On April 10, Kerala, Karnataka, Andhra Pradesh and Puducherry expressed their strong reservations against the terms of reference (ToR) that will be used by the recently constituted 15th Finance Commission (FC) to frame its recommendations. A day later, Tamil Nadu government joined the chorus through an official statement. The major worry of these Southern states, and a Union Territory, seemed to be the revenue hit they will have to take if the Commission uses the population census data of 2011 (instead of the long time practice of 1971 census) as proposed in the ToR, as the basis to calculate the share of union tax revenue that should go to each state. Compared to their counterparts in other regions, especially North India, population growth control has been very effective in the last four decades in the South. Hence population data should be historic, and not recent, if such well administered states should be rewarded for their efforts and achievements, these governments say.
Finance Minister Arun Jaitley calls it a "needless controversy". The ToR, according to Jaitley, is not loaded against any particular region of the country. "The share in Central taxes is allocated to the States based on recommendations made by the FCs to help States meet fiscal deficiency in providing a minimum standard of services to their people. This calls for assessing States' 'needs' on rationale and equitable basis. FCs use appropriate criteria to assess true needs of States. Population proxies very well for the needs of the people in quantitative sense", Jaitley points out.
With just another year to go for the general elections, one cannot blame Jaitley for discrediting any voice that may have the ability to wean away voters from the ruling party. The fact that all the States that are complaining are non-BJP ruled ones can only strengthen this belief.
The timing of the complaint and the manner in which non-BJP ruled states want to synchronize their protests by projecting it as a deliberate anti-South decision by BJP might have been driven by political considerations, but the main issue, the debate over the census data that should form the basis of FC's recommendations - is real. The very same issues were flagged before the previous, 14th FC too during stakeholder consultations.
To quote the 14th FC, "the core mandate of the Finance Commission, as laid out in Article 280 of the Constitution, is to make recommendations on the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them, the allocation between the States of the respective shares of such proceeds and the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India." The role of the FC got widened after the 73rd and 74th Constitutional amendments to recognise the rural and urban local bodies as the third tier of government and recommend measures to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities based on the recommendations of the respective State Finance Commissions (SFCs). The mandate of FCs also got expanded over the years after a Presidential order under Article 280 (2c) provided for the Commission to consider any other matter referred to the Commission by the President in the interests of sound finance.
Further, as Arun Jaitley points out in defence to the ToR of the 15th FC, the previous 14th FC were also allowed to take into account the demographic changes that have taken place since 1971. The 14th FC did make use of the 2011 population numbers and provided a 10 percent weight-age in its revenue sharing proposal calculations.
Without identifying the states, the 14th FC report reveals that nearly half of the states wanted the 2011 Census data on population to be used for the purpose of devolution. The other half insisted the 1971 population data to be the sole criteria for distribution of resources. The debate is not new.
The previous FC's recommendation clearly mentions where it has introduced this change. It recommended distribution of grants to the States for local bodies using 2011 population data with weight of 90 per cent and area with weight of 10 per cent. "The grant to each State will be divided into two - a grant to duly constituted gram panchayats and a grant to duly constituted municipalities, on the basis of urban and rural population of that State using the data of Census 2011", it states.
The census debate might have been the shrillest, but there are other issues too that were pointed out by the complaining states. For instance, Andhra Pradesh Finance Minister Yanamala Ramakrishnudu opposed most of the items in the ToR. He called for scrapping an entire section that talks about performance based incentives to states, stating that it leads to discretion, arbitrariness, and is very subjective. Terming that the Centre should not be left to decide which state scheme is populist or not, he said that schemes are made to suit the needs of the people. "Mid day meal scheme which was thought of as populist scheme earlier has become a national flagship scheme. Schemes which are ahead of time may be misunderstood as populist", he points out.
The Southern states will continue to voice their concerns. The April 10th meeting of the finance ministers of three states and one UT had ended with a call to request the President (who notifies the ToR and the setting up of FCs) to review the terms of reference of the 15th FC. There has been several instances of additional terms getting added to the original ToR. While economics might call for an early and amicable resolution of the problems to help FC carry out its tasks with clarity, continuing confusion might be in the interest of Opposition parties in an election year.