Welcoming 2019

As the frantic revelry recedes of the night,

The New Year emerges into glowing light,

Promising health, wealth & happiness making us capaciously glad,

& sometimes un-sustainable New Year resolutions as a thorny add.

Into General Elections withdraws the Elephant Indian,

Entices countries into a debt trap the Chinese dragon,

US withdraws from Afghanistan, messes up Middle East & encourages Quad,

While Russia & China announce new cold war challenging unipolar God.

With Impunity & breath-taking devastation Tsunamis strike,

But “Climate change” is a term Trump does not like,

With trade sanctions he may spook economy & throttle China’s rise,

Micky (Pence) & Donald (Trump) persist though as “idiots” in the minds of the wise.

Hope this year no journalist suffers Jamal Khashoggi’s fate,

or world loses another brilliant Hawking at heaven’s gate,

Into a new land of Shangri-La, with fantastic promises we enter,

Even as “Goodbye 2018” & “Happy New Year 2019” we banter.

The Reserve Bank of India (RBI) Versus Government of India (GOI) Kabaddi

The GOI-RBI spat evokes images from the competitive Indian sport of “Kabaddi” where a lone offensive player, called “raider”, enters the opposing team’s half of the court to tag “defenders”, thereby scoring points. The unprecedented invocation, by the Ministry of Finance (MoF),  of section 7 of the RBI ACT, of 1935 - that allows the Finance Ministry to issue a diktat to the RBI in “public interest”  - led to the RBI’s  “open mouth operation” – borrowing liberally from the former Governor of RBI YV Reddy’s pun on the “Open Market Operation”  – by the current Deputy Governor, of RBI, Viral Acharya. "Acharya" means "Teacher" in sanskrit & his erudite speech delivered, at the AD Shroff memorial lecture, last week, that went viral, raised 4 main issues

·         Governments’ encroach on the autonomy of their central banks at the peril of inviting the wrath of the financial markets. Ex Argentina in 2010

·         Regulation should be ownership neutral: Govt. should allow RBI to regulate Public Sector banks (PSB) on par with Pvt. Sector Banks

·         GOI’s should not dilute RBI’s regulatory scope by appointing a separate regulator for the payments sector 

·         GOI should not raid RBI’s reserves to fund its fiscal deficit.

GOI seems to have a separate set of grouses

·         RBI lax in managing the Liquidity issues in the market

·         Prompt corrective Action(PCA) that debars 11 of the 27 PSBs (Public Sector Banks including subsidiaries of SBI & Bharatiya Mahila Bank)  from lending needs to be revised & lending to MSME sector encouraged

·         Exempt the power sector companies from the 12^th Feb’18  circular on bad debts

·         Reduce Tier 1 capital norms from the stringent 5.5% to Basel 3 norms of 4.5%

Obviously, both sides have legitimate arguments & had debate rather than confrontation marked their relationship, public fracas could have been avoided. It is also prudent to note that governors' before Rajan had been associated, for a decade or two, with the govt., & hence could carry their concerns to the Finance Ministry, with nuance & subtlety. 

That does not absolve the govt. though of its missteps. Unless subject matter experts, rather than generalist bureaucrats, man the Ministry of Finance (MoF), they might not be able to have a competent debate with the technocrats of the RBI. Furthermore, GOI's lackadaisical  handling of the Election Commission (EC), Chief Vigilance Commission (CVC), Supreme Court (SC) & now the Central Bureau of investigation (CBI), forces one to believe the argument of critics that the Govt. treated the RBI in a cavalier fashion; riding roughshod on the RBI during demonetization, in 2016 & beyond was especially distressing since the latter was left holding the can for the former’s actions. RBI’s employee union coming out in support of Viral Acharya’s speech is indicative of an institution up in arms & not any specific individual or cabal protesting under the impression of being under seize. The RBI angst is thus palpable & has been accentuated with Deputy Governor, Nachiket Mor’s resignation - considering the conflict of interest inherent in his employment with the Bill & Melinda Gates Foundation - & the appointment of independent directors like S Gurumurty, peddling the government's line, during the board meetings.

