1971 vs 2011: Time to question governments specifying census year for finance commissions

When Prime Minister Narendra Modi called critics of the population norms in the terms of reference (ToR) of the Fifteenth Finance Commission (XV-FC) as `vested interests’, he was clearly exasperated.

The Congress and Communist governments of Karnataka and Kerala respectively are spearheading a northern-versus-southern-states battle, saying that the ToR works against their interests. The ToR specifies that the XV-FC should use the population figures of the 2011 Census (instead of the 1971 Census, in the case of the earlier Finance Commissions) whenever it had to take population into account when determining the share of individual states in fiscal transfers. Southern states, they say, will get a raw deal since they had made good progress in population control.

But Modi’s put down would have been more effective if he had, instead, pointed to para 8.25 of the report of the Fourteenth Finance Commission (FFC): “Though we are of the view that the use of dated population data is unfair, we are bound by our ToR [specifying use of the 1971 population figures]”.

Note the words: `unfair’ and `dated population data’.

Or if he had asked his predecessor Manmohan Singh and his finance minister P Chidambaram about the wording of this particular ToR in the case of the FFC, which was set up when they were in power. While specifying the use of the 1971 population data, it also said the Commission “may also take into account the demographic changes that have taken place subsequent to 1971”.

 1971 vs 2011: Time to question governments specifying census year for finance commissions

Prime Minister Narendra Modi. File Photo. PTI

Why did this ToR bring in 2011 data when earlier ToRs only mentioned 1971 population data, including the ToR of the Twelfth Finance Commission, which was also set up by the Manmohan Singh government in 2009? Was this not a signal that 2011 data should also be factored in? Was this not meant to be a kind of preparation for the use of just the 2011 data? If the Congress government saw merit in bringing in 2011 population data for the FFC, why is it opposing its use by the XV-FC? The Congress needs to answer this.

In the wake of the current controversy, there has been much commentary about population growth/decline rates in individual states but the  more important point is this: Should expenditure needs of a state be based on 40-year-old population figures?

M Govind Rao, member of the FFC, pointed out in a panel discussion Finance Commission transfers are meant to enable states to provide comparable levels of services to residents. “When you say comparable levels of services to state means services for the current population and not 2011 or 1971 population (emphasis added).” Why, he asks very pertinently, did the ToR have to mention anything about the population at all?

Why indeed? But this is not something this government alone should be faulted for. The ToR of the first six Finance Commissions did not make any mention of population data at all. It was only in the case of the Seventh Finance Commission, constituted in  1978, that the ToR specified the use of 1971 population figures.

Some subsequent  Finance Commissions raised objections to this. Specifically, the report of the Eleventh Finance Commission said: “We do feel that it is better to avoid a conditionality like this [specifying a particular Census year] in the ToR and a decision on such matters should be left to the best judgement of the Finance Commission.”

The FFC got around the `unfair’ situation by taking both the 1971 and 2011 population data and assigning a 10 percent weight to the latter. The XV-FC may perhaps try to address the objections raised by some other kind of tweaking. But the larger point remains: Why should the ToR of a Finance Commission bind it down to a particular census year? Surely the governments that set the ToR  for the first six commissions had some reason for not specifying this? Perhaps it is time for some serious debate on this issue.

In rubbishing the allegations of the Karnataka and Kerala chief ministers of an inherent bias in the present government towards the southern states, both the Prime Minister and Finance Minister Arun Jaitley have pointed out that there are enough ways the ToR enable better performing states to be rewarded.

Indeed, point number 7 suggests that the XV-FC “may consider proposing measurable performance-based incentives for States, at the appropriate level of government, in following areas” and goes on to list nine parameters. Of these “efforts and progress made in moving towards replacement rate of population growth” is the second.

But this cannot be a palliative. Because setting such a condition is itself flawed. In fact, some public finance experts would even call it unconstitutional. A Finance Commission is a constitutional requirement. It is meant to lay down principles for the devolution of taxes and grants-in-aid to the states and the distribution of these transfers among states. At some point in the nineties, it became acceptable for some conditions of good behaviour to be added into the ToR. The ToR of the XV-FC takes this to a whole new level by even bringing in ease of doing business, progress made on sanitation and  controlling populist measures.

But is it the job of the Centre to be dictating (because that is what this really is) priorities to state governments? As this article pointed out, state governments had been chafing at the conditionalities in cookie-cutter grants they got for various central government schemes. They had sought freedom to use resources according to the priorities of their individual states. Heeding this, the FFC had given a larger share of untied resources to them. The XV-FC ToR number 7 lays  the ground for reversing this fiscal freedom states got.

This particular point is, technically, among the non-core ToR – the core ToR relates to devolution and distribution of taxes and grants-in-aid. Recommendations relating to the non-core ToR are generally kept on the back-burner. But from the Prime Minister’s and Finance Minister’s statements following the current controversy, this will be implemented if the current government  returns to power. This is actually the real danger.

(The writer is a senior journalist. She tweets at @soorpanakha)

Updated Date: Apr 14, 2018 11:05:20 IST