Risk to federalism

Finance Commission should not carve out a separate fund

In a recent decision by the Union Cabinet, the terms of reference of the Fifteenth Finance Commission were amended, so that the needs of defence and internal security be set aside from regular expenditure. In the course of extending the Commission’s term, the Cabinet added the following to its mandate: To “address serious concerns regarding allocation of adequate, secure and non-lapsable funds for defence and internal security of India”.

This has correctly been seen as an attempt by the Centre to occupy more fiscal space. Article 280 of the Constitution requires the Commission to be the overall judge of how taxes are distributed, and Article 266 implies that the Consolidated Fund of India is a shared pool for all national priorities. Setting aside a fund purely for defence, which is the natural end point of the Cabinet’s demand from the Commission, would act against this basic constitutional principle. It would sequester defence spending and give the Centre more space to spend on its own political priorities at the expense of the states. At a time when there is a quiet fiscal crisis brewing, thanks to the underperformance of the goods and services tax, this is not a welcome development.

It is true that defence allocation, in particular, has been a source of constant worry in past years. It has effectively been shrinking as a percentage of gross domestic product. Worse, a large part of the expenditure goes to fund the wages and pensions bills, along with other current expenditure. The capital budget for defence is in any case too small, and much of it is taken up with tied expenditure — purchases already agreed upon, for example. The amount left for modernisation initiatives is too small. But short-circuiting the Constitutional provisions and shrinking the resource for states are not the answer to this conundrum. No one item on the Central List of the Constitution should be given priority over the State List and the Concurrent list in this manner. It is up to the Union government to decide how much it sets aside for defence from the revenue available to it. If it has not been doing so enough in recent years, it should reassess its overall expenditure, and not ask for the pool of taxes available for division be altered at the expense of states that have been more fiscally responsible.

The carve-out might also include spending on internal security. The paramilitary forces in India have been an exception to recent trends, growing in size, number, and expense. This cannot continue forever, especially as left-wing extremism is less virulent than it has been at times in the past decades. The Commission would do well to recognise the extreme political danger that a carve-out at the request of the Centre for internal security and defence poses to the federal structure of the country. If such a security-specific fund is created, it should not affect the revenue that goes to the states. The Centre should pay for it itself. Anything else would undermine the constitutional framework and might lead to serious problems in the coming years.