RBI is right in demanding greater powers to manage PSBs

The RBI is right in demanding parity of powers in dealing with all banks – Public or Private.  RBI’s control over the PSBs is weakened as a consequence of the Banking Regulation Act; clause 51 of the said Act does not allow RBI to remove the Chairman, Directors or the management who are beholden to the govt. unlike the “fit & proper” criteria applied, by the RBI, to the Pvt sector banks that helped influence issuance of marching orders to the Chiefs of Yes Bank, Axis Bank & ICICI . RBI cannot call for a meeting of the PSB’s board, supersede the board or appoint observers nor can it force mergers between PSBs or trigger their liquidation.

RBI guidelines on 15% ceiling on promoter group shareholding & 10% on non-promoters brings in various counterbalancing forces, into banks, that protect minority rights better than PSBs where the govt. holds more than 51% shareholding. The Pvt sector banks have lower NPA’s vis a vis their PSB brethren , perhaps, as a consequence of better regulation & better credit appraisal - courtesy need to approach markets regularly for fund raising, unlike PSBs beholden to the govt. Conversely, lax project appraisal & nepotism led to huge credit outflows of Rs 52 lakh crores, largely from PSU banks, during the period 2008-14 as against 18 lakh crores during the previous 6 years, which PM, Modi mocked as “phone banking”.

Critics have lambasted the RBI, for their inability to detect or prevent scams despite having a nominee on all the PSB boards & more than one where banks are troubled or raise special concerns. To be fair, RBI Governor Urijit Patel, like his predecessor Rajan, have argued for withdrawal of their nominees citing conflict of interest as a regulator cannot be a party to bank’s management decisions. The PJ Nayak committee report, though, has submitted that the bank boards, as they exist now, are not cohesive & the RBI nominees carry weight with the independent directors, acting as a stabilizing advocacy; the committee suggested a 3 phase reform process starting with the formation of a Bank Boards Bureau to be taken over by a holding company of PSBs to be followed by empowering PSB boards & RBI nominees stepping down in phase 3. Unfortunately, we haven't seen substantial action by the govt. on this  issue.

The job of the regulator should be to force timely recognition & disclosure of NPA’s followed by adequate capitalization of PSBs & issue marching orders in case of violations. The RBI, is thus legitimate in demanding more powers to handle PSBs but that alone is useless unless Chinese walls are installed between the MoF & the PSBs - to prevent the recurrence of "phone Banking" - & the reforms advocated by the PJ Nayak committee are completely implemented; no Govt., though, would concede the same, unless it is preceded by electoral funding reform, a prerequisite to eliminate crony capitalism & that appears unlikely in the short term.

"No" to a separate Payments Regulator

The confrontationist stance of the govt. in advocating a separate Payments Regulatory Board (PRB) – with powers to nominate its chairman, in consultation with the RBI, was opposed, rightly, by the latter arguing, instead, for the RBI Governor to be the chairman with 3 members, each, nominated by the RBI & the Govt. with the Governor having a casting vote. Payments are a subset of currency under RBI regulation & dual regulation of instruments like cards or wallets is undesirable. Perhaps, it is time to have a super financial regulator considering the complementarity of jurisdictions between the RBI, SEBI & IRDA & to avoid their turf battles thereoff.

Fixed Formula to share RBI reserves with Govt to avoid annual tussle

The govt. wants RBI to transfer about Rs 3.6 lakh crores of reserves. While admitting that the govt. is under pressure to achieve its fiscal deficit target, since indirect taxes are trending below budget, it is irrational to force RBI to fill the gap, instead of resorting to expenditure rationalization & raising of resources. RBI believes that the balance sheet of the institution would be damaged by such  an action. A fixed formula, to avoid this annual bickering exercise would be in order which would maintain the strength of the RBI balance sheet & transfer the surplus to the govt. – not to manage its fiscal deficit but into an SPV to be used for building infrastructure alone to put a lid on fiscal profligacy.


