Two recent amendments to the Terms of Reference (ToR) of the 15th Finance Commission (FFC) are examined here. The first requires the FFC to examine “whether a separate mechanism for funding of defence and internal security ought to be set up and if so, how such a mechanism should be operationalised”. The second arises from Section 83 of the Jammu and Kashmir Reorganisation Act 2019 (J&K Act), which came into effect when Jammu and Kashmir became a Union Territory on October 31. It requires the President to “make a reference to the 15th Finance Commission to include the Union Territory of Jammu and Kashmir in its Terms of Reference and make award for the successor Union territory of Jammu and Kashmir.” Both these amendments are perfunctorily worded, raising constitutional and interpretational issues which the FFC may find challenging . They also work to the detriment of the states.
The use of the words “separate mechanism” points to creating a mechanism distinct from the existing one. The Constitution requires that estimates relating to voted expenditure in the Annual Financial Statement be submitted in the form of demands for grants to the Lok Sabha every year. The Government of India (GoI) submits demands for grants to the Lok Sabha under the defence and home ministries for defence and deployment of armed forces in states as an aid to civil power. The separate mechanism envisaged could be the creation of a defence and internal security fund in the public account to which their annual budgetary allocations could be credited and then spent over a multi-year time-frame without the threat of lapse. Such an arrangement already exists for a number of funds in the public account, like the National Disaster Relief Fund.
The budget provision for 2019-20 for defence and the police grant of the home ministry is about Rs 5,30,000 crore. It will be inappropriate to squirrel away one-fifth of the GoI’s budget allocations into the public account for five reasons. First, escrowing such a large amount from its resources will constrain the GoI’s budgetary management. Second, similar demands could arise from other critical ministries like infrastructure and health, which if agreed to, will further emasculate budgetary flexibility. Third, it will lead to lazy budgeting by the beneficiary ministries. Fourth, it violates the Government Accounting Rules 1990 (GAR), which allow for creating a fund in the public account only for the implementation of specified schemes of ministries and not for entire budgetary allocations of departments. Fifth, and most important, it violates the fundamental canons of annual budgeting mandated in the Constitution — providing for lapse of moneys budgeted but unspent during a year, and obtaining Parliament’s approval every year for the Annual Financial Statement.
The use of the words “internal security” creates ambiguity. Internal security means maintaining public order and peace by tackling internal threats and upholding the law. Public order and police are part of the state’s responsibility. Internal security is, therefore, as much a concern of states as it is of the GoI. The FFC will face a further challenge if such a fund is created in the GoI’s public account, since it will have to decide how it will be shared with states.
The amendment relating to Jammu and Kashmir is equally troublesome. The phrase “include Union territory of Jammu and Kashmir in its Terms of Reference” is indeterminate. The ToR of the FFC has 15 clauses. In which clause and where should it be included? The names of no state or Union Territory find place in any of these 15 clauses.
It can be argued that this amendment requires the FFC to treat the UT of Jammu and Kashmir as a state for the purposes of its award. The FFC will submit its report on November 30. J&K ceased to be a state on October 31. It will no longer find a place in list of the states in the Constitution, but appear in the list of UT. The Constitution requires the Finance Commission to recommend the “distribution between the Union and states of the net proceed of taxes”.
No Finance Commission has ever made an award for any UT. It is not clear how the FFC can now make an award treating the UT of J&K as a state. It is noteworthy that the J&K Act simultaneously requires that the Union Territory of Ladakh be treated on par with the other UT. No case has been made for treating J&K on a different footing. Further, how can the claims of the two other UTs with a legislature — Delhi and Puducherry — which also have been demanding, for a number of years, that FCs award a share of the divisible pool to them, be ignored?
States argue that the impact of such a provision would increase the number of claimants to the divisible pool and thus reduce their individual share. It is further argued that the GoI, which derived political benefits from its decision to convert J&K into a UT should not pass on the financial fallouts of such a decision to the states. The GoI should treat the requirements of the UT of Jammu and Kashmir within the demand of the Union Home Ministry.
The FFC has been burdened with an onerous and a challenging ToR. Some state governments have complained about its perceived inequities to the President. These two amendments unnecessarily raise more challenges for the FFC. Perhaps, it should ignore these amendments and confine itself to its constitutional mandate.
This article first appeared in the print edition on November 15, 2019 under the title ‘Beyond the mandate’. The writer was joint secretary, 13th Finance Commission and a former finance secretary, Government of Andhra Pradesh.
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