What is the issue?
- 15th FC's terms of reference (ToR) is gaining significance with states' demand for more equity and fairness in resource allocation.
- In this context, it is essential to look into the roles and responsibilities of Finance Commission and the ToR of 15th FC.
Why is FC's role so significant?
- Unity - Article 1 of the Constitution of India recognises India as a Union of States.
- Real fairness and equity in the matter of devolution of powers and resources to the States is essential to preserve this stated unity.
- The foremost objective of the FC is thus an equitable distribution of financial resources between the two units of the Union.
- Resources - The fundamental tasks relating to income growth, human development, livelihoods, environment, etc are entrusted to the States.
- At present, the States do not have adequate resources as well as the right to raise such resources to fulfil these tasks.
- FC's role gains significance in equipping states with adequate resources to take up these major tasks of nation-building.
- Federalism - The Centre’s capacity to mobilise resources is far greater than that of the States.
- But states are required to undertake development expenditures that far exceed their revenue generating capabilities.
- The Constitution entrusts FC with the responsibility of addressing this anomaly and asymmetry in India’s federal system.
- Recent developments - The finances of States have received a double blow due to demonetisation, and Goods and Services Tax.
- Post-GST, states have hardly any major tax left with them to make a difference to State resources.
What are the concerns with 15th FC's ToR?
- Demographic differences - From 2001 and 2011 many states have successfully reduced their rate of population growth.
- This does not mean less expenditure for these states.
- These have incurred huge fiscal costs to achieve a lower population growth and healthy demographic indicators.
- They have made substantial investments on education, health and directly on family welfare programmes.
- Moreover it creates new commitments by the States to those in labour force and especially to senior citizens.
- Thus using the population data of 2011 as the base for tax devolution should not reduce the allocation to these States.
- Caring elderly - Many States have achieved a replacement rate of growth of population or have gone below that rate in a short span of time.
- An immediate effect of this is a sharp rise in the proportion of elderly population.
- The enhanced costs for states for caring them must be considered by the FC in allocation and in deciding the population criterion.
- Revenue deficit - It is specified that the 15th FC may also examine whether revenue deficit grants be provided at all.
- Revenue deficits are offshoots of the path of development followed by States.
- It cannot be brought down in the short term.
- To discontinue post-tax devolution of revenue deficit grants would go against the principle of cooperative federalism.
- Approach - The FC should not take a “residual approach” of distributing what is left over after providing for Centre's requirements.
- However, the 15th FC's ToR explicitly privilege the “committed expenditures” of the Centre.
- Policy domain - The 15th FC is asked to consider proposing performance-based incentives.
- This grant is proposed beyond those relating to fiscal responsibility, population and devolution to local bodies.
- States see this as an attempt to micro-manage their fiscal domain.
- This is because states have set their own agenda for development.
- The sectors may include health, education, forest management, public distribution of food, agricultural production, etc.
- This development resulted not necessarily because of Central incentives.
- It was rather the effect of the best practices followed by the states depending on their regional needs and demands.
- Thus, FC proposing “measurable performance-based-incentives” would affect the liberty and flexibility of the states' policy realm.
- It is not the duty of the FC to venture into the realm of day-to-day governance of the states.
- Fiscal space - The 14th FC recommended an increase in devolution to states from 32% to 42%.
- It is argued that the fiscal space available to the Centre had shrunk due to this.
- However, when implementing this, the Union government cut allocations to several Centrally Sponsored Schemes in 2015-16.
- The cutback was almost equal to the amount received by the States as a whole on account of the rise in share of taxes and duties.
- Thus, there is evidently no squeeze of the fiscal space available to the Union government.
- In fact, the total resources devolved from Union to all States put together has been declining as a share of GDP for some years now.
- There is thus no ground for reducing the share of States in the vertical devolution.
- Diversity - To recognise India's diversity is also to recognise the States' diverse paths of development.
- The FC must facilitate diversity and a democratic path of development.
- Respecting principles of equity and fairness in allocating resources between the Centre and States is essential for this.
Source: The Hindu