Need for Liquidity to manage tight market conditions

The govt. does have a point, though, on some of the issues raised. Courtesy the rise in oil prices & US interest rates, capital outflows have increased during the recent months worsening the Current Account Deficit (CAD); capital outflows, RBI’s intervention to prop the rupee, the delay in GST refunds to exporters, the IL&FS crisis & the NBFC tailspin there-off & the advance tax payments made in Sept by corporates, followed by the busy festive season have accentuated the liquidity crisis. The govt. has nudged for RBI action, perhaps, to also account for the liquidity needs, during the impending elections, to 5 state assemblies, by Dec'18.

The 2008 financial crisis has shown that infusion of liquidity is a necessary strategy to manage systemic risk likely to be caused by the fall of institutions too big to fail; IL&FS conundrum had a domino effect of Mutual Funds & Banks not subscribing to securities issues by NBFCs facing further heat post real estate player, Supertech’s defaults.

Open Market Operations (OMO) planned for Nov, of Rs 40000 crores, in addition to the Rs 36000 crores, in Oct, seems to be the compromise worked out between the warring factions of the RBI & the executive.

Case for refining PCA

Prompt Corrective Action (PCA), that imposed lending restrictions on 11 PSU banks, considering their low Capital Adequacy Ratio CAR), NPAs greater than 6%, negative ROA for 2 consecutive years or leverage crossing 25 times their Tier 1 Capital, while theoretically elegant, is liable to lead to loss of good customers & fee income weakening their balance sheets further.  Livemint report, on 31^st Oct 2018, cites Capital Line data from June 2017 to June 2018 to conclude that during the said period Net Interest Income of these 11 banks rose by 114% but NPA’s rose between 195 basis points for Corporation bank to 667 basis points for IDBI bank - which is now being acquired by LIC. Allowing them leeway lend to “good customers” even while strengthening their “risk assessment & project approval teams” would any day be a better alternative to making a strong bank acquire a weak one, wreaking the balance sheet of the former. The govt. wanting these banks too, to be part of their MSME “Support & Outreach Initiative” that promises approval of “loan under Rs I crore in 59 minutes” is unsound as it caters to their election needs alone, especially when most of the MSME loans are unsecured.

Unsound to offer Lifeline to stresses assets in Power sector

It is to the govt. credit that they rolled out the Insolvency & Bankruptcy code (IBC), in 2016, that has led to a fantastic resolution of the stressed assets in the steel sector. RBI has tightened the bad loan recognition norms vide its 12^th Feb'18 circular: a firm lands up into the Special Mention Accounts(SMA) if it defaults on the interest or principal payment even by a day, NPA on the 91^st day & IBC on the 181^st day, if no resolution plan (RP) has been implemented within the timeline. The Private Power Producers with about 1.5 lakh crores in stressed assets & next in line for IBC resolution, moved the Allahabad High Court which lobbed the ball into the govt. court suggesting that they could use section 7 of the RBI act to initiate consultation. Perhaps, the govt. wants to tackle the stressed assets in the power sector after the general elections in 2019 & is seeking a reprieve. The RBI’s policy prescription is neat, in eliminating ad-hocism & discretion in decision making - that provides scope for corruption & nepotism - thereby sending across an unambiguous signal to the defaulters not take the lenders for granted. Perhaps, prior discussion between the RBI & the govt. before announcing the policy would have been more prudent.

Reduction of Stringent Tier 1 Capital norms

Western financial institutions follow stringent provisioning of NPA norms unlike kicking the can down the road phenomena in India, due to political pressure. The RBI seems to have ordered for 5.5% tier 1 capital against 4.5% as per Basel 3 to counter the malady of sweeping NPA's under the carpet. Perhaps, correct provisioning of NPAs should precede reduction of capital norms

Conclusion

GOI is wrong if it sees the RBI actions as the tyranny of the unelected while the RBI is wrong in assuming complete unencumbered autonomy.  The government’s horizon is short term: its elected term of 5 years while that of RBI is long term: to manage financial stability. Governments wish to drive growth & keep various lobbies happy while RBI is focussed on inflation control & price stability & hence clashes are inevitable.  Since a country is more important than a party, it is prudent for the govt. to elicit the RBI’s views & formulate a policy based on consensus; this needs MoF to staff itself with subject matter experts capable of having an informed dialogue with the technocrats of Mint Street. Similarly, RBI should respond to the MoF, even if it disagrees, & conduct Board meetings more regularly, to dispense with the impression of hubris & arrogance. YV Reddy's simple stratagem on how RBI can adroitly manage the relationship with the executive: complete freedom in operational issues, prior discussion with the govt. on policy issues & working in close coordination with the govt. on structural reforms.  Perhaps, a compromise by GOI & RBI, to arrive at a win-win policy framework is the way forward.

