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Chapter 5: The Formula --- Finance Commissions, GST, and the Arithmetic of Permanent Disadvantage

In February 2026, when the 16th Finance Commission tabled its report in Parliament, Odisha’s share of the central tax pool had fallen to 4.42 percent. This was lower than the 4.528 percent recommended by the 15th Finance Commission, which was itself lower than the 4.642 percent under the 14th Finance Commission. Three consecutive Finance Commissions. Three consecutive declines.

The numbers are small enough to look trivial. The difference between 4.642 percent and 4.42 percent is 0.222 percentage points. But apply that difference to a central tax pool measured in lakhs of crores, and the loss runs into thousands of crores of rupees annually --- money that translates, in a state where districts like Koraput and Malkangiri still struggle with 60-plus percent multidimensional poverty, into the difference between a district hospital that exists and one that does not. Between a tribal school with a teacher and a building with a lock on the door.

This chapter is about the formula. Not the politics around it --- the politics are everywhere, and everyone has an opinion. The formula itself. How it works, what it rewards, what it punishes, and why a state that contributes 42 percent of India’s mineral production value and absorbs the environmental destruction that comes with it keeps getting a smaller piece of the pie.

How Finance Commissions Actually Work

Start with the basics, because the basics are where the manipulation hides.

India’s Constitution mandates a Finance Commission every five years. Its job is to answer two questions:

Question One: Vertical devolution. What percentage of the central government’s net tax revenue should be shared with all states collectively? Under the 14th Finance Commission, this was set at 42 percent --- a historic jump from the 32 percent recommended by the 13th Commission. The 15th Commission dropped it slightly to 41 percent. The 16th Commission has retained 41 percent.

This number matters enormously, but it is the same for all states. The real game --- the game that determines whether Odisha gets a hospital or a locked building --- is in the second question.

Question Two: Horizontal devolution. How should that 41 percent be divided among 28 states? This is where the formula lives. And the formula is not a neutral mathematical exercise. It is a political negotiation dressed in technocratic clothing.

Each Finance Commission designs its own formula. It chooses the criteria, assigns the weights, and effectively decides which states gain and which states lose. The criteria sound objective --- population, area, income distance, forest cover, demographic performance. But the choice of criteria, the definition of each criterion, and the weight assigned to it are all judgment calls. And judgment calls, in a federal democracy of 1.4 billion people, are political acts.

Here is what each of the three most recent commissions chose, and what those choices meant for Odisha.

The 14th Finance Commission (2015—2020): The Baseline

The 14th Commission, chaired by Y.V. Reddy, assigned the following weights:

Criterion	Weight
Income distance	50.0%
Population (1971 Census)	17.5%
Area	15.0%
Demographic change (2011 Census)	10.0%
Forest cover	7.5%

Odisha received 4.642 percent of the divisible pool.

The logic here was reasonably favourable to Odisha, if not ideal. Income distance --- the gap between a state’s per capita income and that of the richest state --- carried the heaviest weight at 50 percent. Since Odisha’s per capita income has historically been below the national average (Rs 1,86,761 against the national Rs 2,00,162 in 2025-26), the income distance criterion gave it a boost. Forest cover, at 7.5 percent, was a new addition that acknowledged the ecological value of maintaining forests --- and Odisha, with 37.34 percent of its geographic area under forest cover, stood to gain.

But even this formula carried a structural bias. The 1971 population was used as the base for the population criterion --- a decision that rewarded states with larger populations in 1971, particularly Uttar Pradesh and Bihar, and disadvantaged states like Odisha and the southern states that had smaller populations. Using 1971 numbers rather than current population also meant that states which had controlled population growth since then received no credit for that demographic discipline.

The 14th Commission’s most consequential decision, though, was not in the horizontal formula but in the vertical number: raising devolution from 32 percent to 42 percent. This was genuinely transformative for all states, including Odisha. But it came with a catch. The Commission simultaneously recommended that Special Category Status --- the mechanism through which eleven states received preferential treatment in central funding --- should be effectively discontinued. The logic was that the higher vertical devolution substituted for the additional support SCS provided. For Odisha, which had been demanding SCS for years, this was a door slammed shut just as it was being offered a slightly bigger window.

