Why some States in a flap over 15th Finance Panel?

Immediately after the issue of a Public Notice by the Fifteenth Finance commission (FFC) on November 30, 2017, stating that it shall use the population data of 2011 instead of 1971, there has been a sharp reaction from the States, which had recorded impressive performance on the population front, by virtue of their stringent measures and incentives.

They are voicing their displeasure that 2011 statistics would put them in a disadvantage, thus depriving them a substantial share of the divisible pool. A few of the Southern States met at Tiruvananthapuram to deliberate upon this issue and echo their feelings. During the meeting, the Finance Minister of Andhra Pradesh put forth that his State would be foregoing an amount of Rs 24,340 crore during the next five-year period by virtue of the change in this single parameter.

Many other States are carrying the similar discontent and it may snowball into a major issue of contention in the Centre-State relations. Already there are indications to this effect. A second meeting of the Finance Ministers of the Southern States was held at the capital of Andhra Pradesh, Amaravathi, on May 7, 2018 and seven States were present on the occasion. These States are demanding the Centre that there shall be a case of re-examination of the methodology employed by the FFC to arrive at the financial assistance of the Centre.

The whole thing appears as though we are going into the discussion of Basics. Going deeper into the matter, there are certain issues which need a closer understanding and analysis. Constitution of the Finance Commission periodically (for every five years) is arrangement incorporated in the Article 280 of the Constitution of India. Virtually, it is the President of India endowed with the power to constitute the same. Under Article 280(4) of the Constitution, the Commission shall determine the procedure and shall have such powers in the performance of their functions as Parliament may by law confer on them.

Two things are discernable from the plain reading of the Article. One, the Commission has the power to determine the procedure. The moot point is whether the expression, ‘procedure’ implies the methodology, parameters and principles on the basis of which the Commission arrives at the quantum of assistance to States.

If this is accepted as the correct interpretation, the Commission is within its powers to chalk out its own methodology. Second, if the reading is to interpret stating that there shall be an enactment for this made by the Parliament, there is no such law brought out so far. The only legislation it has made in this regard is the Finance Commission (miscellaneous provisions) Act, 1951, which specified the qualifications and service conditions of the persons to serve as Members of the Commission. Under Section 8(1) of the said Act, the government only repeated the Clause of Article 280(4) of the Constitution.

Fearing a raw deal, the States have started questioning the very power of the Commission to vary the parameters to their disadvantage. Some of the State governments are demanding that the Central government deliberate on the issue in the Parliament and come out with a suitable legislation to accommodate their point of view. If the episode takes the turn of Legal solution, it may end up tapping the door of the Supreme Court.

At this juncture, it leads us to probe into the fact that whether the parameters or the formula employed by the Commission is so sacrosanct that it shall not be varied over time and that it had not changed in the past. History tells us that there had been such a change in the parameters used in the past by the successive Commissions.

To begin with, the First Finance Commission used only two parameters viz., population and contribution to taxes at 80:20 respectively. The second Finance Commission has used the same parameters, but enhanced the weightage to the population at 90 per cent and the remaining 10 per cent to tax collection. The Third Finance Commission has adopted the criterion of the First and recommended for the distribution of the divisible pool of income tax with 80:20 formula.

A major shift occurred at the time of Fifth Finance Commission. By this time, the criticism got accentuated to look into the issue of allocation of Central assistance to States. D R Gadgil, then Deputy Chairman of the Planning Commission and a Social Scientist who was critical of the Planning models, was requested to devise a new formula for allocation of Central assistance. This, in fact, served as the basis for Fourth and Fifth Five year Plans. It is he who proposed priority treatment for special category States like Assam, J&K and Nagaland then. After that the remaining balance shall be distributed using the following criteria:

• 60 per cent on the basis of population;
• 7.5 per cent on the basis of tax effort;
• 25 per cent on the basis of per capita income and assistance going only to States whose per capita is below the national average;
• 7.5 per cent for special problem of individual States.

The same underwent slight modification at the meeting of the NDC held in October 11, 1990 with the population having 55 points, per capita income having 25 points, Fiscal Management to have 5 points and special problems of States with 15 points weightage. And the Fourteenth Finance Commission got these parameters revised and also changed the weights providing the highest weightage to Income Distance criterion at 50 per cent. It enhanced weightage to Fiscal discipline from 5 to 15 per cent and identified new parameters like the Forest cover with 7.5 percentage.

The contentious issue of taking 1971 population as the basis, instead of 2011, had already been addressed by the Fourteenth Finance Commission, when it divided the weightage of 27.5 per cent between 1971 (17.5 per cent) and 2011 (10 per cent) and felt it to be logical. Therefore, taking into account the population statistics of 2011 had already started. The only issue that remains unresolved pertains to
the weightage in terms of percent that the 15th Finance Commission is going to fix for this
parameter.

In addition, States are also unhappy for the linking of the issues like the GST, Centrally Sponsored Schemes, and the attempt to cut short the volume of Public debt that can be raised by the States. It is for these reasons, the Southern States are at loggerheads with the Centre and that these be sorted out at the earliest. They are also bent upon making a detailed representation to the President of India seeking his intervention in the matter, when they propose to meet at New Delhi next.

It is better that the Centre stays focused on the matter and comes out with a solution before it gets snow balled.

By: Prof K Viyyanna Rao
(Writer is former Vice Chancellor of Acharya Nagarjuna University and Director, SEA Group of Institutions, Bengaluru)