A minefield of issues

The Terms of Reference of the 15th Finance Commission might undermine positive momentum towards 'cooperative federalism'

The 15th Finance Commission faces a minefield of issues. Coming after the positive momentum towards “cooperative federalism”, it has the risks of going backwards. 

The quick and complete acceptance of the 14th Finance Commission devolution formula by the government began the positive momentum towards “cooperative federalism”. The closure of the much derided Planning Commission — which was seen as an institution by which the Centre dictated to the states — and its replacement with the Niti Aayog was another positive step in the spirit of “cooperative federalism”. Then followed the, somewhat unexpected, but very welcome spirit of cooperation developed under the GST Council — a constitutional body like the Finance Commission.

But the Terms of Reference (TOR) of the 15th Finance Commission have reopened suspicions over that cooperative spirit. The most contentious issue is the directive to use 2011 Census — instead of the 1971 census — as the basis for allocation of resources between the states. On the face of it, the idea of using the most recent Census data available seems reasonable. In fact the 14th Commission opened that door by including the 2011 census in its calculations.

Illustration: Binay Sinha

But the complete switch from the 1971 census to the 2011 census as the basis for resource allocation has raised serious concerns especially among the Southern states whose population growth rates are much lower than those in the North. Several North-east states and even West Bengal have lowered their fertility rates hugely. Their quite legitimate gripe is, they are being penalised for faster development and better education and health services that have pushed their population growth down. 

Some creative options can be considered to reduce this tension among states with fast versus slow growing population. One option is to give credit to states that have reduced population growth rates. This would encourage efforts to control population in those states where the fertility rate remains very high.

A second would be to give credit to states that have seen greater in-migration. The common misperception is that intrastate migration is high but inter-state migration is quite low. But if the 2016-17 Economic Survey is right, interstate migration is hugely underestimated and during the decade 2001-2011 could have been as high as 60 million and is accelerating. Creative ways to give credit to states with in-migration between 1971 and 2011 could be considered. This would also encourage states receiving migrants to provide them better services, which they are now usually denied, and discourage discrimination against migrants. 

A second minefield in the TOR is the request to the Commission to consider “the impact on the finances of the Union government of substantially enhanced devolution to the states following the recommendation of the 14th Finance Commission coupled with the continuing imperative of the national development programme — including New India 2022”. Does this suggest that the government is having second thoughts on the fiscal devolution it accepted earlier? Other countries such as Brazil and Indonesia did claw back big-bang decentralisation to some extent. 

In India such an approach will be counterproductive as the 2014 devolution did not lead to any change in the total amount of funds to the states — just in the manner in which they were delivered. Whereas earlier they were tied up in central flagship schemes they were now to be provided in an unfettered form to the states to decide how best to spend them. The TOR of the 15th Commission — especially the reference to the New India 2022 suggest a desire to go back to centrally sponsored schemes — new wine in old bottles. 

A third concern is regarding the request to the Commission to examine “control or lack of it in incurring expenditure on populist measures.” Given the growing concerns over rising state deficits — especially in Bihar and Punjab — the concerns over excessive state spending are well taken. It is again very subjective as there is no clear definition of “populist” programmes. Who decides what is “populist” or realistic? And what of the populist programmes in the Union Budget? Will the Finance Commission opine on those as well? Telling states how to spend their money did not work well earlier and will not work well now. In the spirit of “cooperative federalism” state governments must be allowed to make their own choices and face the electorate over their own performance. 

Finally, the Finance Commission is asked to find ways to “encourage the Ease of Doing Business”. This index has many problems, especially as it always scores less regulation better than more regulation. While competition among states for investment is welcome, a race to the bottom among states to dismantle all regulation — good or bad — is not in India’s overall interests. A more careful look at business and industry surveys that reflect better the constraints to business, rather than score cards on the Ease of Doing Business, prepared by lawyers and business consultants in a few big cities is the way forward.

I hope the experienced and wise members of the 15th Finance Commission will get us through this minefield of issues and help move forward the new-found spirit of “cooperative federalism”. Creative handling through this minefield will help prepare the ground for the bigger battle that will come by 2026 when the basis of political representation, currently also based on the 1971 Census, will need to be revised. 

The author is distinguished visiting professor, NIPFP