In Fact: Amid concerns from South, a case for modifying terms for distribution of taxes

In Fact: Amid concerns from South, a case for modifying terms for distribution of taxes

Southern states meet over new population yardstick, various performance-based incentives.

Pinarayi Vijayan Thomas isaac controversy
Kerala Finance Minister Thomas Isaac has taken the initiative to get all the southern states together (File Photo) 

On Tuesday, ministers and officials of the southern states will meet to discuss their concerns relating to the terms of reference of the 15th Finance Commission, which will recommend the division or distribution of taxes between the Central government and states and then the allocation of shares among states from a pool of central taxes for the period 2020-2025.

Over the last few decades, rarely has a Finance Commission started off its work in the backdrop of such a controversy. This time, it is the southern states that are unhappy about the terms of reference and mainly about the use of the population data of 2011 — rather than 1971 like in the past — as one of the variables for determining the division of taxes. That’s because these states, which have recorded significant progress in population control or in the replacement rate of population growth, fear that they stand to lose much more compared to the northern states.
In his column in The Sunday Express on April 8, former Finance Minister P Chidambaram wrote that the southern states have lost 6.338% on account of better governance and better outcomes, but they were at least protected against the consequences of a fall in their share of India’s population.

“According to the 1971 census, their population was 24.7% of the total population; according to the 2011 census data, it has fallen to 20.7% .If all other factors are kept constant, the mandate to the 15th Finance Commission to consider the population according to the 2011 Census will further reduce the shares of the Southern states,” Chidambaram wrote, and went on to say that the central government has lit a fire and it should be doused before the southern flames scorch the federation.

Thomas Isaac, Kerala’s finance minister who has taken the initiative to get all the southern states together, has been quoted as saying that because Kerala’s population growth has declined, it stands to lose  Rs 20,000 crore if the Finance Commission was to base its recommendation on the 2011 Census data, while Tamil Nadu would lose twice that amount.


It’s not as if the previous commission wasn’t mindful of this. The 14th Finance Commission assigned a weight of 10% to the 2011 census data and a much higher weight of 17.5% to the 1971 population data. It did mention in its report that though it was of the view that the use of dated population data was unfair, it had little choice but to be bound by its terms of reference.

It is not just the use of the 2011 population data that has rankled these states. The Finance Commission’s remit to consider measurable performance-based incentives for states in many areas — such as achievements in implementation of flagship schemes of the central government, progress made in promoting ease of doing business, and control or lack of it in spending on populist schemes, and progress made in sanitation, solid waste management and bringing in behavioural changes to end open defecation — has come in for severe criticism.

A modification of the terms of reference by knocking off some of these terms may help in addressing some of these concerns. And reports of some earlier finance commissions offer some cues. In April 2000, towards the fag end of the 11th Finance Commission that was appointed in 1998, two additional terms of references were added. One was mandating the commission to identify measures that are monitorable and aimed at reduction of revenue deficits of states. The other one was on recommending a central package to be linked to a reform agenda that confined itself to measures to reduce the revenue deficit through monitorable actions by the states. The Finance Ministry at that time had suggested that the reforms programme should be monitorable in the sense that indicators could be measured in terms of numbers, and that the monitoring could be done by a joint committee consisting of representatives of the central government, the Planning Commission (in existence then) and state governments.

At that time, too, states had raised the constitutional validity of the additional terms of reference, and the need for consultation with states — with some states questioning the validity of the conditional release of funds. Maharashtra had said that if any conditionality were to be attached for release of grants to the states on the basis of performance in implementing the reforms programme, the central government should also be brought under similar conditionality. Although the 11th Finance Commission admitted that there were inherent limitations in drawing a monitorable programme for every state, it did design one — with heavy weightage for growth of tax revenue, non tax-revenue, and control of salaries and allowances, interest and lowering of subsidies. The commission also recommended an Incentive Fund aggregating Rs 10,607.72 crore for a five-year period to reward states for the fiscal reforms programme.

As Amresh Bagchi, one of the members of the 11th Finance Commission, pointed out in his dissent note, successive commissions had tried to be progressive. But there is a point beyond which “progressivity” cannot be pushed through tax devolution or division of taxes.

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