On the Role of Population in Criteria-Based Revenue Sharing in India

Population enters as a key determinant in revenue-sharing arrangements in federalfiscal systems. It is used as a proxy for fiscal needs of the states in absolute terms as well as in conjunction with otherfactors. This paper examines the role ofpopulation as a determinant of the overall progressivity of the transfer mechanism under revenue-allocative criteria typically used by the Finnnce Commissions and the Planning Commission in India. If considerable weights are assigned to population, the overall progressivity of the allocative mechanism would be considerably compromised. Further, even in the case of progressive criteria, the use of dated population data instead of current year population data may result in unintended distortions and penalise states not only for a more than average population growth rate but also for being poorer.

The theoretical findings are illustrated with data on the Indian states. Under all the three allocative criteria considered here, use of dated population results in substantial losses/gains in revenue devolution for different states.