The 15th Finance Commission (2021—2026): The Squeeze Begins

The 15th Commission, chaired by N.K. Singh, redesigned the formula significantly:

Criterion	Weight	Change from 14th FC
Income distance	45.0%	-5.0%
Population (2011 Census)	15.0%	Shifted from 1971 to 2011
Area	15.0%	No change
Demographic performance	12.5%	New criterion
Forest and ecology	10.0%	+2.5%
Tax and fiscal efforts	2.5%	New criterion

Odisha’s share fell to 4.528 percent. A decline of 0.114 percentage points.

The changes looked technical. They were not. Each one carried distributional consequences.

Income distance dropped from 50 to 45 percent. This was the single largest weight reduction, and it hurt Odisha directly. Income distance is the criterion that most benefits low-income states. Reducing its weight meant that the redistribution toward poorer states became less aggressive. Five percentage points may sound modest, but in a zero-sum formula where every state’s gain is another state’s loss, this shift moved significant resources away from states like Odisha and toward wealthier states.

Population shifted from 1971 to 2011 Census. This change had been demanded for decades by the northern states, particularly Uttar Pradesh and Bihar, whose populations had grown enormously since 1971. Southern states --- which had invested in family planning and reduced their population growth --- objected vehemently, arguing that rewarding population growth was perverse incentive design. Odisha fell somewhere in between: its population had grown, but not as dramatically as UP or Bihar. The shift moderately benefited Odisha, but the benefit was swamped by the reduction in income distance weight.

Demographic performance was introduced at 12.5 percent. This was the concession to southern states angry about the population base shift. States with lower fertility rates --- indicating better demographic management --- received more under this criterion. Odisha’s Total Fertility Rate (TFR) had declined significantly, from 2.9 in 2005 to around 1.9 by 2020. So this criterion helped Odisha, but at 12.5 percent weight, it could not compensate for the income distance reduction.

Tax and fiscal efforts at 2.5 percent. This rewarded states that raised more of their own revenue relative to their economic capacity. Odisha’s fiscal discipline --- its Budget Stabilisation Fund, its low debt ratios --- should logically have been rewarded here. But 2.5 percent weight is negligible in a formula where 45 percent rides on income distance. This was a token gesture toward fiscal prudence that had almost no distributional impact.

The net result: Odisha lost. Not catastrophically, but steadily. The 15th Commission’s formula was slightly less generous to poor states and slightly more generous to populous states and states with good demographics. Odisha fell into the crack between categories --- too poor to benefit fully from the reduced income distance criterion, not populous enough to gain from the population shift, and too fiscally disciplined to be rewarded by a tax effort criterion weighted at a mere 2.5 percent.

The 16th Finance Commission (2026—2031): The GDP Trap

The 16th Commission, chaired by Arvind Panagariya, made the most significant formula changes yet:

Criterion	Weight	Change from 15th FC
Income distance (Per Capita GSDP)	42.5%	-2.5%
Population (2011 Census)	17.5%	+2.5%
Demographic performance	10.0%	-2.5%, redefined
Area	10.0%	-5.0%
Forest and ecology	10.0%	No change
Contribution to GDP	10.0%	New criterion
Tax and fiscal efforts	Removed	-2.5%

Odisha’s share fell to 4.42 percent. Another decline of 0.108 percentage points from the 15th Commission.

Three changes deserve close examination, because together they reveal a structural shift in how the central government thinks about fiscal federalism --- a shift that is bad for Odisha and states like it.

The GDP Contribution Criterion: Rewarding the Already Wealthy

The introduction of “Contribution to GDP” at 10 percent weight is the most consequential change. For the first time in the history of Indian fiscal federalism, a Finance Commission has decided that states should receive more money from the centre partly based on how much they contribute to the national economy.

