at the expense of their own residents or economic efficiency, Karnataka Chief Minister Siddaramaiah said on Thursday.

In his address to Chairman of the 16th Finance Commission Arvind Panagariya and its members at a meeting here, he said the panel needs to carefully examine the impact of extremely high emphasis given to equity on the incentives of well performing states.

“Moreover, the taxpayers of such states expect their taxes to work for them. This creates public trust. The Finance Commission therefore needs to do a tightrope walk while balancing equity with efficiency and performance,” Siddaramaiah said.

Noting that cesses and surcharges are not part of the divisible pool, the Chief Minister said over the years, the Union Government has increased its reliance on them.

This has led to the divisible pool not growing in the same proportion as the Gross Tax Revenue, he said. This has caused substantial loss to all the States.

The loss to Karnataka on account of the non-sharing of cesses and surcharges from the divisible pool is Rs 53,359 crore during the period 2017-18 to 2024-25, according to him.

The Chief Minister said reduction in central financial transfers is placing severe limitations on the ability of the States to invest in physical and human infrastructure, adding, this issue must be addressed urgently.

“Economically advanced States are committed to supporting poorer States, but this should not come at the expense of their own residents or economic efficiency,” Siddaramaiah said. “A larger proportion of resources generated by the States should be shared with them.”

The Chief Minister said all non-tax revenues of the Centre should be included in the divisible pool of taxes by bringing the necessary Constitutional amendment.

He requested the Commission to take a bold view and approach, whereby equity considerations are balanced with sufficient reward for efficiency and performance.

Karnataka recommends that 60 per cent of contribution of a state to the divisible pool, for inter se allocation among states, should be given to that state, Siddaramaiah said.

Karnataka, the Chief Minister said, has been central to India’s growth story, adding, it contributes approximately 8.4 per cent to the national GDP with only about five per cent of the population. The State ranks second in total GST contribution to the country.

Despite Karnataka’s substantial contribution of about Rs four lakh crore to the Gross Tax Revenue of the Union every year, the state gets about Rs 45,000 crore in the form of devolution and about Rs 15,000 crore grant-in-aid.

“This means that for every rupee Karnataka contributes, only 15 paise is returned to the state,” he pointed out.