The Fourteenth Finance Commission (FFC) has attracted accolades for raising the share of divisible pool to the states to 42% and for further expanding the fiscal space to sub-national governments. It has also given the refreshing title, local governments, as against local bodies used by the previous commissions to the chapter dealing with the grants to the third tier of government. Even so, the recommendations relating to panchayati raj institutions (PRIs) and urban local governments of the FFC appear to be retrograde.
Equity should be the primary rationale underlying any intergovernmental transfer in a federal polity. The criteria for inter se distribution of transfers are thus very important in determining the share of each state. Generally, they are governed by the objectives of the transfers. For inter se distribution of local government grants to states, FFC uses 2011 population with weight of 90% and area 10%. The undue weightage given to population is iniquitous especially because of the use of 2011 Census figures. The deliberate omission of other relevant criteria only helps put democratic decentralisation on the backburner. Clause 7 of FFC’s Terms of Reference (ToR) reads:
In making its recommendations on various matters, the Commission shall generally take the base of population figures as of 1971 in all cases where population is a factor for determination of devolution of taxes and duties and grants-in-aid; however, the Commission may also take into account the demographic changes that have taken place subsequent to 1971. (Report, p3)
The decision to use 1971 figures followed from the days of the seventh panel was taken to avoid bias or disadvantage to any state that may choose to pursue family planning to contain population, a policy once vigorously initiated and incentivised by the Centre. The qualification to “take into account the demographic changes that have taken place subsequent to 1971” does not necessarily mean 2011 population. That the choice of 2011 figures has adversely affected states like Kerala, Tamil Nadu, West Bengal and Andhra Pradesh is clear from the fact that the population share of Kerala in 1971 was 3.931%, Tamil Nadu 7.586%, West Bengal 8.159% and AP 5.098% while the share in 2011 is 2.8% for Kerala, 6.06% for Tamil Nadu, 7.66% for West Bengal and 4.14% for AP. In sharp contrast, the share of Bihar, Gujarat, Haryana, Rajasthan, UP and many others have increased in 2011. The inter se share for states worked out by FFC after adjusting for rural and urban population ratio and area works out to 2.673% for Kerala, and 5.918% for Tamil Nadu to mention the most conspicuous cases. A finance commission constituted after the historic 73rd/74th Constitutional Amendments has a moral, if not legal, responsibility to respect the letter and spirit of parts IX and IXA of the Constitution which demand a vibrant and viable local democracy. In fact all the previous commissions used criteria relating to devolution and decentralisation for inter se distribution. Here it is instructive to listen to FFC which says:
“In our view, neither the ToR nor the Constitution permits the Finance Commission to play any role in the devolution of powers to panchayats and municipalities or to promote a particular model of decentralization. Therefore, we considered it appropriate not to use an index or indices of devolution or decentralization for the purpose of transfer of resources to states for panchayats and municipalities.” (p111, emphasis as in original).
However, the Constitution mandates the creation of gram sabha, people’s participation, five-yearly elections, reservation of seats for women and backward communities, creation of “institutions of self-government” at the panchayat and municipality levels, tasked to prepare plans for “economic development and social justice”, establishment of the District Planning Committee and prepare “a draft development plan for the district as a whole” and the like that proclaim a sui generis model of decentralisation. Of course, no central finance commission can ignore state finance commissions, because Article 280(3) establishing the Union Finance Commission was amended as part of the 73rd/74th Constitutional Amendments, adding sub-clauses (bb) and (c) to 280(3) requiring to supplement the consolidated fund of a state through appropriate steps. The ToR No.4 sub-clause (iii) of FFC is derived directly from these clauses. The condition “on the basis of the recommendations made by the Finance Commission of the state” is not to be treated as a needless irritant. It is a firm acknowledgment of the organic link between Union and state finance commissions as part of our fiscal federalism. Also, the language of the two finance panels with reference to their tasks doesn’t differ substantially except that the former is designed to rectify the fiscal imbalances at the Centre-state level and the latter at the state-sub-state level. In this situation staying neutral is improper for a commission expected to play a decisive role in shaping India’s federal fiscal architecture, more so when we witness wilful negligence by several states in honouring constitutional obligations.
That states in general have been reluctant to part with power, functions and funds to local governments and failed to set up institutional frameworks mandated by the Constitution is well-known. The effort of the 13th finance commission to divide local government grants into basic unconditional grants and conditional performance grants was meant to incentivise the “laggards”. To avail of performance grants the PRIs had to fulfill six conditionalities and urban local bodies nine. The FFC not only reduced the share of performance grants from 34 to 10% of the previous panel but also made the conditionalities stipulated less demanding. To be eligible for performance grants the gram panchayats will have to submit audited accounts that relate to a year not earlier than two years preceding the year in which they claim the grant. It will also “have to show an increase in the own revenues”. These are tepid conditions. To show an increase in own revenue—it could mean even one rupee hike—is different from insisting on a specific jump above an allowance for normal buoyancy. That Kerala has followed an accrual-based double entry accounting system from 2011-12 for panchayats and municipalities is an example to be incentivised because accounting reforms have been underway with the CAG’s help since the days of the 11th panel. That Budget 2015-16 cut allocations to the panchayati raj ministry to Rs 95 crore from Rs 3401 crore has to be seen as an ominous portent of the future of our local democracy.
The writer is honorary professor, Centre for Development Studies (CDS), Thiruvananthapuram. Email: maoommen09@gmail.com