S Gurumurthy on the perilous divide: North-South financial allocation-absurdity and danger!

The allocation of funds from the central government falls short of the taxes amassed by Kerala, Tamil Nadu, and Karnataka. These states have initiated discussions alleging inequity, asserting that the central government favours northern states with greater allocations despite lesser tax contributions. Even Shashi Tharoor, well-versed in this matter, addressed this as a disparity at the 54th Thuglak Anniversary, labelling it as an unjust North-South political rift. A forewarning in Thuglak Magazine indicated our intention to address this issue. 

Prior to countering Tharoor's assertions based on recent statistics, it is imperative to revisit the historical context wherein southern and western states prospered at the expense of their northern and eastern counterparts over five decades. This narrative promises to startle individuals like Shashi Tharoor.

Remarks made by PM Modi in 2024 and those events that unfolded between 1957 and 1992

Before delving further, it's imperative to recollect the Prime Minister's retort during the conclusive parliamentary session, particularly directed at those propagating the North-South fiscal division narrative. "The notion that taxes collected within our state belong solely to us, that river waters within our borders are exclusively ours, that minerals extracted from our land are ours, and that agricultural produce cultivated within our boundaries is exclusively ours, represents a perilous ideology that undermines national cohesion," he elucidated. The empirical validity of his assertion resonates deeply.

In the aftermath of independence, the mineral wealth abundant in Uttar Pradesh, Bihar, Madhya Pradesh, Jharkhand, Chhattisgarh, and West Bengal -- termed as backward states -- was not solely channelled for their own advancement. Rather, the central government crafted policies designed to benefit not only these regions but also foster the development of the southwestern states. This policy remained in effect for a span of 35 years, from 1957 to 1992. 

Consequently, while the pace of development in the North-Eastern states languished, the South-Western states flourished significantly, emerging as bastions of progress and prosperity in contemporary times.
 
Highlighting the adverse impact of the 'Freight Equalization Scheme' (FES) on the developmental prospects of the North-Eastern states while bolstering the progress of the South-Western states, it unequivocally rebukes those decrying the purported exploitation and financial backing of the Northern states. Had the FES policy not been enforced, the clamour today regarding the exploitation of mineral-rich states for the development of others would ring hollow. 

It is no hyperbole to assert that the implementation of the FES policy, which facilitated the growth of the South-Western states, dealt a crippling blow to the developmental aspirations of the Northern states.

FES: Devastation in the North-East, Prosperity in the South-West

In the heartland of India, Uttar Pradesh, Bihar, Madhya Pradesh, West Bengal, Chhattisgarh, and Jharkhand stand as bastions of mineral wealth, boasting vast reserves of coal, iron ore, dolomite, and limestone. These regions serve as epicentres for steel mills, thermal power plants, and cement factories strategically positioned near the mineral deposits. This symbiotic relationship ensures the easy accessibility of raw materials crucial for the production of steel, electricity, and cement. 

The historic establishment of Tata Group's steel plant in Jamshedpur, Bihar, in 1907 under the banner of the Indian Iron and Steel Company (IISCO) underscores the strategic importance of these mineral-rich territories. Furthermore, state-owned behemoth, Steel Authority of India Limited (SAIL), strategically positioned steel mills and thermal power plants in Banda, Uttar Pradesh; Bhilai, Chhattisgarh; Rourkela, Odisha; Durgapur, West Bengal; and Pokhran, Jharkhand, leveraging the proximity to these valuable resources to bolster industrial prowess and economic vitality.
 
During the 1950s and 1960s, the states endowed with abundant natural resources experienced a surge in steel, electricity, and cement industries, igniting a wave of industrialization and economic prosperity. However, the trajectory abruptly shifted in the late 1960s, as the once-thriving states encountered a stagnation in growth while witnessing a mass exodus of steel, electricity, and cement industries to the southwestern states. 

The Freight Equalization Scheme (FES), a concessionary policy ushered in by the Nehru-led government, emerged as a critical factor in this upheaval. Designed to alleviate the transportation costs of ferrying raw materials from resource-rich states to distant counterparts, it incentivized industries to relocate to the southwestern regions, regardless of the availability of raw materials. 

Consequently, the momentum of production and development in the resource-rich areas ground to an abrupt halt, heralding an era of stagnation and economic disarray.

Unveiling the Enigma: The Ascendance of Southern and Western States

The purported mission of the FES appears noble on the surface -- a purported endeavour to harness a state's natural resources for the collective benefit of the nation. Ostensibly, it aims to facilitate the equitable distribution of mineral wealth, propelling development even in regions devoid of such resources. However, the reality paints a starkly different picture -- a portrait of calamity and misfortune. 

The implementation of the FES system wrought havoc upon states blessed with natural abundance, facilitating the unfettered transportation of mineral resources at subsidized rates to distant corners, including the southern, western, and northern states such as Punjab. 

The exodus of industries from resource-rich states ensued, gravitating towards the industrialist hub of the West-South, characterized by robust financial markets and educational institutions. Industrial magnates like Tata who ventured into Bihar, the others found solace in establishing enterprises within their own states post-FES, obviating the need for external ventures.

