15th Finance Commission: A Ticking Time Bomb

The Modi government has issued a below-the-radar public notification which is nothing but a ticking time bomb. It announced that the newly set up 15th Finance Commission would consider 2011 Census as the basis of its recommendations on how much funds are to be transferred to states from the central pool. This may sound like an arcane piece of bureaucratic procedure but in reality it has wide ranging implications.

In 2018-19, the central govt. has envisaged a total transfer of over Rs.12.69 lakh crore to states, largely based on 14th Finance Commission suggested distribution formula. Going by past trends, this will be about a third of all the spending done by the states. A change in the population base year will mean that some states will be deprived of huge amonts of resources while others will gain that much correspondingly.

But first, some background. Finance Commissions are constituted by the Govt. of India periodically to analyse resources available with different levels of government and recommend how much share of its funds should the central govt. share with various state govts. and union territories. This is needed because the Constitution envisaged the need for the central govt., with much larger sources of revenue, to share these with states. Various Articles in the Constitution (268-271, 274, 275, 280, 281) deal with this important issue. Art.280 lays down that the Finance Commission will be constituted by the President and its recommendations will be laid before Parliament.

Finance Commissions (there have been 14 till date, appointed every five years) have been using a complex formula for deciding how much resources will be transferred to each state. Issues that are considered for this sharing include population (more population, more resources), area (more area more resources), average income (usually taken as how much more or less the state’s per capita income is from the average for the country – the lesser it is the more resources) and so on. All these factors are given weights in the formula.

In the past few Finance Commission reports, 1971 Census was taken as the base year for considering population of states. There was a general consensus on this. However, in the previous 14th FC, for the first time 10% weightage was given to 2011 population while 17.5% was retained for 1971 population.

What the present govt. has done is break this consensus on using 1971 as the base year by directing the new 15th FC to consider 2011 as the base year for population.

How does this matter? It matters because there is uneven population growth among states in the period between 1971 and 2011. Population in some states has grown much less than others. For example, population of Tamil Nadu increased by 75% and Kerala by 56% in this 40 year period, while in Rajasthan it increased by 166%, in Haryana by 156% and in Bihar by 146%. So, a shift from 1971 to 2011 population will mean that share of resources based on population will go down for Tamil Nadu and Kerala and increase for Rajasthan, Haryana etc.

In other words states which have shown declining fertility rates and lower population growth rates will be penalized while states with rapidly expanding population like several northern states will get more resources.

The argument that more population should attract more resources is a sound and logical one. But, so is the argument that states which are showing decreasing growth rates should not be unreasonably and illogically penalized for their progress.

Even when the 14th FC had adopted just a 10% of weightage for 2011 population, states like Kerala and Tamil Nadu had opposed it vehemently, claiming that they were being penalized and indeed disincentivised from lowering their population growth rates.

But this time round, the Modi govt. has unilaterally, and in fact without any consultation, declared 2011 as the population base year. This may lead to much dissension among the southern states.

Is there a way out of this impasse? According to Abhijit Sen, former Planning Commission member and also part time member of the 14th FC, the two sides need to be balanced by the new 15th FC.

“One way would be to give some weightage to rate of decline of population. So, while 2011 population could be used for other computations, the weightage to declining population would assist states like Kerala and Tamil Nadu,” he told NewsClick.

Sen also stressed that there was a consensus on 1971 which is sought to be broken by the 15th FC suddenly and this is bound to create problems.

The govt. has asked people to give suggestions on the terms of reference for the 15th FC and it is expecyed that southern states and several other concerned groups will vehemently oppose the new dispensation. Hopefully the govt. will take into account these views – otherwise a dangerous divide will open up in the coming days.

105.58 lakh crore