Four southern govts say terms of reference of 15th Finance Commission unfair: Meet brings back North versus South debate

Three non-BJP ruled southern states and Union Territory Puducherry came out against the Terms of Reference stipulated by the Centre in the 15th Finance Commission for devolution of funds to states. At a conclave of finance ministers of southern states held in Thiruvananthapuram on Tuesday, Kerala, Karnataka, Andhra Pradesh and Puducherry said that the Terms of Reference (ToR) was in contradiction to the principles of Federalism enshrined in the Constitution and also would result in revenue loss to performing states.

The ministers from the four southern states also strongly opposed the ToR recommendation to use the 2011 Census to calculate population for allocation of Union tax revenue in place of 1971 Census, which was used by previous Finance Commissions.

However, AIADMK-ruled Tamil Nadu and TRS-ruled Telangana opted out of the conference, hosted by Kerala to discuss issues of common concern with respect to the 15th Finance Commission. Briefing reporters on the deliberations of the conclave, Kerala finance minister TM Thomas Isaac said a similar conference would be held at Visakhapatnam either in April end or May first week to finalise a memorandum seeking changes in the ToR.

File image of Union Finance Minister Arun Jaitley. PTI

File image of Union Finance Minister Arun Jaitley. PTI

"We will see that Tamil Nadu and Telangana along with more states like West Bengal, Odisha, Punjab and Delhi attend that conference," Isaac said. Stating that all states would be affected, he said BJP-ruled states were also welcome to the conference.

However, he expressed doubt about their participation as ToR was drawn up by the BJP government at the Centre. The memorandum would be submitted either to the President or to 15th Finance Commission Chairman, he said.

Since its formation in November 2017, the 15th Finance Commission has been a matter of contention among the southern states. The Finance Commission is a crucial constitutional set-up which decides every five years the ratio in which Central tax revenue should be divided among the different states.

All the states and Union Territories in India are collectively allocated 42 percent of the Central taxes collected each financial year. The remaining 58 percent is for the Centre to use for national purposes. But the ratio in which the 42 percent gets divided among the different states is decided by the Finance Commission. On 27 November, 2017, the Ministry of Finance issued a notification constituting the 15th Finance Commission under the chairmanship of NK Singh.

In the same notice, one of the ToR stated that the "Commission shall use the population data of 2011 while making its recommendations". Traditionally, the previous Finance Commissions used population data from the 1971 Census as a standard. In fact, Lok Sabha constituencies were also divided based on this data and are set to remain frozen this way until 2026. The reason the 1971 Census was used as the standard is as it was the last Census before aggressive family control initiatives were implemented.

After Tuesday's meeting, there were few who thought that there was an attempt to reduce the Centre's share to states through the 15th Finance Commission, he said. "If this is allowed to succeed, states would become glorified municipalities," Isaac said. The 15th Finance Commission is expected to visit the state in May, he said. Issac also said the conclave was the beginning of a debate on Centre-State relations.

The North-South debate

The decision to include 2011 Census was first introduced in the 14th Finance Commission, which gave a 10 percent weightage to the 2011 Census while allocating the Central tax revenue. Like this piece in The Wire noted, the political consensus was that the ratio of distribution cannot be arrived at based on current population after asking states to implement family planning measures.

The argument the southern states are making is that in the decades between 1971 and 2011, these states saw a steady decline in population growth rate, whereas northern states showed no such sign. The contention made by leaders like MK Stalin and Siddaramaiah is that using the 2011 Census data would result in a much-reduced flow of Central funds to the state, which they term as "punishment" for investing in education and health schemes to reduce the fertility rates and see an uptick in literacy rates.

"We are all aware that the terms of reference of the 15th Finance Commission have created apprehension about principles of fairness and equity in the distribution of national resources for development," Kerala chief minister Pinarayi Vijayan said on Tuesday while inaugurating the conclave. Attacking the BJP-led NDA government, he said ToR was unprecedented in asking the Commission to consider proposing performance-based incentives beyond those relating to fiscal responsibility, population and devolution to local bodies.

"This reflects the viewpoint and ideological inclinations of the Central government and are attempts to micro-manage the fiscal domain of states'," he said. Andhra Pradesh finance minister Yanamala Ramakrishnudu said they were not blaming the Finance Commission or its composition. They were against ToR 'unilaterally' stipulated by the Centre without consulting states, he said and demanded that it be reframed after discussions.

One of the ToR asks the Finance Commission to incentivise "efforts and progress made in moving towards replacement rate of population growth". Joint secretary of the 13th Finance Commission V Bhaskar noted in The Economic and Political Weekly that the replacement level fertility rate is defined as the total fertility rate (TFR) of 2.1. Out of the 29 states in India, 18 have already achieved the desired replacement rate of 2.1 or less, including all the southern states.

Female literacy rates in states like Kerala and Tamil Nadu are much higher than in states like Bihar and Uttar Pradesh. This shows a correlation between education and health; states with better literacy seem better prepared to implement family planning measures.

As The Wire noted in its report, between 1971 and 2011, Tamil Nadu and Kerala showed an absolute population growth of 56 percent and 75 percent respectively — the lowest among all the states. Most other states showed an increase in the population growth exceeding 100 percent. Uttar Pradesh's showed an absolute population growth of 138.02 percent, while Jammu and Kashmir recorded the highest at 171.82 percent.

When the 14th Finance Commission introduced the change in ratio by including the 2011 Census data, it translated to a revenue loss of Rs 6,000 crore for Tamil Nadu, 19 percent compared to the 13th Finance Commission's allocation ratio, making it the worst affected state. If the 2011 Census data is solely used by the 15th Finance Commission, it could result in a loss of nearly 70 percent of Central tax revenue it was allocated by the 13th Finance Commission, the report further stated.

In a statement on Wednesday, Finance Minister Arun Jaitley termed the controversy over the finance commission’s recommendations “needless”. The Union finance minister pointed out that the 14th Finance Commission, which increased the share of states’ revenue to 42 percent from 32 percent, had already set a precedent by giving 10 percent weightage to the 2011 census data. He added that the ToR of the 15th Finance Commission includes a provision for rewarding with special incentives states that have done well in terms of population control. "There is no inherent bias or mandate in the ToR of the 15th Finance Commission which can be construed as discriminatory against the states which made good progress in population control," Jaitley said.

With inputs from agencies


Updated Date: Apr 11, 2018 16:22 PM

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