How to Manage the Indian Rupee?

The Indian Rupee is in a free fall; 2013 redux, cry the opposition while the BJP ducks the criticism under the smokescreen of better macros: fiscal deficit of 3.3% of GDP in 2018-19 versus 4.8% in 2012-13 & inflation of 3.7% now vis a vis over 10% in 2013.

The fall in the rupee is due to the usual suspects:

(a)Increase in rates by the US Federal reserve that reduced the attractiveness of investing in the Indian markets with Investors seeing the interest rate risk premium offered by Indian markets as inadequate.

(b)The rise in oil prices: Since India imports over 80% of its annual oil requirements, an increase in oil prices increased the trade deficit & hence the current account deficit (CAD); CAD has increased from 0.6% of GDP in 2016-17 to 1.9% in 2017-18 & is likely to touch 2.8% in 2018-19.

Unlike the 2013 crisis which was during the period June-Aug, there is now a liquidity crisis, too, in the market, since advance taxes were paid in Sept. The RBI thus was forced to handle the twin problems of Exchange rate & Liquidity.

The PM chaired a meeting to handle the crisis & announced 5 measures all of which were expected to yield a net inflow of $8-10 billion which was a pittance for a country with around $400 billion in foreign reserves. The initial plan asking private companies to raise $10 million, in External deposits, of 1 year duration, was unfortunate because it is short term & no sane company, because of patriotism alone, will raise external deposits, when rupee is in a free fall. Later oil companies we're asked to pick the tab & they will since they are govt. owned.

The other was a grand statement to reduce imports & increase exports. While the traditional economic logic is that a drop in the value of the rupee would boost exports & reduce imports, the same is not fully true.  India’s imports of oil are in-elastic while imports of coking coal inevitable due to lack of indigenous resources; normal coal would do with less imports if Coal India increases production & private players are allowed a free competition; however, pricing differential between players who won coal mines in auctions & those who have got captive sites, free, would be a problem. Likewise, efforts to reduce gold imports, in 2013, by increasing the customs duty to 10% led to an unintended spurt in smuggling & hence unlikely to be repeated. Reducing imports of electronic items is the only solution – vide increase in tariffs which could invite charges of protectionism, but if played well, especially, when the US-China trade war is underway, could help India attract some of the supply chains from the Chinese mainland exploring a de-risking strategy; however, it will only happen over a period of time.  Increasing exports, too, is time consuming & exporters are currently facing the constraint of delay in GST refunds affecting their working capital needs.  

As expected, the market perceived the measures as inadequate & the rupee fall persisted. The Public Policy Takeaway: The PM should not chair such meetings since it gives a wrong impression of a fully blown crisis beyond the capability of the Finance Ministry – RBI combine to handle; it heightens expectations & announced measures, if meek, triggers panic selling, creating a vicious cycle, leading to a perfect storm.

The best policy solution would have been to stop outflows by raising repo rate by 0.5% & RBI issuing a statement that further raises are possible, if need be, to send a warning signal to the speculators who are currently shorting the rupee. Instead the govt. increased interest rates on small savings schemes by 0.4%.The other solution would have been to push exporters to remit their earnings faster & announcing a policy measure to attract Chinese supply chains, to India, in the medium term.

However, industry does not want a rise in interest rates since debt servicing would become a problem;  RBI, initially used over $25 billion to sterilize the rupee, dropping our foreign exchange reserves to about $400 billion. The rupee continued to drop, though, because there is no attempt to plug a leaky bucket - which is a task a repo rate rise should have performed - & India was facing a liquidity crisis. There is now talk of NRI deposits or increasing FCNR rates, a repeat of Resurgent India bonds of 1998, Millennium India bonds of 2000 or the 2013 NRI bonds. Why these round about ways when a direct repo rate hike would have been effective? Plug the leaky bucket first.