Think about what this means. Maharashtra, with its enormous GDP, gets a larger share. Tamil Nadu, Karnataka, Gujarat --- all get rewarded for their existing economic size. Odisha, which contributes about 3.5 percent of national GDP despite holding 28 percent of key mineral reserves, gets proportionally less.

The Commission moderated the criterion by using the square root of each state’s GSDP share rather than the raw share, which prevents the largest states from capturing a disproportionate benefit. But the principle itself is troubling. It rewards outcomes and ignores the conditions that produce those outcomes. Maharashtra’s GDP is high partly because forty-one years of Freight Equalisation Policy channelled industrial investment there instead of to Odisha. Gujarat’s GDP is high partly because its coastline and entrepreneurial culture were amplified by proximity to factories that should have been in the eastern mineral belt. Rewarding these states for their GDP is rewarding the beneficiaries of historical injustice for the wealth that injustice produced.

There is a concept in software engineering called a feedback loop. A system produces an output, and that output is fed back as input, amplifying the original signal. Positive feedback loops are what make microphones squeal --- a small noise gets amplified, the amplification produces more noise, which gets amplified further. The GDP contribution criterion creates a fiscal feedback loop: states that are already wealthy get more central transfers, which makes them wealthier, which increases their GDP share, which gets them even more transfers. States that are poor stay poor, and their low GDP share ensures they receive less, which keeps them poor, which keeps their GDP low.

This is the formula encoding the resource curse into the federal fiscal architecture.

Income Distance Continues to Decline

Income distance dropped another 2.5 percentage points, from 45 to 42.5 percent. This is now the third consecutive commission to reduce the weight of the criterion most favourable to poor states. The 14th Commission gave it 50 percent. The 16th gives it 42.5 percent. In twelve years, the weight assigned to redistribution toward poorer states has fallen by 7.5 percentage points. That 7.5 percentage points has been redistributed to criteria --- population, GDP contribution --- that favour larger or wealthier states.

The 16th Commission also changed how income distance is calculated. Instead of measuring the gap between a state and the single richest state, it now measures the gap between a state and the average of the top three large states. This sounds like a minor technical adjustment. In practice, it slightly compresses the income distance measure, reducing the benefit to the poorest states.

Area Halved

Area’s weight dropped from 15 to 10 percent. Odisha, with 155,707 square kilometres --- the ninth-largest state by area --- loses from this reduction. Area was always a rough proxy for the cost of delivering governance and services across a large geographic space. Reducing it means the formula gives less weight to the physical challenge of governing a geographically vast state with dispersed populations, difficult terrain, and expensive infrastructure requirements.

Demographic Performance Redefined

The 16th Commission changed the demographic performance metric from Total Fertility Rate (the 15th Commission’s approach) to population growth between 1971 and 2011. This is a subtle but significant shift. TFR measures current demographic behaviour and rewards states that have recently achieved low fertility. Population growth over forty years reflects cumulative demographic outcomes, including those driven by factors other than family planning --- migration, urbanisation, economic development. States that had high population growth in the 1970s and 1980s but have since improved receive less credit under this definition than they would under TFR.

For Odisha, whose dramatic TFR decline in recent decades was a genuine policy achievement, this redefinition is slightly unfavourable. The state’s population grew moderately over the 1971-2011 period, but its recent demographic performance was stronger than the forty-year average suggests.

The Cumulative Picture: What the Three Commissions Show

Line up the three commissions and the pattern is unmistakable:

Finance Commission	Odisha’s Share	Change
14th FC (2015-20)	4.642%	—
15th FC (2021-26)	4.528%	-0.114%
16th FC (2026-31)	4.42%	-0.108%

Each decline looks marginal in isolation. Together, they represent a persistent erosion. Odisha’s share has fallen by 0.222 percentage points over three commissions, from a base that was already low relative to the state’s contribution to national mineral production and the costs it bears from that production.

