Tax divide: Why are southern states upset?

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₹15,000 crore. The state was unable to pay salary and arrears among other payments. Subsequently, Kerala dragged the union government to the Supreme Court for limiting its borrowing powers.

Earlier this week, the Supreme Court refused to grant any interim relief to the state and referred the matter to a larger constitutional bench. Politicians from southern states said that even with significant redistribution for many decades in their favour, states like Uttar Pradesh and Bihar continue to have poor records when it comes to social and economic development. “As it stands today, the devolution process rewards bad outcomes and penalizes good governance," said Palanivel Thiaga Rajan (popularly called PTR), Tamil Nadu’s IT minister who till recently held the finance portfolio.

With elections knocking on the door, regional parties in south India have made fiscal devolution into an electoral issue—in nearly every speech, politicians in Tamil Nadu, Karnataka and Kerala take potshots at the Bharatiya Janata Party (BJP), India’s ruling party, accusing it of depriving funds to opposition-ruled states. Politics aside, India’s devolution process does need an urgent revamp, experts said. The 16th Finance Commission, which will arrive at the devolution formula for the 2026-31 period, has its task cut out.

In India’s fiscal structure, the central government raises much of the tax revenue and states, by virtue of delivering last-mile governance, bear much of the expenses. To tackle this imbalance, a process of transferring resources is in place. The Finance Commission is the constitutional body that oversees this transfer, which happens in two stages.