JOIN USAllocation of financial resources is best undertaken by the tier of government that is nearest to beneficiaries, and mobilisation of resources is best undertaken by the tier of government that is farthest from taxpayers. It is for this reason that in all federations, taxation powers are generally concentrated in the Centre while the burden of expenditure is mostly on the states. To address this fiscal imbalance, there would have to be some constitutional mechanism to transfer resources from the Centre to states.
In India, the Union Finance Commission, appointed under Article 280 of the Constitution once every five years, is the institution for recommending the vertical division of resources between the Centre and states as well as the horizontal distribution of the devolved resources between the states. In other words, sharing is not gratis from the Centre, but a constitutional right of the states. However, the formation of the Finance Commissions (FCs) and deciding their terms of reference (ToR) has been the exclusive preserve of the Centre. This is against the grain of federalism.
Since the 1990s, the finance commission has also become a vehicle for incentivising and coercing the states to implement fiscal reforms, such as deficit targeting. This is done citing Article 280(2)(c) of the Constitution that enables the Centre to make recommendations in the interest of sound finance.
Finance Commissions, since the 11th, have been consistently doing this by linking grants and debt relief packages to states implementing the Fiscal Responsibility and Budget Management Act (FRBMA), adhering to zero Revenue Deficit and a 3% fiscal deficit-GSDP (Gross State Domestic Product) ratio. A look at the ToR of the 15th Finance Commission leaves no doubt in one's mind that this role is being further enhanced.
The FRBMA Review Committee, 2017, had recommended that instead of deficit targeting, the debt-GSDP ratio should be anchored to 60% level (40% for the Centre, 20% for the states), and accordingly the fiscal deficit-GSDP ratio should be glided down to 2.5% for the Centre and 1.7% for the states by 2022-23. This is a sharp reduction from the present 3% level. Unless the revenue position of the Centre and the states improves markedly (which is unlikely at present), this would necessitate a substantial expenditure compression. The tenor of the ToR gives a feeling that the 15th Finance Commission may become an instrument to curtail the fiscal space of the states.
In what could be debilitating for the states' finances, the ToR also suggests whether there should be revenue deficit grants at all. Till the 14th Finance Commission, post-tax devolution Article 275 grants-in-aid were called Non-Plan Revenue Deficit (NPRD) grants and were an important part of central devolution and a means of augmenting the Consolidated Fund of the state. The 14th Finance Commission awarded revenue deficit grants, taking a holistic view of plan and non-plan revenue expenditure. When the state's finances are likely to be stressed in the immediate future due to: a) Pay Commission awards; b) problems in implementation of GST; c) need for spending on social and economic sectors; and, d) interest liabilities on UDAY bonds, the ToR, if implemented, would severely strain states' finances.
The ToR 7 is about "control, or lack of it, of populist measures". This is vague and open to wide interpretation. Through this, the Finance Commission would get authority to restrain democratically-elected governments from implementing promises made to the people in election manifestoes. Any measure from welfare pensions to food subsidy can be selected for attack. This strikes at the root of democratic polity.
Exacerbating the divide
Another area of concern is with doing away with the1971 population as criterion for tax devolution (ToR 8). States that have achieved demographic and health indicators and controlled the increase in population will substantially lose, and their loss will be in proportion to the weight the 2011 population criterion gets in the tax devolution formula. A look at the comparative position of the states when the 1971 and 2011 populations are used shows that all southern states and Goa, Orissa, Assam, Himachal Pradesh, Punjab and West Bengal would lose when the 2011 population is the criterion.
For Karnataka, the share of population in the national total has gone down 0.25%. It is pertinent to note that states like Kerala have reached replacement rates of population growth and are now not able to reap the demographic dividend of the new labour force. They have also incurred a huge cost to achieve this progress and are now bearing the burden of revenue deficits. Their loss needs to be considered in the tax devolution formula, lest the 15th Finance Commission award becomes a disincentive for achievements in human development, which have come through conscious public action.
The Finance Commission becoming a monitoring agency is not befitting its constitutional role. As the Finance Commission is not an ongoing body, any monitoring mechanism suggested by it would become a tool for central officials' supervision over state governments.
The ToR 6 (iv) challenges the basic framework of federalism. It is premised on: "The impact of the fiscal situation of the Union government of substantially enhanced tax devolution to the states following recommendation of the 14th Finance Commission, coupled with the coming imperative of national development programme, including New India-2022." In a framework of cooperative federalism, there has to be a consensual approach and states and Local Self-Governments, being closer to the people benefiting from the programmes, should have the prime role.
A substantially enhanced devolution would naturally ensure implementation of these programmes in a better way, and there should not be any room for the apprehension expressed in TOR 6 (iv). In fact, a larger untied allocation for measurable outcomes, would be better than the Centre spending from its own resources as tied grants.
All talk of cooperative federalism seems to have evaporated into thin air, as can be seen from the ToR. States will have to effectively take a position on these issues in their memorandums to the 15th Finance Commission if they are to retain their rightful position in the federal polity.
(The writer is the Finance Minister of Kerala)
(The Billion Press)