16th FC: Karnataka must seek higher weight for forest cover, urbanisation

Karnataka is unlikely to qualify to receive revenue deficit grants under Article 275 under the forthcoming 16th Finance Commission (FC). The state’s strategy should be to focus on increasing its share in tax devolution first, by asking for the increased share to the states in the divisible pool from the present 41 per cent and, second, making a strong case for the inclusion of fiscal capacity and need factors that are favourable to the state in its memorandum to the 16th FC.

There are a number of reasons for not relying on the revenue deficit grants. First, it is not clear what approach the SFC will take in regard to the post-devolution revenue deficit grants.

Second, the state’s relatively better fiscal management has resulted in relatively lower committed expenditure on interest payments, unlike in Kerala, Punjab, Rajasthan, and West Bengal where the debt to GSDP ratios are 53 per cent, 37 per cent, 40 per cent, and 34 per cent, respectively, and their interest payment to revenue ratio is close to 20 per cent. In contrast, Karnataka’s debt to GSDP ratio is 24 per cent, and the interest payment to revenue ratio is 15 per cent.

Third, the 16th FC may not include the additional expenditure on the five guarantees in its normative assessment.

Karnataka has been losing its share of tax devolution under the recommendations of successive Finance Commissions, except the 14th. The state’s share was 4.45 per cent under the 12th FC, 4.4 per cent under the 13th, 4.71 per cent under the 14th, and 3.647 per cent under the 15th FC. The reason for this is to be found in the faster growth of per capita GSDP, resulting in a lower distance from the highest per capita income state. Note that this factor is given 45 per cent weight in the distribution formula.  

To estimate the income distance, the 15th FC took the average comparable per capita income of three years -- 2016-17 to 2018-19 -- estimated specifically for the purpose by the Ministry of Statistics and Programme Implementation (MoSPI). According to this estimate, among the large non-special category states, Karnataka’s rank was third after Haryana and Kerala, and the share arising from this factor to the state was just 1.1 per cent. Thus, even as the state secured higher shares on account of geographical area, the area under forest cover, and the inverse of the fertility rate, the aggregate share was just 3.647 per cent.

The loss in the share on account of the mandate in the ToR to take the 2011 population in the devolution formula instead of the 1971 population by the earlier commissions was partially offset by taking the inverse of fertility rates. Surely, the 16th FC, too, will be asked to take the 2011 population in the devolution. Since 2020-21, the state’s per capita income has grown faster, and if this continues to receive 45 per cent weight, a 10 per cent reduction in the income distance would reduce the state’s share by 0.05 per cent.

The situation is likely to become harder under the 16th FC as the per capita GSDP in the state has increased at a rate faster than in other states. Of course, the actual estimate will be known only when we get the comparable per capita GSDP estimated by the MoSPI. But the available information on GSDP estimated by respective State Statistical Bureaus, aggregated by the Central Statistical Organisation, shows that among the large non-special category states, Karnataka’s per capita GSDP in 2021-22 in current prices at Rs 2,92,542 was the second highest, next only to that of the reference state Haryana (Rs 2,95,923). This means that the larger the weight the income distance factor receives in the devolution formula, the lower will be the state’s share. 

A higher share in the devolution is possible only when the factors favourable to the state are taken into account. Certainly, per capita GSDP distance is not one of them, and the state would have to argue for lowering the weight to this factor.

In fact, under the recommendations of the 14th FC, the state secured a higher share mainly on account of taking the area under forest cover as one of the factors. The earlier commissions had given separate grants to the states according to the area covered by forests, taking into consideration “the need to manage ecology, environment and climate change, consistent with sustainable development”.

However, the 14th Finance Commission took that into account as a factor in the devolution formula itself and assigned 7.5 per cent weight to this factor.  The logic of including the forest cover in the formula was that higher forest cover causes both revenue and cost disabilities while contributing to the global public good. This was continued by the 15th FC and the weight was increased to 10 per cent.

Considering the fact that Karnataka has a relatively larger forest cover, the state could ask for reducing the weight to income distance and to increase the weight for forest cover in its memorandum. It could also seek higher weight to factors like tax effort and urbanisation.

Quite apart from the above, the ToR will require the Finance Commission to recommend measures to augment the consolidated funds of the states to augment resources of panchayats and urban local bodies based on the recommendations of the State Finance Commissions. The 15th FC had recommended that the states initiate immediate measures to appoint the State Finance Commissions and place their recommendations in the state legislatures by March 2024 to avail the grants in the remaining period of its award. The state should immediately act on this recommendation. The 15th FC has also given some grants to augment services in the millennium cities. The state should seek higher allocation on this from the 16th Finance Commission.

(The writer is a former Director, NIPFP and Member, 14th Finance Commission)

(This is the second of a two-part series. The first part appeared in the edition dated August 30, 2023)