Why does Maharashtra get such a low share of the Union Budget?

Governments' receipts include direct tax, indirect taxes and borrowings. Direct tax contributes approximately 30 per cent to the total receipts of the Government that the Central Government directly collects itself. Indirect taxes are collected by the state governments and returned to the Central Government. The Central Government distributes the tax collected to the State Government for running the state and its projects. However, out of every INR 100 that the states collect indirectly, Maharashtra gets back only INR 7 while Uttar Pradesh gets back INR 333, and Bihar gets INR 922. So, why does Maharashtra get such a low share from the Central Government’s receipts? Well, there is a set formula by which the distribution is decided which is known as the Finance Commission, currently, the Fifteenth Finance Commission. The formula takes into account several factors. Some of the key factors are as follows:

1.?Income distance – How far is the state’s per capita income from the state with the highest per capita income? This redistributes collections from richer states to relatively poorer states and helps in developing them.

2.?Area – Larger the state, the higher would be its needs to spend on building and maintaining infrastructure like roads, airports, highways, and civic services.

3.?Population – The allocation will be used to spend on education, healthcare, sanitation, and housing. Therefore, the states with higher populations would have higher allocations.

4.?Demographic performance - While population carries weight in the formula, it should not be an incentive for states to grow their population unsustainably. So demographic performance is based on progress in population control. This is a recent addition to the formula.

5.?Forest cover - States which maintain their forest cover are giving up some of their economic potential for conserving the environment. This is to compensate and incentivise nature conservation.

6.?Tax effort - This is an incentive for states which have higher tax collection efficiency. It is the ratio of the average per capita own tax revenue and the average per capita state GDP. However, it has the lowest weightage (2.5%).

Therefore, even though Maharashtra does relatively better on most parameters, the highest weight goes to income distance, which favours states with lower per capita income. That is why Bihar gets 10.06% of the tax devolution as compared to Maharashtra’s 6.14%.