Last month, Telugu actor and Jana Sena founder Pawan Kalyan posted on Twitter that a “population-based formula” for tax-sharing between the Centre and states would “hurt” South Indian states. On March 14, Karnataka Chief Minister Siddaramaiah complained on Facebook that “six states south of the Vindhyas contribute more taxes and get less”, and noted that even though these states “have nearly reached replacement levels of population growth”, population remains a “prominent criteria for devolution of central taxes”. He asked: “For how long can we keep incentivizing population growth?”
A week later, DMK Working President M K Stalin wrote to Prime Minister Narendra Modi about the Terms of Reference (ToR) of the Fifteenth Finance Commission. On March 23, Siddaramaiah gave a call on Twitter to “resist” these terms, tagging the Chief Ministers of Kerala, Tamil Nadu, Andhra Pradesh, Telangana, Puducherry and Maharashtra, besides Stalin and Thiruvananthapuram MP Shashi Tharoor. A day later, he repeated on Twitter the points he had made on Facebook earlier, and asked whether the way to remove regional imbalances in development was “by under investing in the south?” On April 10, Kerala will be hosting a meeting of Finance Ministers of South Indian states to discuss these issues.
Why are the southern states unhappy with the proposed Terms of Reference?
A key mandate of all Finance Commissions since the early 1950s has been to work out the share of net tax proceeds between the central government and states, and its distribution among states. Over the last few decades, this has been based on many factors such as population, fiscal capacity and discipline, area, and fiscal distance from top-ranking states. The ToR of each commission varies. The Fifteenth Finance Commission, constituted in November 2017, has said that it would use population data available in the 2011 census while making its recommendations for the five-year period beginning from 2020. Many southern states believe that the recommendations will not recognise their effort to check population growth, and will impact the transfer of resources.
Following Siddaramaiah’s complaint that the use of 2011 census data (instead of 1971 census) would affect the interests of the South, others states joined the protest. Andhra Pradesh Chief Minister Chandrababu Naidu, as well as Tamil Nadu Assembly Opposition Leader M K Stalin, have rallied behind Siddaramaiah.
Has there been a similar protest earlier?
Yes. In 2013, Odisha Chief Minister Naveen Patnaik protested against the ToR of the Fourteenth Finance Commission, which included 2011 census data as an additional criterion to the 1971 census. He wrote to then Finance Minister P Chidambaram that the ToR would impact resource transfer to 11 states, which had taken progressive steps to arrest the rapid growth of population. The
11 states included Karnataka, Kerala, Tamil Nadu, Andhra Pradesh, Assam, Chhattisgarh, Goa, Himachal Pradesh, Odisha, Punjab and West Bengal. Some of the major North Indian states do not figure in the list, a point highlighted this time again by the southern states.
What are the demands of these states?
The South Indian states want the allocation of resources to better reflect their consistent effort in improving infrastructure, governance, and industrial growth. “The 15th Finance Commission must bring new thinking to the table & give incentives to tax mobilization effort, growth engines like Bengaluru, Hyderabad, Coimbatore, Kochi etc., and education & empowerment of women (a proxy for population control),” Siddaramaiah said. Andhra Pradesh, Kerala and Tamil Nadu have also voiced a similar demand. But from a political perspective, it is interesting to note that the resistance comes from southern states including Telangana and Puducherry, where the Bharatiya Janata Party is not in power.
What all did the last commission consider while making its recommendations?
The Fourteenth Finance Commission gave 17.5% weight to the 1971 population data, and 10% to the 2011 data. The commission also assigned a slightly higher weight for fiscal capacity (50%), 15 % for area or distance, and 7.5 % for forest cover. However, it removed fiscal discipline from the list.
What is the main challenge for the Fifteenth Finance Commission?
Promoting equity and efficiency is the key challenge. The commission has to take into account regional imbalances, the relative resource base, cost disabilities due to geography, historical circumstances, and remoteness in the case of some special category states in the North East. The major challenge is to work out incentives for achieving efficiency. In the past, fiscal discipline and tax collection effort were also considered. But as previous commissions pointed out, the major constraint in designing forward-looking incentives is the unavailability of real-time data to judge performances of states.
Should recommendations be better targeted with incentives?
The Thirteenth Finance Commission had said that it was desirable to make fiscal awards more incentive compatible and better targeted to securing varied objectives. This requires the identification and use of reliable data which are regularly available, easily understood, and do not require interpretation in normative assessment by any agency.
What will the newly constituted commission take into account?
The commission will take into account performance-based incentives such as deepening of the tax net under the GST, boosting tax and non-tax revenues, promoting savings by adopting direct benefit transfers, removing layers between the government and beneficiaries, and assessing expenditure incurred while implementing populist measures.
But, how will the commission assess populist schemes?
The big challenge for the commission will be to define what a populist measure is. Decades ago, when some southern states introduced schemes to provide meals at subsidised rates, they were criticised by economists. But the Centre, over the course of time, acknowledged the success of these schemes. It can be argued that even schemes to waive farm loans are populist in nature. The commission has to carry out the assessment without violating the spirit of federalism.
What are the other issues that the commission has to address?
Chairman N K Singh has said that equitable regional growth is part of the ToR. States with income levels below the average per capita income will be assessed to see if they require special attention. The Commission will also examine the 42% tax devolution that was recommended by the previous commission.