Centre’s flawed fiscal formula leaves high-performing Telangana short-changed
Telangana’s tax contribution to the Centre has surged nearly fourfold in five years, but the State receives only 42% in return. Economists warn that rising cesses and an inequitable devolution formula are undermining federal balance and disadvantaging high-performing States
Hyderabad: Even as the tax contribution of Telangana has nearly quadrupled within five years, between 2020-21 and 2024-25, high-performing States like Telangana are being left short-changed by the Centre’s revenue formula, which is increasingly tilted towards New Delhi’s control rather than cooperative federalism.
According to multiple answers tabled by the Centre in the Parliament during the ongoing session, Telangana’s tax contribution to the Union government divisible pool increased from Rs 35,243 crore in 2020-21 to over Rs 1.33 lakh crore in 2024-25. As a result, the State contributed a massive Rs 4.32 lakh crore between 2020-21 and 2024-25, accounting for 3.87 per cent of the nation’s direct tax and domestic GST pool.
But in return, Telangana received only Rs 1.84 lakh crore, which is a mere 2.45 per cent of the national tax devolution, Finance Commission grants and Centre’s share in Centrally Sponsored Schemes. In other words, for every Rs 100 Telangana contributed, the Centre returned only about Rs 42.
Even after taking into consideration of indirect benefits through Central projects including national highways and also loans, the State received a total Rs 3.27 lakh crore. Thus, the Central funds to Telangana increased by only Rs 6,300 crore over five years i.e. from Rs 60,590 crore in 2020-21 (including Covid-19 period support) to Rs 66,295 crore in 2024-25.
In contrast, Uttar Pradesh, which contributed 4.6 per cent, cornered a massive 15.82 per cent of all transfers. Similarly, Bihar received 8.66 per cent of devolution funds against a meagre 0.68 per cent contribution, and Madhya Pradesh was given 7.4 per cent of funds with a 1.94 per cent contribution. Both Uttar Pradesh and Bihar received three times and 12 times of their respective contribution. Even Andhra Pradesh has received almost Rs 97 in return for every Rs 100 contributed, where the State contributed Rs 3.32 lakh crore to the Central treasury and received Rs 3.23 lakh crore in return.
Economists pointed out that the Union government raked huge revenue through cesses and surcharges. This fiscal strategy allowed the union government to inflate its revenue without passing on the share to the States.
Against tax revenue of 111.75 crore earned during 2020-25, the Centre collected Rs 19.41 lakh crore through major cesses and another Rs 4.84 lakh crore through surcharges. Telangana is estimated to have contribtued around Rs 85,000 crore to the national treasure through cesses and surcharges. Agriculture cess, crude oil cess, GST compensation cess, health and education cess among others, rose sharply year after year.
Unless New Delhi revisits the ballooning cess regime and inequitable devolution formula, India’s federal balance may tilt irreversibly toward centralisation, with States like Telangana paying the price.
