Finance panel: changing priorities

The first conclave of the finance ministers of the South Indian states happened in Thiruvananthapuram on April 10. The meeting was called upon by the Kerala finance minister to discuss on the Terms of Reference (ToR) of the 15th Finance Commission. The meeting happened in the background of an outcry by several South Indian leaders across party lines, opposing the ToR for its use of the population-based Census (2011) for the calculations with regard to allocation of Central funds to the states.

This is in contrast to the provisions by the earlier finance commissions since 1972, which used the 1971 Census as the baseline for such calculations. The South Indian states argue that they are being penalised for successfully implementing a national policy since the 1970s that aimed at bringing down the population growth rate. They also argue that such a re-allocation has drastic economic implications in their states as the share of central funds will considerably decrease. Such provisions may also affect the federal structure of the country. The meeting concluded with a plan for another meeting at Vishakhapatanam later this month with the inclusion of more states such as Punjab and Himachal Pradesh which would also be affected by the ToR.

Among other points discussed in the meeting, the representatives of southern states were not only concerned about the weightage given to the population in the allocation of central funds, but also contended that the states have novel expenses with regard to such a demographic transition which the finance commission is not taking into consideration. The Kerala chief minister observed in his inaugural speech that “the (South Indian) states need to continue to focus to sustain the achievement in demographic reduction. Less population doesn’t mean less expenditure for the state, on the contrary it creates new commitment to the labour force and senior citizens. The care of the elderly is the responsibility of state government.”

The rise of the share of elderly in the southern states is a natural consequence of the continuous reduction in fertility rate since the 1970s. The fertility rate of the southern states is 1.7 to 1.9 children per woman. This is much lower than the replacement level of fertility rate of 2.1 per woman, a level of fertility rate at which the population neither increases nor decreases. This is in contrast to the fertility rate of the states in the Hindi-heartland such as Rajasthan, Uttar Pradesh, Bihar and Madhya Pradesh, where it is above three children per woman. Consequently, the share of elderly in these states are above 10% of the population, whereas it is just around 7% in the Hindi-heartland. According to the latest Census, the South Indian states have around 19 million people aged above 60. This is expected to increase to 70 million in 2051.

Fading support

Feminisation and ruralisation of ageing are an important characteristic of the rising elderly. This means that the share of females and rural population in the total share of elderly population is higher. Along with the fading traditional family support system and fast urbanisation, such features of population ageing may push the elderly to a vulnerable position, in the absence of adequate social support systems. Grave labour shortages in many sectors in the southern economy is also a visible consequence of such demographic changes. Such a shortage also explains why there is a higher internal migration of labour from North to South India.

An important consequence of such high share of elderly population is that the old-age dependency ratio among the South Indian states is higher, and is expected to increase. This means that the number of elderly that need to be supported by the younger labour force is higher. A shortage in working age population means that there is lower amount of disposable money with the population and thus, lower spending in the economy. The social security expenditure of the South Indian governments should necessarily rise.

In the absence of adequate healthcare and pension schemes, the elderly would be more vulnerable. These will push up the government expenditure and it is important that the respective governments be prepared for such expenditures. Central schemes on the elderly are minimal, given the needs of the states and the support of the elderly is mainly the responsibility of the state governments.

It is important that the principles of fairness and equity in distribution of public resources is considered. The major parameters decided by the 14th Finance Commission for the allocation of resources was based on the “backwardness” of a state, and the population of the state and thus, already takes into consideration the needs of many northern states. However, if the Finance Commission decides to use the 2011 Census as the base for its calculations, backwardness of a state becomes the chief criteria of evaluation. Such an arbitrary change in calculation of revenue sharing would not be sensitive to the fact that South India is drifting towards a higher ageing population.

The needs and priorities of South Indian states are thus different, and a reduction of funds for these states would not be in line with the principle of respecting the diversity of the country.