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Why States See TOR As Terms Of Estrangement

The ball is clearly in the court of the 15th Finance Commission. It would have been better served if its TOR had been less detailed and less revealing about the Centre’s preferences

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Some cleavages in India’s federal structure have surfaced from the terms of reference (TOR) assigned to the 15th Finance Commission (FC). The most discussed of these relates to its requirement to shift to 2011 population figures from hitherto used 1971 figures that are also the basis for states’ representation in Parliament. A recent meeting of southern states highlighted that this would penalise their success in controlling population growth. And, despite the Centre pointing out that the TOR specifically allows the 15th FC to give adequate weight to “progress made in moving towards replacement rate of population growth”, a further meeting is likely to be held soon with invites to all the other states that have also restrained population growth. Interestingly, most of these states have non-BJP governments.  

However, population is not a clear-cut nor the most important issue. Indeed, the real issue is that the TOR of the 15th FC appears to be nudging the Centre’s own agenda in an unprecedented manner by including suggestions that ought more properly to have been in the Centre’s memorandum to the 15th FC rather than in the TOR.

For example, the TOR asks the 15th FC to consider whether it should at all award any revenue deficit grants. This is something that all previous FCs have seen as an essential part of their constitutional duty. Second, it asks the 15th FC to consider proposing measurable performance-based incentives to encourage various priorities of the Centre while controlling “populist measures”. Third, since incentives are only possible if the balance between tax devolution and grants is shifted significantly towards the latter, the TOR specifically asks the 15th FC to examine the impact of the 14th FC recommendation to substantially enhance tax devolution. While, of course, every Finance Commission has the liberty to make whatever recommendations it deems fit, it is unprecedented for a TOR to even suggest a reversal of the recommendations of its predecessor.

Although I was a dissenter on the magnitude of the devolution increase awarded by the 14th FC, I fully agreed with the decision to increase tax devolution while at the same time desist from awarding any state/sector specific grants subject to conditionality. This was a deviation from the direction taken by the 13th Finance Commission, not because of any prodding from our TOR but because of our unanimous belief that untied devolution was more in keeping with the constitutional role of Finance Commission awards. Also, I subscribed fully to the 14th Finance Commission view on co-operative federalism. This in sum was that state/sector specific grants from the Centre’s resources are required even for matters in the State list when there are significant spill-overs and externalities, and conditionality might be relevant here, but that States must have adequate say in the institution that designs, allocates and monitors such grants.  
As it turns out, Niti Ayog has still to evolve fully and almost all allocative power now rests in the Union Finance Ministry, which allows States negligible say. Arguably, the GST Council is better equipped to deliver co-operative federalism but this is only on the revenue side where States have collectively relinquished almost all discretion in what was hitherto their main source of own taxes.

The ball is clearly in the court of the 15th Finance Commission. It would have been better served if its TOR had been less detailed and less revealing about the Centre’s preferences. But as a constitutional body it has the right and the duty to look beyond its TOR and recommend keeping in view its own assessment of the current and ideal state of co-operative federalism.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Abhijit Sen

The author is Former member, Planning Commission

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