The direction of the formula changes is consistent: less redistribution toward poor states, more weight to population and economic size, new criteria that reward existing wealth. This is not an anti-Odisha conspiracy. It is a structural drift in how India thinks about fiscal federalism --- a drift from equity toward efficiency, from need-based to contribution-based, from compensating disadvantage to rewarding performance. And that drift systematically disadvantages states that are resource-rich but income-poor, geographically large but not demographically dominant, fiscally disciplined but economically underdeveloped.

If you were designing a formula to hurt states in precisely Odisha’s position, you would do roughly what the last three Finance Commissions have done: reduce the weight of income distance, increase the weight of population, introduce GDP contribution as a criterion, and define demographic performance in ways that underweight recent improvements.

I do not think this is deliberate. I think it is the product of competing political pressures --- southern states demanding credit for demographic performance, northern states demanding recognition of their population, wealthier states arguing that their economic contribution should be rewarded --- that are resolved through compromises that consistently leave states like Odisha on the losing side. The conspiracy, if there is one, is the conspiracy of indifference: nobody is deliberately targeting Odisha, and nobody is particularly concerned about protecting it either.

There is a confidence level I should state explicitly. I believe with roughly 85 percent confidence that the formula drift is structural rather than targeted --- that it emerges from the bargaining dynamics among more powerful states rather than from any specific intent to disadvantage Odisha. I would be wrong if internal Finance Commission deliberations or political negotiations revealed explicit trade-offs where Odisha’s share was consciously reduced as part of a deal to satisfy other states. Such evidence might exist; I have not seen it.

The GST Trap: When Consumption Replaces Production

If the Finance Commission formula is the slow erosion, the Goods and Services Tax regime is the structural earthquake.

GST, introduced in July 2017, replaced India’s patchwork of central and state indirect taxes with a unified national tax. The economic logic was sound: remove internal trade barriers, simplify compliance, create a common market. But the design choice that defined GST --- destination-based taxation --- carried distributional consequences that were enormous for states like Odisha.

Under the pre-GST regime, indirect taxes were origin-based. When iron ore was mined in Keonjhar and processed into steel, the state government collected VAT, entry tax, and other levies at the point of production. When coal was extracted from the Talcher coalfield, excise and state taxes accrued where the coal was dug. The state that bore the environmental destruction, the displacement, the water pollution, and the health costs of extraction also captured the tax revenue.

GST inverted this. Under destination-based taxation, the final tax accrues to the state where goods are consumed, not where they are produced. Odisha mines the iron ore, but the GST on the steel made from that ore is collected in Maharashtra, where the car factory is, or in Tamil Nadu, where the construction project uses the steel beams. Odisha produces the coal, but the GST on the goods manufactured using that coal’s electricity is collected wherever those goods are sold.

This is a straightforward transfer of tax revenue from producing states to consuming states. And Odisha is one of the most production-intensive, consumption-light states in India. It produces 42 percent of India’s mineral output. Its consumer economy, relative to that production, is small. Its population of 4.6 crore is dwarfed by the consuming populations of UP (24 crore), Maharashtra (12 crore), and Tamil Nadu (7.7 crore). The minerals are extracted here. The value is consumed elsewhere. And under GST, the tax follows the consumption.

There is a precise analogy from software economics. In cloud computing, there is a concept of “compute” versus “storage.” The state that stores the data (holds the mineral reserves) and processes it (mines and refines) bears the infrastructure costs --- the energy, the cooling, the hardware degradation. But the revenue model is based on who queries the data --- who consumes the output. A cloud provider that only stores and processes data but serves no end users captures none of the application-level revenue. Odisha is the storage and compute layer. The application layer --- the consumption, the revenue, the tax --- runs in Mumbai, Bangalore, and Delhi.

The Compensation That Ended

To cushion the GST transition, the central government guaranteed all states a 14 percent annual revenue growth for five years (2017-2022), with any shortfall funded through a GST compensation cess on luxury and sin goods. This guarantee was politically essential --- without it, producing states would never have agreed to GST.