The lopsided repercussions are evident: the South-Western states burgeoned in industry, economy, tax revenue, and per capita income, while the mineral-rich states languished in the shadows of neglect. This stark reality underscores the enigmatic growth of the South-Western states over the past half-century. 

The policy, enforced from 1957 to 1992, served as a catalyst, fostering prosperity in one region at the expense of another. However, with the advent of liberalization, this paradigm shifted, prompting the return of manufacturing industries like steel and electricity to the mineral-rich states they once deserted. 

Nonetheless, the scars of the 35-year FES regime continue to mar the economic landscape of these states, impeding their recovery. Multiple studies corroborate the narrative: the South-Western states thrived at the detriment of their counterparts, perpetuating a tale of disparity and injustice.

The Fallacy and Danger of North-South Political Divide

Shashi Tharoor's assertion of framing the Central-State allocation issue as a North-South matter is erroneous and cannot be endorsed. Demonstrating its fallacy is straightforward; consider the distribution of total direct tax collections amounting to Rs 16.63 lakh crore: Rs 6.05 lakh crore in Maharashtra, Rs 2.22 lakh crore in Delhi, Rs 2.08 lakh crore in Karnataka, and Rs 1.07 lakh crore in Tamil Nadu. 

Notably, these four states contribute a cumulative total of Rs 11.42 lakh crore (69%). This statistical breakdown illustrates that the entities generating such income operate across various states, thereby distributing tax contributions across state borders. The notion that tax revenues are solely attributed to the state where they are collected is absurd. For instance, the Rs 2.22 lakh crore collected in Delhi encompasses profits generated nationwide, not solely within Delhi's borders. 

A significant number of the central government employees who belong to various states pay taxes in Delhi, is it right to say those taxes belong to Delhi?, Likewise, Chennai, Mumbai, and Bengaluru contribute three-quarters of tax revenues in their respective states. Tax payments transcend the boundaries of the state where profits accrue. 

The constitutional mandate granting businesses nationwide operations mandates the fair distribution of tax revenues among states where profits originate. Hence, claiming exclusive ownership of tax collections by the state of collection, whether direct or indirect, is erroneous and impractical. 

Engaging in North-South politics based on this flawed premise not only perpetuates misunderstanding but also poses a significant danger to political discourse and national unity.

Annamalai’s Answer

Shashi Tharoor contends that the more populous northern states receive greater funding allocations. Tamil Nadu BJP President Annamalai provided a resolute response at the 54th Anniversary of Thuglak Magazine. He emphasized the role of the Finance Commission, constituted every five years per constitutional provisions, in determining revenue distribution between the Center and the States. 

The 15th Finance Commission, established in 2021, allocates funds to states based on several factors: (1) per capita income disparity within states - 45 points, (2) land area - 15 points, (3) population - 15 points, (4) family planning - 12.5 points, (5) Afforestation, Environment - 10 points, (6) Financial Sector Regulation - 2.5 points. 

Annamalai highlighted the significance of population, and allocated 15 points, contrasting it with the 1970s during the Indira regime when 50% of the population was prioritized in fund allocation, which has now reduced to 15% in 2021.

During the Congress rule, the allocation of more funds to northern states based on their larger population is no longer applicable. Annamalai further asserted that while the 15 points allotted to the population may favour the northern states, the 12.5 points allocated to family planning effectively balances the scales for the southern states.

Annamalai underscored the absurdity of implying revenue disparities among states, particularly noting that the six western districts of Tamil Nadu single-handedly contribute a substantial 54% of the total revenue. 

Despite this significant contribution, the Tamil Nadu government channels the funds received from these districts to bolster the development of underprivileged regions within the state. Annamalai raised a critical question: without such equitable distribution, how can the overall development of Tamil Nadu be sustained?

Similarly, states like Punjab, Uttar Pradesh, Uttarakhand, Rajasthan, West Bengal, and the Northeast constitute border states in the country, warranting special attention and allocation of resources. Likewise, Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, West Bengal, and Madhya Pradesh, which have endured developmental setbacks, have relinquished their mineral resources to the South-Western states under concessional terms. 

It is undeniable that such states necessitate greater allocation of resources. Those who frivolously debate the allocation of funds are doing so with incomplete information, engaging in divisive north-south politics. They must substantiate their claims with comprehensive evidence or refrain from perpetuating this perilous political discourse.

Betrayal of the Northern and Eastern States

Stuart Corbridge, a British expert, starkly equated the exploitation of natural resources in Africa to the plundering of mineral-rich regions in North and East India through the Freight Equalization Scheme (FES) policy. This policy facilitated the unabated extraction of cheap raw materials from the northeastern states, only to bolster cement production in Gujarat, Maharashtra, South India, and Punjab at concessional rates. 

Consequently, states like West Bengal, Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar Pradesh, and Odisha were stripped of their natural resource endowments, spiralling into financial bankruptcy and industrial backwardness. Even after the abolition of the FES policy in 1992, these states struggled to bridge the developmental chasm with their more affluent counterparts. 

The reverberations of injustice endured by mineral-rich states echoed as late as 1996, with the West Bengal Industry and Commerce Minister saying that the abolition of the FES policy failed to rectify the historical exploitation inflicted upon these regions.

Note to the Reader: This article originally appeared in Thuglak Tamil Weekly Magazine. It has been reproduced in Asianet News Network. Views expressed are personal.