The President of India on November 27, 2017 constituted the 15th Finance Commission under the chairmanship of bureaucrat turned politician Nanda Kishore Singh. Mr Singh, a BJP leader, has been among the country’s top bureaucrats and handled important portfolios such as India’s Expenditure and Revenue Secretary, a Member of the Planning Commission as well as Secretary to the Prime Minister. With Mr Singh there will be four other members namely Sri Shaktikanta Das, former secretary to government of India, Dr Anoop Singh, Adjunct Professor, Georgetown University, Dr Ashok Lahiri , Chairman Bandhan Bank, and Dr Ramesh Chand, member, NITI Ayog. Shri Arvind Mehta, currently Additional Secretary Trade Policy Division Department of Commerce Government of India will be the secretary to the Commission.
The key role of the Finance Commission is to recommend the union government how to distribute the net proceeds of taxes between the Union Government and state governments and devise formula how to share resources among state governments. Along with this the FC also recommends to provide grants-in-aid to states and to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State.
As compared to the 14th finance commission, the terms of reference for the 15th finance commission has a number of distinct characteristics. Below I have discussed some of the important differences and its implications.
First, the major departure in the ToR of the 15th FC is the suggestion to use of 2011 population. All the Finance Commissions after 1971 have used the population of 1971 for distributing resources among states. The 14th finance commission although was asked to use the population of 1971, it was asked to take into consideration the demographic changes that had taken place since 1971. The 14th FC had also opined that it is not logical to use the dated population figures of 1971. While the 15th FC has been asked to use the 2011 population, it has also been asked to incentivize the states those have been successful in checking the population growth and move towards replacement rate (around 2.1%) of population growth. Replacement rate of population growth implies that two children replace their parents, thus the overall population remains constant.
It must be noted that during the emergency, through forty-second constitutional amendment the government froze the total Parliamentary and Assembly seats in each state till 2001 Census. This was done mainly due to wide discrepancies in family planning among the states and thus giving time to states with higher fertility rates to implement family planning to bring the fertility rates down. Even though the boundaries of constituencies were altered in 2001 to equate population among the parliamentary and assembly seats; the number of Lok Sabha seats that each state has remained unaltered since 1971 census and may only be changed after 2026. Following this constitutional amendment the previous FCs had been using the 1971 populations for sharing resources among states.
The weights assigned to population for the horizontal distribution (distribution among states) of resources have steadily declined from a very high of 90% by the second FC to merely 10% by the FC XI, and 17.5% by the 14th FC. In order to capture the demographic changes the 14ht FC had further given 10% weight to 2011 population. Thus in effective population had got 27.5% weight by the FC XIV. Both FC XII and FC XIII had used 25% weight for population for the horizontal distribution of resources. It is to be seen how much weight will be assigned to population by the 15th FC.
If the 15th FC takes the population figures of 2011 for distributing resources among states the bigger states in population terms will benefit maximum. The major beneficiary of this would be Uttar Pradesh which has a 1.3% higher population share in 2011 compared to 1971, followed by Rajasthan (1%), Bihar (1%), and Madhya Pradesh (0.6%). Similarly, other states that are going to benefit marginally are Maharashtra, Gujarat, Haryana, Jharkhand, Jammu and Kashmir, Meghalaya and Nagaland. The major losers will be Tamil Nadu of which population share has declined by 1.5% in 2011 compared to 1971 followed by Kerala (-1.1%), undivided Andhra Pradesh (-0.9%), West Bengal (-0.5%) and Odisha (-0.5%). Similarly, the other states that will suffer loss are Karnataka, Assam, Punjab and Himachal Pradesh.
Second, the ToR of 15th FC explicitly reflects the priorities of the Union government. In this list of priorities some of them are fiscal measures and some are non-fiscal measures. For example, the 15th FC has been asked to incentivize the Efforts made by the States in expansion and deepening of tax net under GST. Similarly, the 15th FC has been asked to incentivize states for the Progress made in promoting ease of doing business by effecting related policy and regulatory changes and promoting labour intensive growth.
Third, the Swatchha Bharat Mission has also got a place in the ToR of the 15th FC. The 15th FC has been asked to reward the states for the Progress made in sanitation, solid waste management and bringing in behavioural changes to end open defecation. The Commission has also been asked to reward the states for Direct benefit Transfer and efforts towards digital economy
Fourth, the importance on environmental regulation has got diluted in the ToR of 15th FC. The 14th FC was asked explicitly to take into consideration the need to balance management of ecology, environment and climate change consistent with sustainable economic development while recommending the devolution of funds to states. The ToR of 15th FC however, has only made passing references to climate change, disaster resilient infrastructure and sustainable development. It must be noted that the FC XIII had given special grants to states based on forest coverage and the FC XIV had given 7.5% weight while sharing revenue among states. States with more dense forest were rewarded with more funds.
Amarendra Das 