For Odisha, the compensation period masked the structural disadvantage. The state’s GST collections grew at a compound annual rate of 22.4 percent between FY18 and FY25 --- one of the highest growth rates in the country. This sounds like good news. It partly is: tax compliance improved, the formal economy expanded, and Odisha’s industrial output grew. But the high growth rate was partly a base effect --- Odisha’s pre-GST indirect tax collections were relatively low, and any improvement looked dramatic in percentage terms.

The compensation period ended in June 2022 (extended through cess collections until March 2026 to repay borrowings, but with no further payouts to states). From now on, Odisha’s GST revenue depends entirely on what is consumed within its borders. And here is the structural problem that no formula can fix: Odisha is a net exporter of minerals, intermediate goods, and people. Young Odias who leave for Surat’s textile factories, Bangalore’s IT parks, and Hyderabad’s construction sites take their consumption --- and the GST on that consumption --- with them. The state that educated them, vaccinated them, and built the roads they grew up on captures none of the tax revenue from their adult economic activity.

This is the fiscal equivalent of a company that invests heavily in R&D --- incurring all the costs of research, training, and infrastructure --- but licenses its patents for free, allowing competitors to capture all the commercialization revenue. The investment happens in one place; the returns accrue elsewhere.

The Double Bind

The GST trap and the Finance Commission formula interact in a way that creates a double bind for producing states.

The Finance Commission formula gives less weight to income distance and more weight to GDP contribution. Producing states like Odisha, which have lower per capita incomes but contribute raw materials essential to other states’ GDP growth, lose on both counts --- penalised for being poor and unrewarded for enabling others’ wealth.

GST simultaneously shifts tax revenue from producing states to consuming states. The minerals extracted from Odisha’s soil become taxable economic activity in other states’ territories, boosting those states’ GST collections and, by extension, their GSDP --- which then earns them a larger share under the new GDP contribution criterion in the next Finance Commission cycle.

It is a feedback loop, and it runs in one direction: away from Odisha.

Special Category Status: The Door That Closed

Against this backdrop of declining devolution shares and structural GST disadvantage, Odisha’s repeated demand for Special Category Status takes on a particular poignancy.

SCS, for the states that have it, is transformative. The eleven states with SCS --- the seven northeastern states plus Himachal Pradesh, Uttarakhand, and Jammu & Kashmir (before reorganisation) --- receive a 90:10 cost-sharing ratio for centrally sponsored schemes instead of the standard 60:40 or 75:25. They get excise duty and customs duty exemptions. Income tax concessions for industries. A 30 percent allocation of the centre’s gross budgetary support. For a state like Odisha, this would translate into thousands of crores in additional central funding and substantial industrial incentives.

Odisha’s case for SCS is not frivolous. The state has 22.8 percent Scheduled Tribe population --- among the highest nationally. It sits in one of the world’s most cyclone-prone coastal zones --- the 1999 super cyclone, Cyclone Phailin (2013), Cyclone Fani (2019). Its poverty levels, particularly in the tribal belt, remain among the worst in India. Its infrastructure gaps --- in healthcare, education, connectivity --- are documented and quantified. The criteria originally used to grant SCS --- economic and infrastructural backwardness, large tribal population, strategic considerations --- overlap substantially with Odisha’s profile.

But the demand has been blanket-rejected. Union Minister of State for Finance Pankaj Chaudhary told Parliament, in response to a question by BJD MP Dr. Sasmit Patra, that “there is no proposal under consideration of the Union Government for granting Special Category Status to the State of Odisha.” This was not a conditional refusal or a promise to review. It was a flat statement that the question was not being asked. The minister explained that the government was assisting Odisha through centrally sponsored schemes, NDRF/SDRF support, and “other developmental interventions.” In other words: you will get what you get through the existing channels, and you will not get a structural upgrade.

The institutional reason for the rejection is straightforward: the 14th Finance Commission, by raising vertical devolution from 32 to 42 percent, explicitly argued that higher devolution substituted for SCS. The Commission’s report effectively recommended that no new states be granted SCS. Every subsequent Finance Commission has maintained this position. The mechanism through which Odisha could have obtained SCS has been dissolved.

