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.