If there is a leaky bucket & water is flowing out - akin to money flowing out due to higher interest rates in US - plugging the leak first to ensure no more water flows out - by increasing the repo rate -would have been a sane choice.  Adding, thereafter, water - NRI deposits, Millennium bonds etc. - to the extent of water already escaped to fill the bucket would have effected stability to the exchange rate. The govt., by concentrating on the latter alone, is obviously, staring at suboptimal outcomes.

The Judgement on Section 377: Grant Of Partial Freedom To the LGBTQI Community

A 5 member Supreme Court (SC) bench, headed by the Chief Justice, Dipak Misra, on 6^th Sept, 2018,  decriminalized” homosexuality, by an unanimous verdict, paving the way for the LGBTQ (Lesbian, Gay, Bisexual, Transgender, Queer) community to lead a life free of discrimination, persecution, harassment & extortion; blackmailers’ included law enforcement authorities, forcing the community to live incognito or in a closet. The judgement opined that homosexuality is not a mental disorder – as argued by certain petitioners – but is a natural biological condition; likewise, the apex court averred that society cannot dictate sexual relationships - between consenting adults – which are wilful & informed. For those who argued on “immorality” of a miniscule minority compromising the social order of the majority, the judgement reminded that constitutional morality out-weights public morality even if it be the majoritarian view.  India, thus, joins the league of nations that recognizes gender identity & sexual orientation & the judgement is likely to have a transnational impact.

The judgement “read down” section 377, of the Indian Penal Code, but did not strike it down from the statute books. “Bestiality” – sex with animals - & “Sodomy” – non- consensual oral or anal sex - still continue as criminal acts; non-consensual vaginal intercourse, that comes under the ambit of Sec 375, dealing with rape, still stands. Minors are further protected under the POSCO Act (Protection of Children from Sexual Offenses). The judgement is, however, silent on civil rights – Marriage, divorce, Adoption, Inheritance etc. - & it will be interesting to watch Parliament & the Judiciary navigate the tricky slopes going ahead.

The SC judgement avoided the issue of civil rights, perhaps, as a consequence of the stand taken by the BJP govt., vide an affidavit submitted by Additional Solicitor General, Tushar Mehta, that the Union of India would subscribe to the wisdom of the honorable court, on the constitutional validity of Sec 377 to the extent that it applies to “consensual acts of adults in private”. The RSS stand against “Gay marriage” lends credence to this assessment.

Section 377 deals with “carnal acts against the order of nature”; in other words any act which does not lead to procreation, like “oral sex” or “anal sex” is proscribed.  Even heterosexual couples indulging in such acts, are deemed criminals under the act. But with the Puttaswamy vs GOI(Government of India) judgement, in 2017, that held “Privacy” as a fundamental right under Article 21 – Right to Life & Liberty -  the same stands corrected & any of those aforementioned acts conducted in privacy, if wilful & informed, is not deemed a criminal offence any longer.  In the same judgement Justice Chandrachud held Article 377 as “unsustainable” since right to privacy & the protection of sexual orientation lie at the core of fundamental rights guaranteed by articles 14 (Right to Equality), 15 (Right against discrimination) & 21(Right to Life & Liberty) of the constitution” paving the way for the current judgement.

Deja Vu

 It was a moment of déjà vu for Gay rights activists, since Delhi High Court’s Justice AP Shah & Murlidhar, delivered a similar sounding, progressive judgement, in 2009, only to see it reversed, in 2013, by a 2 member bench of the Supreme Court of Justice GS Singhvi & SJ Mukhopayhaya. Petitioner, Suresh Kumar  koushal, had appealed against the Delhi HC judgement – on the grounds that homosexuality  is “immoral” & “threatens national security” & was paradoxically, supported by various Christian & Muslim religious outfits; in a polarized India, religious fundamentalists, otherwise at loggerheads, joined hands to deny LGBTQ community their rights.