There is a deeper issue here that neither the Finance Commission reports nor the parliamentary answers address. The SCS criteria were designed for a specific type of disadvantage: hilly terrain, border areas, low population density. Odisha’s disadvantage is different. It is a resource colony disadvantage --- a state that is poor not because it lacks wealth but because the wealth flows out. The SCS framework, even if it were revived, does not have a category for this kind of structural extraction. There is no checkbox for “state whose minerals enrich other states while its own people remain poor.” There is no criterion for “state that bears the environmental destruction of national industrial policy.” The conceptual vocabulary of Indian fiscal federalism simply does not have a word for what Odisha experiences.

Whether the SCS demand was ever a genuine policy expectation or always a political performance is a question worth asking. Every chief minister --- Congress, BJD, now BJP --- has made the demand. None has been in a position to force it. The demand’s value may always have been symbolic: proof that the state’s leaders are fighting for a better deal, even when the fight is structurally unwinnable. I believe this is more likely than not, though I would revise this assessment if evidence emerged that any Odisha chief minister had conditioned parliamentary support for the ruling party on SCS, and been rebuffed --- that would suggest a genuine negotiation rather than a performance.

The Budget Stabilisation Fund: Odisha’s Self-Insurance

In the absence of structural protection from the centre, Odisha has built its own hedge. The Budget Stabilisation Fund, constituted in FY 2022-23 with an initial corpus of Rs 13,700 crore and subsequently grown to Rs 18,700 crore, is a reserve fund designed to cushion the state budget against commodity price volatility.

The logic is sound and the execution is sophisticated. Mining revenue --- Odisha’s largest source of non-tax income, contributing an estimated 84 percent of total non-tax revenue --- is inherently cyclical. Iron ore prices swing with global steel demand. Coal prices follow energy markets. A state that spends its entire mining windfall during boom years finds itself in fiscal crisis when prices crash. The BSF sets aside surplus revenue during good years, building a strategic reserve drawable during downturns. The fund is administered by the Reserve Bank of India and includes a special drawing facility, meaning the state can borrow against its accumulated investments without liquidating them.

This is genuinely good governance. It is also a confession of structural vulnerability. Odisha has built a Rs 18,700 crore self-insurance mechanism because the federal fiscal architecture does not insure it. The Finance Commission formula provides no protection against commodity price shocks. GST provides no compensation for the structural disadvantage of being a producing state. Special Category Status has been denied. Central disaster relief is discretionary and politically mediated. In the absence of all of these protections, the state has done what any rational actor does when the system will not protect it: it has protected itself.

NITI Aayog’s Fiscal Health Index for 2025 ranked Odisha first among all states, with a score of 67.8. The state’s debt-to-GSDP ratio is among the three lowest in India, alongside Gujarat and Maharashtra. These fiscal metrics are the product of two decades of disciplined management under the BJD government --- management that was rewarded by the Finance Commission formula with a declining share and by the political system with no Special Category Status.

The irony is precise and worth sitting with. Odisha is India’s most fiscally disciplined state. It is also the state that keeps getting a smaller piece of the central tax pool. Fiscal prudence has not been rewarded with a better formula. It has been treated as evidence that the state is managing fine and does not need more. The Budget Stabilisation Fund, intended as a hedge against volatility, has inadvertently become evidence against the case for more generous devolution: if you can save Rs 18,700 crore, the argument goes, you clearly do not need more money from the centre.

This is the Catch-22 of being a well-governed poor state. If you manage poorly, you are told you do not deserve more resources because you will waste them. If you manage well, you are told you do not need more resources because you are managing fine. The structural disadvantage is invisible from Delhi, because the numbers --- fiscal deficit, debt ratios, stabilisation fund balance --- look healthy. What the numbers do not show is what the money was not spent on: the hospitals that were not built, the schools that were not staffed, the industrial infrastructure that was not created, because the state was saving for the rainy day that the federal system would not cover.

