Fifteenth Finance Commission Faces Uphill Task Of Getting States To Pull Together

The Fifteenth Finance Commission has been at work on the nuts and bolts of its recommendations that will be implemented for five years starting 1 April 2020. It has been at the receiving end of unprecedented criticism, too, for the terms of reference (ToR) that the Narendra Modi government has given it. The controversy over ToR has resulted in a north-south divide, with southern states slamming the government move to use the 2011 census for making its recommendations.

Southern states, in particular, are aggrieved since they believe taking the 2011 census as the basis would affect them because they have been taking population control measures for over four decades and they could now lose out on allocations because of the lower population.

According to the spokesperson of the Dravida Munnetra Kazhagam (DMK), P T Thiagarajan, who is also a member of the assembly from Madurai Central constituency, Section 15 of the forty-second amendment to the Constitution in 1976 froze the population figures till 2001, with the 1971 basis as the reference. The time limit was extended to 2026 through Section 3 of the Constitution (84th Amendment) Act.

M R Sivaraman, who had served the central and Madhya Pradesh governments in various capacities including as the revenue and finance secretary, said the late Indira Gandhi had assured Parliament and the Planning Commission that the 1971 census would be the criteria for allocation of funds by the Finance Commission. “[The] 1971 census has been accepted as the norm and a constitutional amendment has been made,” Sivaraman told Swarajya.

However, a former government official, who did not wish to be identified, said former finance minister P Chidambaram had tinkered with the terms of reference when the Fourteenth Finance Commission was set up. Chidambaram allowed the 2011 census to capture demographic changes. On 18 May, when the 15 Finance Commission members met Vice President Venkaiah Naidu, they told him that the earlier commission took the 2011 census to reward states that did well to control population.

Mumbai University professor Abhay Pethe, who works from the university’s Dr Vibhooti Shukla Chair Unit in Urban Economics and Regional Development, says it is a fact that Indira Gandhi made such a commitment that was reiterated at the National Development Council a couple of times later and in Parliament. But Finance Commissions in the past had used the latest population figures to calculate per capita income distance, particularly while dealing with local bodies.

“My point is simple, that if population is to be the criterion in the formula to measure the per capita requirement in terms of revenues for provision of public goods and services and considering all citizens of India everywhere should have equal entitlement. This can be captured only by taking current population figures,” Pethe said.

On his Facebook page, Finance Minister Arun Jaitley, who is currently recuperating from a kidney transplant, wrote that the Fourteenth Finance Commission “rightly used” the 2011 census data to capture the demographic changes since 1971 to make a realistic assessment of the needs of the states. According to him, the commission gave 10 per cent weightage to 2011 population.

Writing in the Economic and Political Weekly, joint sectary in the Thirteenth Finance Commission, V Bhaskar, said some of the changes proposed in the Fifteenth Finance Commission are within the mandate of the Constitution while some others are not. “Others appear extraneous. Some appear to urge the commission to asymmetrically treat a group of states,” Bhaskar wrote.

“The terms of reference are incorrect since they do not give any incentives to states that have achieved the desired rate of fertility,” Sivaraman said, adding, “the fertility rate in 18 states is below 2.1 per cent or below. How will they be compensated?”

Women in these states give birth to children lesser than in other states, particularly in North India like Bihar, Uttar Pradesh, and Madhya Pradesh. That these states have not focused on population control is the general objection to the terms of reference by financial experts and analysts.

Bhaskar wrote in his article that population was an important criterion that affects the state’s shares, directly and indirectly, of the allocation. The Fourteenth Finance Commission allocated a weightage of 17.5 per cent to the 1971 population that directly determined a state’s share.

Thiagarajan says southern states could be deprived of incentives as they had reached the neutral net reproductive rate long ago. “This is the most counter-productive measures taken hitherto with regard to population control incentives provided by the central government,” he said.