While the SC judgement left it to the discretion of Parliament to delete the provision,  political invertebrates could not arrive at a consensus on the issue; a private member bill introduced by MP(Member Of Parliament), Shashi Tharoor, to decriminalize homosexuality, was voted out in the Lok Sabha, in 2015 A curative petition was than submitted by the Naz Foundation, arguing that the SC Judgement wrongly held that “ a miniscule fraction of the population cannot claim fundamental rights” & is now rewarded with a revised pronouncement.

The NALSAR judgement by the SC, in 2013 gave transgenders the right to be treated as the “third gender” in line with India’s obligations to international treaties & Yogyakarta principles. Reading down of sec 377 was, in a way, an extension of the same reasoning of progressive jurisprudence,

Brief History

Section 377, is of a colonial vintage – year 1861 to be precise – a reflection of Victorian prudishness. Bibek Debroy, in an article in the Indian Express, avers that Section 377 was liberal “for its times” since the section reduced punishment from a death sentence – under the English Buggery Act 1553 - to a maximum of life imprisonment. Oscar Wilde & Alan Turing were some of the beneficiaries of the changed statute. 

Indian society is replete with sexual permissiveness as reflected in the Kamasutra & Natyashastra texts,  Puranic stories of men becoming women & vice versa, Khajuraho sculptures etc. Medical texts like Charak Samhita too have references to queers. Devdutt Patnaik opines that the presence of over 50 words for non-heteronormative genders and sexualities for the past 3000 years, since Vedic times, in Sanskrit, Prakrit and Tamil, reveals a rejection of binaries. Customs like invitation to transvestite “hijra” members to bless a newly born, indicate social inclusivity which, unfortunately, turned regressive due to a colonial legal intervention & India refused to do away with it despite England revoking the statute, in 1967 & allowing gay marriages in 2013, with many former British colonies followed suit. In Britain, a Royal, Lord Mountbatten, is planning to marry his partner, James Coyle, next summer, with his former wife doing the honours, of giving him away, setting an new precedence.

Way Forward

Many people fear revealing their LGBTQI identity anticipating mockery or ostracisation from family & society; they endure the ignominy of participating in rituals & therapies to cure the so called malady; after all, the process is the punishment. With the current judgement not only ensuring protection but also eliminating persecution from law, the onus is now on civil society along with NGOs’ to lead the onerous task of transmitting the message. Psychological counselling, for parents, to accept their kids for what they are is important since they form the most important support base for their progeny. Education in schools to look beyond binaries would need a change in the education policy & purists would scoff at such a suggestion. Making schools & workplaces inclusive - avoiding discrimination & prejudice - by launching anti bullying programs would be an acceptable alternative. Affirmative action, as per Justice AP Shah, is needed to ensure a frictionless integration of this community into the society.

The Naz Foundation filed a petition in the Delhi High Court to decriminalize homosexuality, in 2001, & it took 17 long years, of a topsy turvy battle, to bear fruition; granting civil rights to the LGBTQI community, could pass through a, similarly, torturous process. Meanwhile, the long walk to ultimate freedom continues.

The Controversial Terms of Reference (TOR) of the 15th Finance Report & Way Forward

The NDA govt. constituted the 15^th Finance Commission (FC), under the Chairmanship of the former Finance Secretary & Planning commission Member, N K Singh, & the TOR (Terms of reference) announced soon, thereafter, had some southern states – AP, Karnataka, Pondicherry & Kerala – fuming & up in arms with others like Punjab, Delhi & Bengal joining the chorus later. Clearly, it is not a North- South divide as it was originally postulated because of two reasons

(a)Tamil Nadu & Telangana are not part of the protest, perhaps, because the former’s AIADMK govt.  genuflects before the Centre while the latter has nothing much to lose under the revised TOR

(b)Northern states like Punjab & Delhi along with the Eastern state of Bengal joined the protest indicating that it is a pan India protest of states negatively impacted by the new guidelines.

The TOR of the last 4 finance commissions – as shared by PRS Legislative Research – follows & the weights assigned to each criterion explains the reasons of angst of some states.

