Context:

• The presidential terms of reference (ToR) of the Fifteenth Finance Commission have raised questions, and the recent conclave of Finance Ministers of the southern States to discuss contentious issues in the ToR is only the beginning.
• This conclave was about concerns over the directive to use population data in the ToR from the 2011 Census, and not the 1971 Census that was used earlier, is an exaggeration.
• For the southern States the issue of population was a point of concern and provided a common meeting point for the Ministers. But this was not the only area.

Fiscal federalism:

States need to debate a number of contentious issues in the ToR which affect the very structure of fiscal federalism.

These include: asking the Commission

• “to examine whether revenue deficit grants be provided at all”;
• considering “the impact of [the] fiscal situation of the Union government of substantially enhanced devolution by the Fourteenth Finance Commission, coupled with continuing imperative of the national development programme including New India 2022”;
• looking at the conditions that may be imposed by the Central government while providing consent to States when they borrow under Article 293(3);
• asking the Commission to propose measurable performance-based incentives to States in respect of a number of areas such as the implementation of flagship schemes, progress towards replacement rate of population growth, a control or lack of it in incurring expenditure on populist measures; and finally,
• promoting ease of doing business.

However, the ToR of the Fifteenth Commission raise questions about constitutional propriety and has implications for the federal fabric of the nation itself.

• Take, for example, the suggestion that the Commission may examine whether the revenue deficit grants should be given at all.
• The very objective of Article 275 is to enable the Commission to give grants to offset post-devolution gaps between normatively assessed revenues and expenditures.
• If the Commission takes this suggestion seriously, it will have serious ramifications for States with genuinely large resource gaps.

National plans

Never before in the history of the country has a Finance Commission been asked to review the recommendations of the previous Commission on the grounds that it gave “substantially enhanced devolution”. It has been clarified several times that the Commission had to include the grants for State Plan Schemes in its devolution. Furthermore, it desisted from giving discretionary and sector-specific grants including those for the environment.

• Asking the Commission to take into account the performances in implementation of various Central schemes is equally contentious.
• The Seventh Schedule of the Constitution assigns the respective functions in terms of Union, State and Concurrent subjects.
• It is ironical that the Union government has been intruding into State subjects through Central schemes by forcibly using fiscal space.
• Performances must be built into the implementation of schemes and not into the tax devolution formula.
• It must be noted that devolution of taxes to States is not a charity; it is their right. 

Point of the Sixth Finance Commission:

•  “It is misleading to speak in terms of redistribution of resources between the Centre and States. It will be more appropriate to view the problem as one of distribution of resources as between the subjects coming constitutionally within the competence of the Centre and those coming within the purview of States. The resources belong to the nation and they should be applied at points where they are needed most.”

The ToR of the Ninth Finance Commission

• It had raised considerable disquiet among States when it was asked to adopt a normative approach. The Chairman of the Commission had to allay their apprehensions in his letter to all the Chief Ministers saying: “It is the Commission’s prerogative to adopt such approach and method as it considered fit and appropriate on subjects covered by (a) and (b) of Article 280(3) of the Constitution. In view of the Presidential notification, however, the Commission would consider, inter alia, adopting a ‘normative approach’ wherever appropriate in the interest of sound finance. But by doing so, the Commission would apply a uniform, just and equitable yardstick both to the Centre and States.”

The Way Forward:

The ToR of the present Commission raise even more serious issues of constitutional propriety and, hopefully, States will safeguard their turf to preserve the federal fabric of the country.

Source:TH