15th Finance Commission
By Dr S. Saraswathi
(Former Director, ICSSR, New Delhi)
The Terms of Reference (ToR) to the 15th Finance Commission have provided another issue to different forces trying to bring together non-BJP parties against the Union Government. This time, it is in the guise of asserting State rights and fighting injustice in the exercise of federal fiscal powers. There is propaganda that the Centre is attempting to reduce the States as glorified municipalities.
The issue over the ToR contains several sub-issues — performance of States in carrying out population control measures, North-South divide in population control, the logic of changing the base for population criteria in determining fund share of States and so on. Even BJP-friendly parties are under political compulsion to question the Union Government’s proposal lest it should be understood and painted as pro-Centre and anti-State equated as anti-people stance.
A conclave of Finance Ministers of southern States of India was convened recently by Kerala Government with the idea of initiating a dialogue on the 15th Finance Commission, particularly on its ToR, which were considered as “unjust”. The idea gained ground as there was a belief that these were “in contradiction of the principles of federalism enshrined in the Constitution”. The aim was to stop what was perceived as the Centre’s attempt “to impose stringent conditionalities on State Governments”.
Some States were disappointed that the Centre did not consult them on the ToR to the Commission. The CPM stated that the terms were intended to reduce the tax share of the States in devolution, impose unacceptable conditionalities, and accord priority to Centrally Sponsored Schemes over that of the States.
It was the first such conclave and was held at Tiruvanandapuram on 10th April. Finance Ministers of Andhra Pradesh, Karnataka, and Puducherry besides the host State, Kerala attended the meeting while Tamil Nadu and Telangana stayed away. Incidentally, one must acknowledge the reality that it is not easy to bring together neighbouring States and present regional unity where it does not exist.
Efforts are on to convene a second conclave with enlarged participation of States under non-BJP governments like Delhi, Mizoram, Odisha, and Punjab. It is a political move entangled with economic interests.
Though Tamil Nadu stayed away from the conclave, it sent a communication to the Commission registering its strong disapproval of some of the clauses in the ToR. It called for granting weightage to the share of respective States in Central tax revenue. The existing arrangement has delinked the size of the State’s contribution and its eligibility for funds. Tamil Nadu further resented the clause pertaining to Central Government’s flagship schemes which amounted to discrediting some of the popular schemes of the State government.
The 15th Finance Commission was set up in October 2017 under Article 280 of the Constitution and deals only with the Central tax revenues. It is the body to make its recommendations to the President as to how the tax revenue collected by the Centre should be distributed among the States and the principles which should govern the grants-in-aid of the revenues to the States out of the Consolidated Fund of India. These are matters of immense significance economically for equitable growth of all States, and politically for smooth Union-State fiscal relationship. In either side, it is a crucial instrument to exercise financial control over the States by the Centre and a principal determinant of the efficacy of our federal system.
The conclave was particularly seized of the issue of taking 2011 census population figures as the basis for devolution of tax revenue to the States. Southern States on the whole have been keen on implementing population control measures for many decades. Andhra Pradesh, Goa, Karnataka, Kerala, Puducherry, Tamil Nadu, and Telangana have already reached replacement fertility rate of 2.1 and therefore, their population growth is small.
Population growth of Kerala has dropped from 19.24% in 1970s to 14.32% and 9.43% in subsequent two decades. Both Kerala and UP present contrasting pictures in population growth— 4.86% in the former and 20.09% in the latter, since 2000. Eleven States are likely to be affected adversely by taking 2011 census figures as the base.
The Commission’s proposal to provide incentives to States that are striving to achieve the fertility rate of 2.1 would not benefit the Southern States that are already below that level. Calculations on 2011 census basis show that UP will be the biggest gainer to increase its share from 15.3% to 16.5% followed by Rajasthan increasing its share from 4.7% to 5.7%. Other gainers would include Bihar, Madhya Pradesh, Haryana, and J&K. Tamil Nadu would lose by 1.6% and Kerala by 1.1% and Andhra Pradesh by 1%.
Though population is not the sole determinant of fiscal devolution, the affected States have reason to feel aggrieved that they are being punished for being earnest about population control and efficient in implementing family welfare programmes. It is overlooked that States that have brought down fertility rates face certain other population problems like the care of the elderly.
Indeed, the development agenda of States cannot be uniform and cannot progress at uniform pace as these depend on numerous factors. States also make different kinds of contributions to the nation’s welfare and security — all of which are essential for the nation’s progress.
Contributions of tax revenue from southern and western States are more than from other States. Whether this should be taken into account in disbursal of funds is a ticklish issue in a country made up of areas at different levels of development due to historical, geographical and social factors. However, no State in the Indian federation, familiar only with water quarrels and linguistic pride, would magnanimously offer its revenue to other States for their development.
It is a test for our federalism. It is a challenge for the Union Government with national interests on top of its agenda to provide for the requirements of all States without being unjust or prejudiced. Other federal governments have different objectives and mechanisms.
In Australia, the federal government collects extensive revenues, but its power to spend directly is rather limited. Two types of payments are made to States — Specific Purpose Grants (SPG) according to specific agreements between the federal government and the States; and General Revenue Assistance (GRA) which is mostly the share of GST. The amount each State finally gets is based on the principle of horizontal fiscal equalization (HFE). Distribution of GST is done on the recommendation of the Commonwealth Grants Commission (CGC).
In Canada, “equalization payments” are made to the less well-to-do States to improve their fiscal capacity. A distinction as “have province” and “have-not province” is introduced which at times creates tension between provinces. In Brazil, redistribution is done with the idea of favouring States with lower HDI ranking.
Thus, there is no universally applicable solution to guide Union-State fiscal relations, but a common problem of unequal development is present. We should avoid putting better performing States at a disadvantage and also discourage the growing culture of dependency amongst non-performing States. — INFA