Finance Commission will not take a disruptive decision: Panagariya

Bengaluru: The Sixteenth Finance Commission (16th FC) will not take any decision based on data or criteria which will cause large disagreements among Centre, states and various stakeholders, Chairman Arvind Panagariya said on Thursday.

Panagariya said this in the context of Karnataka’s suggestion that the biggest economic centres be kept out of income distance and per capita income calculations of a state.

“I don’t think any commission can take such arbitrary decisions,” Panagariya said, at a media briefing after meeting Chief Minister Siddaramaiah and top ministers and bureaucrats of the state, adding that such a way of calculating income distance would be very difficult.

In a written communication to the union Finance Ministry last year, the Siddaramaiah government had asked that southern states be rewarded for intaking migrants from other states, and that since the impact of some metropolitan areas to the per capita income of certain states is significant, the 16th FC should consider excluding cities like Bengaluru, Hyderabad, Kolkata, etc, so as to arrive at a more accurate per capita income level for the respective states.

Sources aware of the discussions between the 16th FC and the state government on Thursday told DH that on the suggestion of Karnataka being rewarded for intaking migrants, the Panagariya gave a ‘federalist-nationalist counter-argument’.

Sources said that the meeting was cordial and professional, and that the 16th FC was receptive of many other suggestions, including that states should be rewarded for efficiency and for doing better on economic and social indicators compared to others.

On the issue of Karnataka seeking Constitutional amendments to bring the Centre’s cess and surcharges under the divisible tax pool, Panagariya said at the media briefing that no previous Finance Commission had recommended any amendment to the Centre’s powers to not share proceeds of cesses and surcharges with the states.

The 16th FC will decide on the distribution of the divisible tax pool between the Centre, states and union territories for five years - 2026-27 to 2030-31. The divisible pool consists of all the central direct and indirect taxes, including income and corporate taxes, goods and service tax, customs and excise duties, but excludes cesses and surcharges. For the five-year period, the 16th FC will also decide various grants and rewards to states.

The demands by southern states have accompanied the work of the past few finance commissions. This is part of a larger political narrative where many southern and western states feel that they are in effect subsidizing poorer northern and eastern states.