Period	2000-05	2005-10	2010-15	2015-20
Finance Commissions	11th	12th	13th	14th
Income Distance*	62.5	50		50
Population 1971	10	25	25	17.5
Population 2011				10
Index of Infrastructure	7.5
Fiscal Discipline**	7.5	7.5	17.5
Tax Effort	5	7.5
Fiscal Capacity Discipline			47.5
Area	7.5	10	10	15
Forest Cover++				7.5
% Transfers to States from Central pool	29.5	30.5	32	42

 +All weights listed are in %

*Income distance is the difference between the per capita income of a state (State GDP/Population) & the average per capita income of all states. States with lower per capita income may be given a higher share to maintain equity among states.

** Ratio of own revenue receipts of a state to its total revenue expenditure relative to the corresponding average across all states

++States like Arunachal Pradesh, Chhattisgarh, Madhya Pradesh, Karnataka and Jharkhand gained due to the “Forest Cover” criteria.

The Opposition

The TOR of the 15^th FC seeks recommendations based entirely on the 2011 census which, needless to say, penalizes states which have done better in the implementation of the family planning programs & incentivizes the cow belt BIMARU states – Bihar, Jharkhand, MP, Chhattisgarh, Rajasthan & UP. P Chidambaram tweeted "According to the 1971 Census, the southern states' population was 24.7% of the total population; according to the 2011 Census data it had fallen to 20.7%; clear punishment for states that had performed splendidly between 1971 and 2011 in stabilising their population.” Former Karnataka Chief Minister, Siddaramaiah argued that “for every one rupee of tax contributed by Uttar Pradesh, that state receives 1.79. For every one rupee of tax contributed by Karnataka, the state receives 0.47. While I recognize the need for correcting regional imbalances, where is the reward for development? Or how long, can we keep incentivizing population growth?” Currently, while the Indian fertility rate is about 2.3%, that of Bihar & UP are at 3.4% & 3.1% respectively.

The other criticism of the TOR is that by suggesting that revenue deficit grants may not be provided at all, the 15th FC is being nudged towards violating the provisions under Articles 275(1) and 280(3b) of the Constitution, effecting about 11 states which gained  a total revenue deficit grant of Rs 1,94,821 crore as per 14^th FC recommendations.  

While the 14^th FC increased the divisible pool of central taxes to states to 42% from 32% earlier, the 15^th FC is being nudged to review the same downward, raising questions on “fiscal autonomy” & “federalism”. It must be noted that the 14th FC covered the requirements of both plan and non-plan expenditure, & hence in reality, the increase was only from 39%to 42%, & the argument that greater devolution led to reduction in fiscal space for the centre, appears specious.   With each state at different growth phases, greater devolution not only to the states but to local bodies & Panchayats – going forward – would be a better policy.

Finance Minister, Arun Jaitley, strongly defended the ToR of 15th FC, as expected, saying that a neat balance between “needs” - represented by latest population - and “progress towards population control” has been achieved.

Equity demands that transfers be on a per capita basis & hence “latest population” becomes a legitimate criteria; but states which have invested aggressively in health care & education to drive family planning programs & reduced fertility rates would lose out in the bargain & hence the need to be compensated elsewhere. Likewise, Income distance measures the fiscal capacity of a state in raising resources (State GDP/Population) vis a vis the national average & states which were plagued by bad governance could not raise the numerator (State GDP) nor slow down growth in population explosion - due to ineffective family planning programs – which ended up bloating the denominator. It is probable that “income distance” would have a 50% weightage & Population - as per 2011 census - a 25% weightage in the 15^th FC recommendations which means that population directly or indirectly effects devolution of about 75% of resources; perhaps, this is too high.

States with larger “Area” have to spend more on service delivery & a 10-15% weightage seems legitimate. 

Other Concerns

The bigger elephant in the room is whether the govt. would use the latest census figs to conduct the delimitation exercise for determining Legislative Representation going forward.

