Finance Commission Brouhaha – When The Shoe Is On The Other Foot

V Anantha Nageswaran

Apr 16, 2018, 06:51 PM | Updated 06:51 PM IST

The south Indian states.
The south Indian states.

In these matters, I consider myself an outsider and dispassionate observer since these are intra-national matters. Nor do I come with any accumulated knowledge baggage about Finance Commissions, etc. All I did was to read the Terms of Reference (ToR) of the XV Finance Commission and that of the Fourteenth Finance Commission.

You can find the ToR for the Fifteenth Finance Commission (FC) here.  On the crucial issue of population, the ToR states the following:

On this aspect, the ToR of the Fourteenth Finance Commission had the following clause:

What the Southern States are protesting about?

Southern States are up in arms that this would mean a lower share of the central pool of taxes because they have done a good job of bringing their population growth under control since 1971. See here for the most recent data on Total Fertility Rate. The contrast between the Southern States and the laggards could not be more vivid. Tamil Nadu and Keral are among the top six States with the lowest fertility rate. Uttar Pradesh and Bihar are among the top four states with the maximum fertility rate.

Uttar Pradesh has made tremenous progress, however, in bringing down its TFR from 4.46 in 2004 to 2.64 in 2017. Bihar relatively less so. Rajasthan and Madhya Pradesh too have made very good progress in bringing down the TFR from around 3.70-3.75 to 2.24-2.34.

R. Jagannathan at Swarajya had a very good piece on the controversy that has erupted on the ToR, particularly with respect to the use of 2011 population data as the basis for the Commission to make its recommendations. He says that sticking to 1971 would unfairly advantage the Southern States whereas using 2011 would not be bad for Tamil Nadu and Pondicherry since their decadal population growth between 2001 and 2011 actually picked up:

What the southern states (deliberately, perhaps) fail to acknowledge is an important component of the ToR of the Fifteenth Finance Commission which was not there in the Fourteenth Finance Commission. It is this:

4. The Commission may consider proposing measurable performance-based incentives for States, at the appropriate level of government, in following areas:

(i) Efforts made by the States in expansion and deepening of tax net under GST;              (ii) Efforts and Progress made in moving towards replacement rate of population growth;
(iii) Achievements in implementation of flagship schemes of Government of India, disaster resilient infrastructure, sustainable development goals, and quality of expenditure;
(iv) Progress made in increasing capital expenditure, eliminating losses of power sector, and improving the quality of such expenditure in generating future income streams;
(v) Progress made in increasing tax/non-tax revenues, promoting savings by adoption of Direct Benefit Transfers and Public Finance Management System, promoting digital economy and removing layers between the government and the beneficiaries;
(vi) Progress made in promoting ease of doing business by effecting related policy and regulatory changes and promoting labour intensive growth;
(vii) Provision of grants in aid to local bodies for basic services, including quality human resources, and implementation of performance grant system in improving delivery of services;
(viii) Control or lack of it in incurring expenditure on populist measures; and(ix) Progress made in sanitation, solid waste management and bringing in behavioural change to end open defecation.

If the southern states think and claim that they are better governed, then they ought to do well on the above nine parameters (mostly, if not all) and hence, the Commission has a very big leeway in giving them incentives on the above to make up for any setback arising out of the population figures of 2011.

Clause (3) of the ToR of the Fifteenth Finance Commission and Clause (6) of the ToR of the Fourteenth Finance Commission are similar in principle and comparable. But, the considerations that the XIV FC was asked to keep in mind in that clause (6) were longer. This government has kept its clause (3) shorter.

Instead, it had come up with clause (4) – see above – and that goes a long way in accommodating and recognising good governance.

The charge of politicisation of the Finance Commission

Some others have picked up issue with the fact that the ToR for the 15th Finance Commission includes the devolution sanctioned by the Fourteenth Finance Commission. The Fifteenth FC has been asked to study its impact.

