15th Finance Commission: PM Narendra Modi refutes terms of reference changes

Prime Minister Narendra Modi on Thursday sought to calm the southern states, which are protesting the 15th Finance Commission’s (FFC) terms of reference (ToR) for its alleged potential to reward populous states at their cost, saying the Centre had, in fact, suggested to the commission to “consider incentivising the states who have worked on population control”. Inaugurating the diamond jubilee building of the Cancer Institute in Chennai, Modi said, “I would like to remind you this (incentive for population control) was not the case earlier.” The prime minister said, “Baseless allegations were being made about the ToR being biased against certain states or a particular region,” adding that by the yardstick to be employed by the commission, “a state like Tamil Nadu which devoted a lot of efforts, energy and resources for population control would certainly benefit”. The FFC, whose award will be valid for the 2020-25 period, will rely on the 2011 Census data, while the 1971 Census numbers were mostly used by the previous finance commissions; the 14th commission, whose award (2015-20) is now being implemented, had given weight to both the 1971 (17.5%) and 2011 (10%) censuses.

As per the ToR, among the measurable performance-based incentives, the FFC would consider “efforts and progress made in moving towards replacement rate of population growth”. States like Tamil Nadu and Kerala are expected to benefit the most from this. On Tuesday, the finance ministers of three southern states — Karnataka, Kerala and Andhra Pradesh — and the chief minister of Puducherry had assembled in Thiruvananthapuram and articulated their shared concerns over the ToR and called for its reformulation. Apart from the FFC’s proposed reliance on the latest census to ascribe the weight for population, the southern states also alleged that its other performance-based criteria also militated against federalism. While Tamil Nadu and Telangana did not attend the Thiruvananthapuram conclave, Tamil Nadu chief minister E Palanisami is on record denouncing the ToR.

Many experts have, however, refuted the arguments of the southern states. They pointed out that the previous finance commissions’ awards haven’t made any clear or permanent winners or losers or reflected regional biases. For instance, if the share of Tamil Nadu and Kerala in tax transfers from the Centre declined steadily over the last four finance commissions, so have the shares of Bihar and Odisha. The 14th FC’s tax award saw Bihar and Uttar Pradesh among losers while Karnataka and Kerala were among the gainers. Also, the poorer states rely much more on the Centre for revenue, than the more developed ones do, as the latter have more robust source of own revenue (in Bihar’s case, for instance, 60% of the tax revenue came from Centre’s devolution in 2015-16, while the corresponding figure for Tamil Nadu was just 20%).

Finance minister Arun Jaitley has said that a needless controversy was being sought to be created that the ToR are loaded against any particular region of the country, adding that “nothing could be further from truth”. In a Facebook post on Tuesday, the minister said the ToR rightly balance both the ‘needs’ represented by latest population and “progress towards population control”. There is no inherent bias or mandate in the ToR that can be construed as discriminatory against the states that made good progress in population control, he had added. His predecessor P Chidambaram, however, believes the ToR is “seriously flawed” and “would adversely affect the better-performing states”. According to the 1971 Census, the southern states’ population was 24.7% of the country’s total population and this has fallen to 20.7%, as per the 2011 Census, he pointed out in column that appeared in Sunday FE on April 8. Although it is for the FFC to assign the relative weights to various parameters in deference of the ToR , the 14th commission had assigned a 50% weight to income distance (for the benefit of poorer states), followed by 15% to area and 7.5% to forest cover.

While states now lay their hands on 42% of the divisible pool of central taxes thanks to the 14th commission’s award (compared with 32% earlier), the new commission’s ToR include assessing the burden on the Centre due to the national development programme and the impact of the previous commission’s award to states on the Centre’s finances. This is being viewed by many as a signal to the commission to cut the tax devolution rate. Also, states like Kerala are opposed to the inclusion of the Centre’s policies and programmes, including its flagship schemes, direct benefit transfers, digital economy, ease of doing business, sanitation, etc, among the performance-based incentives for states and consider the commission’s mandate to have a critical look at the state governments’ “populist measures” as an infringing on their autonomous political space.

The divisible pool during the period of the 14th FC award is estimated at Rs 94 lakh crore; of this, states are receiving Rs 44.86 lakh crore (47.72%) — Rs 39.48 lakh crore (42%) as tax transfers and Rs 5.37 lakh crore (5.72%) as grants-in-aid. In fact, as a fraction of the divisible pool, the Centre’s aggregate transfers — which include assistance to centrally sponsored schemes and (previously) central assistance to state Plans apart from commission-awarded tax devolution and various grants — have remained more or less constant before and after the 14th FC. The aggregate transfers continue to be around 61% of the divisible pool, even as mandatory (unconditional) transfers is higher now thanks to the 14th FC award.