IT is difficult to recall any instance of a few states coming together to voice their concern over the terms of reference (ToR) of a finance commission. On Tuesday, finance ministers of Karnataka, Kerala, Andhra Pradesh and Puducherry came together at a conclave in Thiruvananthapuram to point out that the ToR of the 15th Finance Commission violated the principles of federalism. The ministers said using the 2011 Census data for determining the division of taxes between the Centre and the states and the allocation to each state would lead to their governments losing out to their counterparts in the North, which have a larger population. These developments are disquieting.
Finance Minister Arun Jaitley has explained that the ToR rightly balances the “needs” represented by the latest Census and “progress towards population control”. One of the mandates of the 14th Finance Commission was to use the population base of 1971 for determining the devolution of taxes, duties and grants while also taking into account demographic changes that had taken place since 1971. Accordingly, the 14h Finance Commission assigned a weightage of 17.5 per cent to the 1971 Census data and 10 per cent to the 2011 population figures. To insist that the current finance commission use dated data is unfair. Besides, the process of updating the data used had started with the 14th Commission. Also, the challenge of designing performance-based incentives is in line with the commission’s mandate. However, these designs will need to factor in political economy constraints, especially the priorities of state governments, some of which may be deemed populist measures by the commission. It is wise to remember that the incentives and measures the 12th Finance Commission introduced while making allocations did help to enhance fiscal discipline in many states thereafter. However, these are politically fraught issues that the commission and the states need to negotiate.
The framing of the debate in the conclave of southern states comes against the backdrop of a slowdown in growth and revenue buoyancy. The country’s fiscal framework itself has undergone a significant change with the implementation of GST. The charge of bias against the southern states may be unfounded, since rarely has there been a deviation of more than 0.5 per cent from the mean shares across finance commissions. Any finance commission will have to be sensitive to the need to ensure equal treatment to states, in various stages of development and with varied fiscal capacity, while also balancing the need to reward efficiency and the short- and long-term implications for public finances. That has never been easy, even in the best of times.