The 42^nd amendment to the Indian Constitution, 1976, initiated by the Indira Gandhi govt., froze state wise representation, in the Lok Sabha, based on the 1971 census figs, until 2000, while the 91st amendment, 2001, moved by the Vajpayee govt. extended the same, until 2026. Shashi Tharoor avers that “it was based on the sound principle that the reward for responsible stewardship of demography and human development by a state could not be its political disenfranchisement.”

The way forward, though, is tricky; article 81 of the constitution mandates that the nos. of the Lok Sabha cannot exceed 550; thus, the delimitation exercise, if taken up, could see the 2031 census figs, emerging as the basis necessitating

 (a)Either an increase in Lok Sabha seats beyond 550, necessitating a constitutional amendment. This might not lead to better legislative process though, since the Speaker today is unable to manage a crowd less than 550 & increased nos. could only enhance bedlam. 

(b)Alternatively, reallocation within the same 550 nos. is a solution which shall incur the ire of states that have done well in implementing family planning programs.

NS NIlakantan in an article published in "The Wire" on 15/2/2018, gives state wise losses/gains in seat allocation if option (b) is adopted

States/UTs That Will Lose Seats		Gain seats		No Change
Tamil Nadu	-7	Delhi	1	Uttarkhand	0
Kerala	-5	Jharkhand	1	Jammu and Kashmir	0
Andhra Pradesh (United)	-4	Gujarat	1	Puducherry	0
Orissa	-2	Haryana	2	Tripura	0
Arunachal Pradesh	-1	Maharashtra	2	Assam	0
Goa	-1	Madhya Pradesh	4	Nagaland	0
Karnataka	-1	Rajasthan	6	Chhattisgarh	0
Himachal Pradesh	-1	Bihar	6
Lakshadweep	-1	Uttar Pradesh	9
Mizoram	-1
Dadra and Nagar Haveli	-1
Andamans	-1
Manipur?	-1
Punjab	-1
Sikkim	-1
Meghalaya	-1
West Bengal	-1
Chandigarh	-1
Daman and Diu	-1

There is reason to believe that the BJP is floating the trial balloon, of the “2011 population criteria” under the 15^th FC, so that they could gain during the delimitation exercise, in the “cow Belt states where the party is stronger.  The fair compromise arrived in 1976 to freeze political representation vide state wise Lok sabha representation & allocation ratios based on 1971 population is now jeopardized. .

Way Forward

(1)The 15^th FC should not reduce devolution from the central pool below 42%:

With increased devolution of 42% to the states vide the 14^th FC, the no. of centrally sponsored schemes were reduced from 66 to 28; prudent to  reduce them further to about 10 by eliminating thinly funded schemes like Blue Revolution (401 cr), Stand-up India (520 cr), National Ganga Plan (2250 cr), Khelo India (350 cr) etc.

(2)Incentivize better performing states under different criteria:

Prudent to incentivize better performing states under the heads of “Fiscal Discipline”’ “Fiscal Capacity Discipline” & “Tax Effort” as it happened until the 13^th FC. Supporting sustainable development to manage climate change vide criteria such as “Forest Cover”, “Air quality” etc. is recommended. Introduction of a “Family planning” criterion would push laggard states to invest on healthcare, education & Asha workers to reduce fertility rates.

(3) Increase direct devolution to local bodies

India has been fortunate to have many good Chief Ministers during the last 20 years who have pushed newer boundaries in developing their states. It is time we have good Mayors too at least in the top 500 towns/cities. The 14^th FC offered grants of upto 6% to the local bodies & it is prudent that the fig. gets enhanced to 15% to address local – both urban & rural local body - issues better.

Conclusion

The very idea of India as a robust nation is a great refreshing thought that needs compromises & consensus building from all sides based on the spirit of accommodation. Thus while the BIMARU states should gain due to devolution based on the 2011 census figs, the South & other effected states should be compensated with a  freeze on political representation – state wise Lok Sabha seats - until 2050. Since surpassing China in Population is not something to be proud of, addition of the “Family Planning” criteria is recommended to push states towards desired outcomes even while “Sustainable development criteria – Forest Cover, Air Quality etc.” need to be introduced to push state governments towards exploring out of the box solutions to manage climate change.