People watch the Union Budget 2026-27 being presented by Union Finance Minsiter Nirmala Sitharaman on February 1, 2026. Veteran experts in public finances say Tamil Nadu has got virtually nothing extra.
| Photo Credit: The Hindu

Dr. Arvind Panagariya, Chairman 16th Finance Commission. File
| Photo Credit: Sandeep Saxena

Kerala Finance Minister K.N. Balagopal (file)
| Photo Credit: S. MAHINSHA

Centre-State financial relations, grievances regarding cuts in allocation and the need for a united front to secure a fair share in the 16th Finance Commission will take centre stage in Thiruvananthapuram on Thursday (September 12, 2024) at a one-day conclave to be attended by Finance Ministers of four southern States and Punjab.

Kerala, which is organising the Finance Ministers’ Conclave, sees it as a platform for Opposition-ruled States to thrash out their positions with respect to the 16th Finance Commission headed by Arvind Panagariya. Telangana Deputy Chief Minister and Finance Minister Mallu Bhatti Vikramarka, Karnataka Revenue Minister Krishna Byre Gowda, Punjab Finance Minister Harpal Singh Cheema, Tamil Nadu Finance Minister Thangam Thennarasu and Kerala Finance Minister K.N. Balagopal will be attending the conference along with leading economists and planning experts.

Kerala Chief Minister Pinarayi Vijayan is scheduled to open the conclave at Hotel Hyatt Regency here at 10 a.m. Leader of Opposition V.D. Satheesan also will address the conclave.

Centre’s stands contradictory: Balagopal

Mr. Balagopal said the conclave is being organised against the backdrop of the Union government’s stands that contradict the spirit of fiscal federalism and sustainable centre-State relations.

Preserving the sanctity of tax devolution, the Centre’s increasing reliance on cesses, Finance Commission norms for the division of resources, and surcharges and States’ grievances concerning borrowing limits are expected to come up in the discussions on Thursday.

It may be recalled that Kerala, accusing the Centre of placing a financial embargo on it, has approached the Supreme Court against the borrowing constraints imposed on it.

Mr. Balagopal said a “vertical and horizontal” imbalance persists in the transfer of resources. “Kerala is taking the lead to organise this conclave in the context of the challenges that fiscal federalism faces today. Ideation with regard to presenting the development and financial issues faced by the States before the 16th Finance Commission is the primary aim of the conclave. A report of the 15th Finance Commission has observed that States shouldered 62.4% of the aggregate expenditure, while 63% of the revenues goes to the Centre. States should receive at least 50%,” Mr. Balagopal said.

In Kerala’s case, the recommendations made by the previous Finance Commissions have been unfavourable, according to Mr. Balagopal.

Cut in tax devolution

The State suffered a drastic reduction in tax devolution from 3.87% under the 10th Finance Commission to 1.92% under the 15th Commission. In contrast, Uttar Pradesh’s share rose from 17.8% under the 10th Commission to 17.9% under the 15th, he said.

Central transfers constitute only 21% of Kerala’s overall revenue at present, according to the State. While Kerala’s own revenue rose by ₹30,000 crore from ₹41,000 crore in 2020-21 to ₹77,000 crore in 2023-24, the State is not benefiting from it due to the cuts in Central transfers, according to Mr. Balagopal.

Cesses and surcharges levied by the Centre as a proportion of the total revenues have risen from 9.4% in 2011-12 to 22.8% in 2022-23. Kerala has maintained that the trend harms the interests of States as these levies are not part of the divisible pool.

Presenting the 2024-25 State Budget in February 2024, Mr. Balagopal noted that “Kerala cannot remain a mute spectator against the hostile approach of the Central government which is pushing the State towards the worst financial crisis in its history.”

Kerala has also repeatedly urged the Centre to amend its “discriminatory stand” on ‘off-Budget’ borrowings made by the Kerala Infrastructure Investment Fund Board (KIIFB) and the Kerala Social Security Pension Ltd. The State has asked the Centre not to whittle down its borrowing limit citing these borrowings.

On Thursday afternoon, Mr. Balagopal will chair a discussion at the conclave. Arvind Subramanian, former Chief Economic Advisor to the Government of India, will deliver the keynote address. Senior bureaucrats and Finance department officials from the five States and leading economists and planning experts, including Prabhat Patnaik, Kerala Planning Board vice chairman V. K. Ramachandran, former Union Cabinet Secretary K.M. Chandrasekhar, former Kerala Finance Minister T.M. Thomas Isaac, and members of past Finance Commissions are expected to take part in the discussions planned on Thursday afternoon.

T.V. Somanathan, Finance Secretary. File.
| Photo Credit: KAMAL NARANG

The government is expected to constitute the 16th Finance Commission by end of November, Finance Secretary T V Somanathan said.

Finance Commission is a constitutional body that gives suggestions on Centre-State financial relations.

It suggests, among other things, the ratio in which tax is to be divided between the Centre and States for five years, beginning April 1, 2026.

“The Finance Commission is expected to be constituted by end of November because that’s the statutory requirement,” he told PTI in an interview.

Terms of Reference (ToR) for the Commission is being finalised, he said.

The previous Finance Commission submitted its report on November 9, 2020, for the 5 fiscals — 2021-22 to 2025-26 — to the President.

The 15th Commission under N.K. Singh had kept the tax devolution ratio at 42% — at the same level suggested by the 14th Commission.

The Central government accepted the report of the commission, and accordingly, the States are being given 42% of the divisible tax pool of the Centre during the period 2021-22 to 2025-26.

The 15th finance commission’s recommendations include the fiscal deficit, debt path for the Union and States, and additional borrowing room to states based on performance in power sector reforms.

As per the glide path for fiscal consolidation, the government aims to bring down the fiscal deficit to 4.5% of gross domestic product (GDP) by the 2025-26 fiscal.

For the current fiscal, the deficit is projected at 5.9% of GDP, lower than 6.4% in the last fiscal ended March 31, 2023.

He also said the government will stick to the fiscal deficit target of 5.9% of the GDP as robust tax, non-tax collections will help meet the spending requirement and make up for any shortfall in disinvestment proceeds.

Although there would be a shortfall with respect to disinvestment, he said, this shortfall would be met by non-tax revenue mobilisation.

“Disinvestment target is unlikely to be met. However, I would say in aggregate the collective amount between disinvestment and non-tax revenue is likely to be very close to the budget,” he said.

The total of disinvestment receipts, plus non-tax receipts are likely to be very close to the Budget Estimates, he said.

“We expect to adhere to our fiscal deficit target this year…none of the events so far have caused anything for us to deviate from it,” he said.

The government has already got a higher dividend from the Reserve Bank of India and expects higher dividends from public sector banks and other PSUs than estimated in the Budget.

The Reserve Bank of India in May approved a ₹87,416-crore dividend payout to the central government for 2022-23, nearly triple of what it paid in the preceding year. The government was expecting ₹48,000 crore from the RBI, public sector banks and financial institutions in the current fiscal.

The dividend payout by the RBI was ₹30,307 crore for the accounting year 2021-22. With public sector banks posting record profits of over ₹1 lakh crore in fiscal 2022-23, the government’s earnings from them are likely to be higher.