The Union Government may have one political party in office now. When the Fifteenth Finance Commission submits its report, it may or may not be in office. So, it is hard to make the accusation that the Union government is politicising the institution.

ToR are meant to guide the Finance Commission’s deliberations and its analysis. It does not dictate the conclusions to be reached. The Commission can say that it finds nothing to change in the recommendations of the Fourteenth Finance Commission. To say that the Government is asking the Fifteenth to sit in judgement of the Fourteenth is a logical stretch and a consequence of some creative imagination.

The Fourteenth Finance Commission was asked to assess the impact of GST on the finances of the Union and State governments and the impact of the compensation mechanism to States in case of revenue loss. Can we argue that the Union Government then was asking the Fourteenth Finance Commisison to sit in judgement of the various Committees that had recommended the implementation of GST?

Good to see Souther CMs batting for efficiency

Interestingly, Mr. Chandrababu Naidu told the HT Leadership Summit in Singapore on Friday the 13th April that his only point was that efficiency should not be penalised and non-performance rewarded.

Wow! a perfectly appropriate sentiment for a Chief Minister to have.

I am really happy to note that this aspect has now been recognised by the Southern Chief Ministers – the challenge is to strike the right balance between rewarding efficiency and performance even as one tries to bring the laggards up to speed.

But, they must now think of the so-called welfare policies that they had been following. There are multiple examples.

Think of loan waivers – whethere they are microfinance loans or farmer loans. What is the incentive for thoso who diligently repay? What is the incentive for the loan providers to keep providing those loans if the States write them off and do not compensate the lenders on time and in full and drag the compensation out? Second, why cannot States encourage the borrowers to honour their loan contract by giving them the money and ask them to repay. If they misuse the money, then they did not deserve it.

What about the permanent policy of reservations with the booster shot of diluted performance criteria for admissions to educational institutions – at all levels of learning. Why cannot the criteria be maintained or diluted just a little? Why cannot the ladder be withdrawn at some point in the higher education institutions if they had been given the leg up already at entry and slightly later levels? Also, for how long? It was meant to be for ten years after independence? Now, these policies are permanently in place.

What is the incentive for those who have performed well? Leave the State? Leave the country?

What about reservations in jobs in the government and even in promotions too? Doesn’t the same issue arise there too? Now, politicians are dropping threats every now and then that they would extend reservations to the private sector too.

In sum, if the Southern States feel that they would be penalised unfairly for doing well on population management while laggards would be rewarded, they would do well to reflect on many segments of the population in their States must be feeling about some of their ‘welfare policies’ that achieve exactly the same thing – punish the achievers and pamper the laggards. Moral hazard is written all over India’s development policies – perhaps, as pervasively in Southern India as it is elsewhere, if not more.

Now that they know how the shoe pinches when it is on their foot, they would do well to rethink the impact of some of their ‘anti-development’ policies.

Let us be clear. India does need welfare policies as there are millions in the bottom of the pyramid for not much fault of theirs. As Warren Buffett put it, they just did not win the ovarian lottery. So, development policies are needed – they need good education, nutrition, sanitation and healthcare.

Government schools have to function, teachers have to teach, schools must have toilets and there should be running water. Streets should have functioning lights and not overflow with sewage. Drains must not clog and stagnate, pollute and contaminate drinking water. If the States do the above development tasks well, then many at the bottom of the pyaramid would compete rather well and rise up the material ladder.

The challenge for States is to do the development thing right and that too, without hurting, scaring or driving away the efficient and the well performing ones.

In that sense, the Union Government has achieved the impossible already. It has woken up the Southern State Chief Ministers to the quintessential challenge of economic and social development in India – one that they have either ducked or failed miserably, more precisely.

This article was first published on the writer’s blog, ‘The Gold Standard’, and has been republished here with permission.

V. Anantha Nageswaran has jointly authored, ‘Can India grow?’ and ‘The Rise of Finance:Causes, Consequences and Cures’

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