Events & Issues
New
Delhi, 27 April 2018
15th Finance Commission
TEST FOR FEDERALISM
By Dr S. Saraswathi
(Former Director, ICSSR, New Delhi)
The Terms of Reference (ToR) to the 15th
Finance Commission have provided another issue to different forces trying to bring
together non-BJP parties against the Union Government. This time, it is in the
guise of asserting State rights and fighting injustice in the exercise of federal
fiscal powers. There is propaganda that the Centre is attempting to reduce the
States as glorified municipalities.
The issue over the ToR contains several
sub-issues -- performance of States in carrying out population control
measures, North-South divide in population control, the logic of changing the
base for population criteria in determining fund share of States and so on.
Even BJP-friendly parties are under political compulsion to question the Union
Government’s proposal lest it should be understood and painted as pro-Centre and
anti-State equated as anti-people stance.
A conclave of Finance Ministers of southern
States of India was convened recently by Kerala Government with the idea of
initiating a dialogue on the 15th Finance Commission, particularly
on its ToR, which were considered as “unjust”. The idea gained ground as there
was a belief that these were “in contradiction of the principles of federalism
enshrined in the Constitution”. The aim was to stop what was perceived as the
Centre’s attempt “to impose stringent conditionalities on State
Governments”.
Some States were disappointed that the Centre
did not consult them on the ToR to the Commission. The CPM stated that the
terms were intended to reduce the tax share of the States in devolution, impose
unacceptable conditionalities, and accord priority to Centrally Sponsored
Schemes over that of the States.
It was the first such conclave and was held
at Tiruvanandapuram on 10th April. Finance Ministers of Andhra
Pradesh, Karnataka, and Puducherry besides the host State, Kerala attended the
meeting while Tamil Nadu and Telangana stayed away. Incidentally, one must
acknowledge the reality that it is not easy to bring together neighbouring States
and present regional unity where it does not exist.
Efforts are on to convene a second conclave with
enlarged participation of States under non-BJP governments like Delhi, Mizoram,
Odisha, and Punjab. It is a political move entangled with economic interests.
Though Tamil Nadu stayed away from the
conclave, it sent a communication to the Commission registering its strong
disapproval of some of the clauses in the ToR. It called for granting weightage to the share of respective States
in Central tax revenue. The existing arrangement has delinked the size of the
State’s contribution and its eligibility for funds. Tamil Nadu further resented
the clause pertaining to Central Government’s flagship schemes which amounted
to discrediting some of the popular schemes of the State government.
The 15th Finance Commission was
set up in October 2017 under Article 280 of the Constitution and deals only
with the Central tax revenues. It is the body to make its recommendations to
the President as to how the tax revenue collected by the Centre should be
distributed among the States and the principles which should govern the
grants-in-aid of the revenues to the States out of the Consolidated Fund of
India. These are matters of immense significance economically for equitable
growth of all States, and politically for smooth Union-State fiscal
relationship. In either side, it is a crucial instrument to exercise financial
control over the States by the Centre and a principal determinant of the
efficacy of our federal system.
The conclave was particularly seized of the
issue of taking 2011 census population figures as the basis for devolution of
tax revenue to the States. Southern States on the whole have been keen on
implementing population control measures for many decades. Andhra Pradesh, Goa,
Karnataka, Kerala, Puducherry, Tamil Nadu, and Telangana have
already reached replacement fertility rate of 2.1 and therefore, their
population growth is small.
Population growth of Kerala has dropped from
19.24% in 1970s to 14.32% and 9.43% in subsequent two decades. Both Kerala and
UP present contrasting pictures in population growth-- 4.86% in the former and
20.09% in the latter, since 2000. Eleven States are likely to be affected
adversely by taking 2011 census figures as the base.
The Commission’s proposal to provide
incentives to States that are striving to achieve the fertility rate of 2.1
would not benefit the Southern States that are already below that level. Calculations
on 2011 census basis show that UP will be the biggest gainer to increase its
share from 15.3% to 16.5% followed by Rajasthan increasing its share from 4.7%
to 5.7%. Other gainers would include Bihar, Madhya Pradesh, Haryana, and J&K.
Tamil Nadu would lose by 1.6% and Kerala by 1.1% and Andhra Pradesh by 1%.
Though population is not the sole determinant
of fiscal devolution, the affected States have reason to feel aggrieved that
they are being punished for being earnest about population control and
efficient in implementing family welfare programmes. It is overlooked that States
that have brought down fertility rates face certain other population problems
like the care of the elderly.
Indeed, the development agenda of States cannot
be uniform and cannot progress at uniform pace as these depend on numerous factors.
States also make different kinds of contributions to the nation’s welfare and
security -- all of which are essential for the nation’s progress.
Contributions of tax revenue from southern
and western States are more than from other States. Whether this should be taken into account in
disbursal of funds is a ticklish issue in a country made up of areas at
different levels of development due to historical, geographical and social
factors. However, no State in the Indian federation, familiar only with water
quarrels and linguistic pride, would magnanimously offer its revenue to other
States for their development.
It is a test for our federalism. It is a
challenge for the Union Government with national interests on top of its agenda
to provide for the requirements of all States without being unjust or
prejudiced. Other federal governments have different objectives and mechanisms.
In Australia, the federal government collects
extensive revenues, but its power to spend directly is rather limited. Two
types of payments are made to States -- Specific Purpose Grants (SPG) according
to specific agreements between the federal government and the States; and
General Revenue Assistance (GRA) which is mostly the share of GST. The amount
each State finally gets is based on the principle of horizontal fiscal
equalization (HFE). Distribution of GST is done on the recommendation of the
Commonwealth Grants Commission (CGC).
In Canada, “equalization payments” are made
to the less well-to-do States to improve their fiscal capacity. A distinction
as “have province” and “have-not province” is introduced which at times creates
tension between provinces. In Brazil, redistribution is done with the idea of favouring
States with lower HDI ranking.
Thus, there is no universally applicable
solution to guide Union-State fiscal relations, but a common problem of unequal
development is present. We should avoid putting better performing States at a
disadvantage and also discourage the growing culture of dependency amongst non-performing
States. ---INFA
(Copyright, India
News & Feature Alliance)
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