UPSC GK: Understanding Controversy over 15th FC (ECONOMICS)

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.

Credit: Indian Express Explained