Tamil Nadu serves as a useful test case. But the question is larger than Tamil Nadu: if Indian federalism can reward states for producing GDP and preserving forests, should it also recognise those that create human capabilities subsequently used elsewhere?
Why Tamil Nadu? Why not Maharashtra, Gujarat, Karnataka or Bihar? Precisely. The question is not whether one state deserves another cheque from New Delhi.
It is whether Indian fiscal federalism is measuring all the things that states actually produce. The timing could hardly be better. The Sixteenth Finance Commission, whose award period began in 2026–27, assigns 10% weight to a state’s contribution to GDP and another 10% to forests, alongside population, demographic performance, area and per-capita GSDP distance.
Significantly, contribution to GDP is a new criterion. India can therefore reward where economic output is produced and recognise ecological assets whose benefits cross borders. But what about human capability?
Tamil Nadu makes that question difficult to dismiss. Census-based figures used by the Finance Commission put its population share at about 6.06%. Yet Tamil Nadu’s Department of Economics and Statistics estimated its GSDP at 9.21% of India’s GDP at current prices in 2023–24. Its social indicators make the case more compelling. The Ministry of Education’s AISHE 2021–22 places Tamil Nadu’s higher-education Gross Enrolment Ratio at 47%, against 28.4% nationally. NITI Aayog estimated that just 2.2% of Tamil Nadu’s population was multidimensionally poor in 2019–21, compared with 14.96% for India.
These numbers, however, do not prove that Tamil Nadu is a net human-capital-exporting state. That proposition needs evidence India does not yet systematically assemble: where a worker was educated and trained, how much of that formation was publicly financed, where that person subsequently works, and where the resulting economic and fiscal gains materialise.
That missing ledger is precisely the point. Imagine a nurse educated through publicly supported institutions in Tamil Nadu working in Bengaluru; an engineer trained in Coimbatore joining a firm in Hyderabad; or a doctor educated in Chennai practising in New Delhi. The individual gains and must remain completely free to move. The destination state gains skills and productivity. Further, the destination state also spends money. It provides roads, public transport, policing, healthcare, housing infrastructure and the ecosystem in which that worker becomes productive. Talent belongs to citizens, not governments. That is the strongest objection to any simplistic demand for compensation — and it is correct.
Yet another fact remains. The state financing education, health, nutrition and skill formation may generate benefits extending beyond its borders. Fiscal economists call this an inter-jurisdictional spillover. IMF work on fiscal relations specifically identifies higher education among expenditures whose benefits can spill across regional boundaries and notes that intergovernmental transfers can, in principle, address such externalities. OECD research likewise finds that skilled migration can enhance productivity, innovation and trade in destination regions, while those gains are distributed unevenly geographically.
India already accepts this principle elsewhere. Forests enter Finance Commission calculations partly because ecological benefits do not stop at state boundaries. Earlier Finance Commission research explicitly justified forest-related criteria on the grounds of cross-border ecological benefits and costs borne by states. The Sixteenth Finance Commission has retained forest cover as a 10% criterion.
The analogy is deliberately imperfect. Trees do not migrate by choice; people do. Human beings cannot become balance-sheet assets. However, the fiscal question survives the analogy: if one jurisdiction pays for an investment whose benefits partly accrue elsewhere, does the present transfer system create the correct incentive to keep making that investment? And this is where the argument must stop being Tamil-centric.
A serious measurement exercise might show that Karnataka, Maharashtra, Kerala, Telangana, Punjab or Gujarat also create substantial mobile human capital. It might equally reveal that poorer states such as Bihar or Uttar Pradesh finance years of schooling only to see workers and sometimes their most capable workers move elsewhere. Conversely, it could show that destination states bear costs large enough to offset much of the alleged gain. The answer must come from data, not regional pride.
Nor should India invent "human-capital royalties". The expression is economically crude and ethically worse. It risks commodifying citizens, double-counting existing transfers and rewarding governments merely for spending money.
Instead, India could begin with something far less dramatic: a Human-Capital Spillover Account a statistical framework tracking public investment in education, health and skills against subsequent interstate mobility, occupation, earnings and destination. No compensation initially. No new entitlement. Measure first. Only when several years of evidence exist should a future Finance Commission ask whether verified human-capital spillovers merit some recognition perhaps through tightly designed grants rather than permanent devolution weights. The Sixteenth Finance Commission has taken an important step by recognising contribution to GDP.
The next question is more provocative: should India eventually recognise contribution to the people who produce that GDP, even when they produce it somewhere else? Tamil Nadu need not be paid. Well, India should at least begin counting what Tamil Nadu and every other state may be giving away.
Thakur is Professor, Department of Economics; Director – Center of Excellence in Public Policy, Sustainability and ESG Research, Alliance University, Bengaluru