Pethe says the net migration would have to be separated to identify the outcome in terms of fertility. “Then, either have it included in the incentive basket in the formula or as part of a special grant – we will need to find a constitutional provision for it. The time since they have achieved will have to be taken into consideration and overall effort measured through normalisation looking into overall state’s overall population size, out migration and when it was achieved,” he says. This can be done, says Pethe, adding that the 18 states that have achieved a low fertility rate will have to be given due consideration.

Jaitley wrote in his post that “the ToRs of 15th FC rightly balance both the 'needs' represented by latest population and 'progress towards population control' very well”.

Sivaraman finds fault with the composition of the commission itself. “It does not have any representative from the judiciary who can lend balance in crucial issues,” he said. Pethe said a judge would have helped particularly in constitutional and legal veracity, but other members could be balanced and ask for expert legal/constitutional advice from outside. “I would rather have had South India also represented, not for anything but for optics,” he said.

Sivaraman, in fact, says N K Singh shouldn’t have headed the Commission. “Although he (Singh) is a very competent person, he has had different political leanings and that could influence his view on maters concerning the southern states,” he said.

Sivaraman says the centre should review if the states have delivered on the conditions stipulated by the previous finance commission for its allocation. “What have the states done for maintaining assets and recovery of costs? These are things that need to be reviewed,” he said.

Pethe says: “This is not strictly true. When looking at performance in terms of measured variables, they (critics) are looking at this implicitly. In fact, there has been an argument that the Finance Commissions depend too much on the past and should rather identify futuristic variables to inform their allocation.”

Pethe says that once the Finance Commission winds up, no dynamic element can be introduced in the allocation parameters in the next five years. Some like him have argued for the continuation of the Finance Commission, “at least in the form of a cell which could monitor and revise allocations to states during the five years of the award”.

The other issue that concerns people like Sivaraman is some states having already achieved the objectives of Vision 2020. “States like Kerala and Tamil Nadu have achieved the health and social economic progress goals. How will the centre compensate them?” he wonders.

Pethe puts the onus on the respective states. “These states will submit their memorandum to the Finance Commission suggesting specific criteria for incentive asked and added weightage for them seeking reward. They will have to be persuasive (in their claims),” he said.

Former government official says states like Odisha and Madhya Pradesh have to be given additional benefits in view of Scheduled Castes and Scheduled Tribes making up a significant part of their population. “SCs/STs make up 34 per cent of Madhya Pradesh population, while in Odisha they make up over 36 per cent,” the official said, blaming leaders like Lalu Prasad for not setting up enough higher educational institutions in their states. “Bihar and Uttar Pradesh have not been in development mode at all throughout. They have squandered the central government’s funds. Why should the centre continue to fund them for lack of development?” he asked.

Bhaskar argued that while Uttar Pradesh could gain Rs 35,167 crore, Andhra Pradesh could lose Rs 24,340 crore. Similarly, while Bihar, Rajasthan, and Madhya Pradesh could benefit by Rs 32,044 crore, Rs 25,468 crore, and Rs 14,735 crore respectively, Tamil Nadu, Kerala, and Karnataka could lose Rs 22,497 crore, Rs 20,285 crore, and Rs 8,373 crore respectively.

But Jaitley contends that TOR reference to efforts and progress made in moving towards a replacement rate of population growth recognises efforts of all states that have done well in population control.

Allaying fears raised in various quarters, the Finance Minister wrote that the specific ToR will allow the Finance Commission to propose a specific incentive scheme to reward states that have achieved a replacement level of population growth. “Also, if the 15th FC wishes to do so, it can assign appropriate weight to the progress made in population control while allocating resources,” he said.

Pethe, writing for the Observer Research Foundation, where he is a distinguished fellow, said there are a few flaws, like the higher share of allocation to states and lower devolution to urban areas, that need to be changed.

As the Finance Commission goes about doing its job, the outcome of the hue and cry raised, particularly by the states, that has already reached the Rashtrapathi Bhavan, will be keenly awaited.

Also Read: Finance Commission Brouhaha – When The Shoe Is On The Other Foot