In terms of direct tax collected from states, there are many non-south states which contribute more to the tax collection as compared to Southern states.
Maharashtra and Delhi account for 50.4% of direct tax collection, All 5 Southern states combined pay 25.8% of tax. [Edit: Mathematically, south states pay more proportion of direct tax as compared to north, but it still doesn’t prove that south feeds off from north.]
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In terms of state-wise GST collection, South states account for 25.9% of total GST collection, and Northern states (J&K, PJ, HR, HP, UK, RJ, UP) account for 26.2%.
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In terms of how much states get back for taxes paid:
There are several other states like Haryana, and Delhi-NCT that contribute more to the center and get way less than what southern states get. These states are located in the northern part of the country.
Maharashtra — which is in West India gets even fewer grants from the center as compared to Tamil Nadu and Andhra Pradesh, Gujarat — which is a BJP-ruled state gets fewer grants from the center as compared to Kerala which is ruled by LDF, this- even though BJP is currently ruling the center.
Overall, Northeast states and hill states like Himachal Pradesh, Uttarakhand, and Sikkim and eastern states like Bihar and Jharkhand get back more taxes from the center than they pay.
But why do some states get more from the center than others?
The answer to this question is the ‘Progressive tax system’ where relatively more affluent states pay more taxes to finance the growth of relatively less affluent states. This system is employed so as to:
- Reduce the regional disparity in the country by uniformly distributing wealth.
- Reduce the poverty rate of the relatively not-so-well-off region.
- Promoting economic development by investing in education, infrastructure, and skill development programs for creating the workforce required for jobs.
- Enhancing social mobility and reducing multi-generational poverty.
In any other country in the world, it’s always relatively well-off states which pay more to the federal government and get less in return and conversely, relatively not-so-well-off states get more taxes from the federal government. For example, here is how tax distribution happens in USA:
From the above, we can see that states marked in green is the states which pay more to the center and get less in return whereas states marked in red are the states which pay less to the center and get more in return.
Here is another example from European Union where it’s shown that Germany and France are the net-contributors and conversely Poland and Greece are the net-beneficiaries.
But what do relatively well-off states get in return for their contribution?
There are several things they get:
1: Military protection
Irrespective of what ‘Global citizen’ types or ‘Open border types’ say, the military is necessary to guard the borders (Air, Oceans, and land). Southern states are surrounded by oceans so a powerful navy is necessary so that enemy countries do not attack peninsular India. Army guarding the land borders ensures that enemy countries don’t percolate deep into the heartland and eventually south. Most military officers come from northern states.
Overall figures for states which sends more cadre to the army are:
- Uttar Pradesh
- Punjab
- Rajasthan
- Haryana
- Himachal Pradesh
- Bihar
- Jammu and Kashmir
- Maharashtra
Southern states don’t have to pay protection money to the Indian government since they are part of the country as well. Military guard the oceans provides means to deter potential aggressors whilst allowing the states to develop without worrying about invasions.
Elsewhere in the world, if you were to request or allow foreign military to guard your country then you had to pay ‘protection money’. For example;
- Take the case of Japan and South Korea which pays US military for guarding their country where they pay almost $1–2 billion per year. [Japan approves 5 years more funding for U.S. military presence as China, Russia and North Korea threats loom large], [Lawmakers approved the $8.6 billion, 5-year host-nation budget amid rising threats from China, North Korea and Russia.], [https://www.cbsnews.com/news/japan-us-military-host-nation-budget-china-north-korea-russia-threats/]
- Germany also pays protection money to USA [Germany spent over $1B to cover costs linked to US troops], [The German government has paid more than $1 billion over the past decade to cover costs related to the stationing of U.S. troops in Germany, according to the finance ministry in Berlin.], [https://www.militarytimes.com/news/your-military/2020/07/06/germany-spent-over-1b-to-cover-costs-linked-to-us-troops/]
- As well as Saudi Arabia [Saudi Arabia paid $500 million for cost of US troops in area], [The United States has received $500 million from Saudi Arabia to help cover the cost of American troops stationed in the kingdom, a U.S. official told CNN], [https://thehill.com/policy/defense/budget-appropriations/478721-saudi-arabia-paid-500-million-for-cost-of-us-troops-in/]
Why do these countries pay protection money even though they are allies of USA?
Because they aren’t USA, they are sovereign countries who pay US military to protect their country. US states like Puerto Rico don’t have to pay protection money since they are part of USA. Similarly, Southern states and other states which are part of Indian union don’t need to pay protection money.