What the Academic Literature Says

The structural dynamics described here are not unique to India. The academic literature on fiscal federalism has documented, across multiple federal systems, how formulas designed to balance competing claims tend to disadvantage states that are resource-rich but income-poor.

Noronha, Srivastava, Datt, and Sridharan (2009), writing in the Economic and Political Weekly, examined “Resource Federalism in India: The Case of Minerals” and documented how India’s federal fiscal architecture systematically undercompensates mineral-producing states for the externalities of extraction --- environmental degradation, displacement, health costs, infrastructure damage from mining operations --- while channelling the tax revenue from mineral consumption to other states.

Darshini and Gayithri (2024), in a paper published in the Review of Development and Change, examined the basic resource gap (BRG) and fiscal dependency of 14 major Indian states over 35 years (1981-82 to 2016-17). Their finding that Odisha had reduced its fiscal dependency faster and more sustainably than most other states is consistent with the BSF story --- a state that has responded to structural disadvantage by becoming more self-reliant, not because self-reliance is the optimal path but because the federal system offered no better alternative.

The Supreme Court’s 2024 judgment in the Mineral Area Development Authority case, where an 8:1 majority upheld states’ rights to impose taxes on mines and mineral-bearing lands, and ruled that royalties are not taxes, was a significant step toward correcting the fiscal imbalance. But the judgment addressed the legal question of taxing power, not the formula question of how central tax revenue is shared. States like Odisha, Jharkhand, and Chhattisgarh may now levy additional taxes on mining --- but the Finance Commission formula that determines their share of central taxes continues to drift away from them.

The Structural Problem No Formula Can Fix

Here is the uncomfortable truth at the centre of this chapter: no plausible Finance Commission formula can fully compensate Odisha for the structural disadvantage of being a resource colony within the Indian federation.

The formula can be made more equitable. Income distance could be weighted at 50 percent again, or higher. A new criterion could be introduced for states that bear disproportionate environmental costs from mineral extraction. The GDP contribution criterion could be removed, or weighted by per capita GDP rather than aggregate GDP, preventing the feedback loop that rewards already-wealthy states. Forest cover could be weighted more heavily, recognising that states like Odisha pay an opportunity cost for maintaining forests that provide ecological services to the entire country.

But even the most favourable formula would not address the fundamental structural issue: that India’s fiscal architecture taxes consumption (through GST) and distributes the proceeds (through the Finance Commission) in ways that systematically undercompensate production. The state that digs the iron ore, bears the displacement, poisons its rivers, and destroys its forests captures a fraction of the economic value generated. The tax on the final goods --- the cars, the buildings, the appliances made from that steel --- goes to the state where the consumer shops. The Finance Commission then distributes the centre’s share based on criteria that increasingly reward size and wealth over need and contribution.

This is not a problem that can be solved by adjusting weights by 2.5 percentage points. It is a design flaw in the architecture. And design flaws persist because the people who benefit from the current design have more political power than the people who are harmed by it.

Maharashtra has 48 Lok Sabha seats. Tamil Nadu has 39. Karnataka has 28. Uttar Pradesh has 80. Odisha has 21. The states that benefit from the current formula and the current GST architecture have the political weight to defend that architecture. The states that are disadvantaged by it do not have the weight to change it. The formula is not just a mathematical exercise. It is a reflection of who has power and who does not.

The formula will be revised again in five years, by the 17th Finance Commission. Odisha will submit its memorandum. It will argue for higher income distance weight, for recognition of environmental costs, for compensation for GST’s structural disadvantage. And it will be heard politely and accommodated marginally, because twenty-one Lok Sabha seats do not command the attention that eighty seats do.

The formula is the formula. It works as designed. The question is whether the design serves the country’s stated commitment to equity, or whether it quietly encodes the preferences of the powerful at the expense of the weak.

The answer, across three consecutive Finance Commissions, has been consistent. And it has not been in Odisha’s favour.

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Source Research

The raw research that informs this series.