2: Access to Raw materials
Chennai is famous for its automobile manufacturing. The most important component of automobile is steel and aluminum. The raw materials required for it comes from eastern states like Odisha, Jharkhand, and Chhattisgarh.
Source: Odisha leads among top 7 crude steel-producing Indian states in CY22
Here is the figure for the overall mineral availability state-wise:
Industries in the South do not have to worry about additional customs duties or tariffs since the raw materials are transported from one part of the country to another much unlike importing from other countries where customs duties or tariffs are imposed.
3: Power supply
The majority of the states still depend on coal for electricity supply. The proportion of coal usage in electricity generation varies from state to state. This chart shows the coal dependency ratio of 7 nit-picked states:
Source: How Karnataka insulated itself from power crisis that hit many states | https://powermin.gov.in/sites/default/files/uploads/MOP_Annual_Report_Eng_2021-22.pdf
States like Telangana and Andhra Pradesh majorly depend on coal for electricity production. For Tamil Nadu, almost 44% of electricity power comes from coal.
Where do they coal to generate electricity from?
Answer is eastern states.
Source: Which State in India has the Largest Coal Reserve?
And once again, the mentioned states don’t need to pay customs duty or tariffs for buying coal from east Indian states. States like TN, KA and AP imports lumpsum coal from eastern states.
Karnataka to get coal supplies from Odisha, Maharashtra
RINL can breathe easy as Centre allots coal mine in Jharkhand [RINL is based in Vishakhapatnam]
4: Food production
Food is important for the survival of the population. For a larger population, large amount of food production is necessary to avoid devastating famines.
The soil variant like red soil or black soil present in southern India isn’t suitable for large-scale agriculture, and rivers in the south tend to be largely seasonal. Northern states and Eastern states like West Bengal and Bihar have the most fertile soil in India and this coupled with perennial rivers and less drought conditions are suitable for agriculture as demonstrated by the chart here:
Source: Top 10 Leading Agriculture States of India — With Most Crops
5: Access to the cheap labor
Factories require cheap labors to run. But many times, the host workers tend to form labor unions that demand more benefits, more salary with less work output. Labors from other states do not form unions when they migrate to different states and tend to work for longer time with less salary.
Hence factory owners tend to recruit large numbers of laborers from north or east states. Without these laborers, the local industry will suffer losses. We have already witnessed how states suffered loss during COVID times because a large number of laborers migrated to their home state. Just like how UK/Germany depends on East European immigrants for filling up the labor shortage being a part of European Union. South and West depend on North and East Indian laborers for filling up the labor shortage if any.
Many southern states are currently facing ageing population and its migrants from north and east who will ensure demographic dividend. This means when south faces labor crunch then laborers from north and east will fill the gap.
6: Access to large market
The economically well-off states who specialize in manufacturing (like TN) need to have huge market to sell their products elsewhere to get profit. Since they are part of the country, they don’t attract custom duties and can be sold everywhere in India. Since North India is a huge market for buying cars, bikes or anything. It benefits the economically well-off states as well.
Additionally, South Indian film industries are dubbing their movies and releasing it in Hindi for Hindi audience. So, if south Indian film actors get rich, north Indian audience are also responsible for it. Films like kantara, Bahubali, Vikram Vedha etc. owes its success to north Indian audience as well; just like the successful Bollywood movies owes their success to south Indians as well.
Overall, both North and South India depend upon each other, and each is playing their part in the development of the country.
EDIT-1: For people who think that spending money in the development of relatively not-so-well-off states is futile. See this:
Multi dimensional poverty has been reduced from 24.9% to 15% in a span of 4‐6 yrs. States like Bihar, MP and UP has seen greater reduction in multidimensional poverty.
Electrification of railways has also accelerated in last few years, from less than 35% few years ago to around 90% in 2023.
India’s surging rail investment fails to avert disaster (ft.com)
Here is the stat for state wise railway electrification.
Even the northern states railways are electrified.
There is also surge in infrastructure spending across different transport sectors such as building of expressways, airports and electrification of railways. Here is the road network in 2014 and 2023:
https://www.economist.com/asia/2023/03/13/india-is-getting-an-eye-wateringly-big-transport-upgrade
Here is the map for greenfield airports constructed as of november 2023:
https://www.economist.com/asia/2023/11/23/india-is-seeing-a-massive-aviation-boom
Tax money is well spent. :)
