The Fifteenth Finance Commission (FFC) was constituted by the President on 27 November 2017 for giving recommendations on the sharing of tax revenues between the Centre and the states, and among the states for the five-year-period from 1 April 2020 to 2025. The Commission’s mandate is defined by its Terms of Reference (ToR) on which suggestions are invited from state governments, general public, organisations and institutions. The ToR of the FFC have already generated a lot of debate and discontent because some states feel that their powers are being taken away.
Under the Presidential ToR, the FFC is mandated to use the Census of India 2011 population data for its recommendations on devolution of taxes, duties and grants in aid instead of the previously used 1971 population data. The performing states that have done better on development indicators like population control and family planning are of the opinion that they are being disadvantaged. The larger concern is about the reversal of India’s cooperative federalism.
Recently, at a meeting of the Union Cabinet held on 17 July 2019, it was decided to insert an additional item in the ToR. Under the additional ToR, the Commission has been mandated to “examine whether a separate mechanism for funding of defence and internal security ought to be set up, and if so, how such a mechanism could be operationalised”. The Commission’s term has been extended by a month to 30 November 2019. A gazette notification to this effect was issued on 29 July 2019.
No doubt, internal security, as well as defence, are subjects of great national importance. But this additional ToR raises a number of questions, more particularly from the financial perspective of states. In the ToR given to the Commission at the time of its appointment in November 2017, it was mandated that, “While making the recommendations, the Commission shall have regard among other considerations to ... The demand on the resources of the central government on account of defence, internal security, infrastructure, railways, climate change, commitments towards administration of Union Territories without legislature, and other committed expenditure and liabilities.’’ This was included in the ToR of previous Commissions too. Accordingly, the Commissions have been taking into account the committed liabilities of the Centre including defence and internal security before deciding on the share of the states in tax devolution.
An essential characteristic of a federal structure is the distribution of powers between the Centre and the states. Schedule VII of the Indian Constitution states that these powers are divided into three lists—Union List, State List and Concurrent List. As defence is a Union subject, it is in the Centre’s purview to create a dedicated Fund from the Consolidated Fund of India (which does not include tax devolution). In such case, the additional ToR is redundant. If the Centre wants to spend more on defence, it can allocate more resources from its Consolidated Fund as it has access to much more resources. Then obviously the intention behind giving the additional ToR is most likely to create the Fund from the divisible pool of central taxes before determining state shares.
As opined by Dr M Govinda Rao (Former Finance Commission member), the only explanation seems to be to nudge the Commission to recommend a lower share to the states in tax devolution. As no previous Commission has reduced state share in the divisible pool, another approach could be to carve out a Fund first from the divisible pool while retaining the states’ share at the present 42%. Effectively, this will result in the reduction in the size of the pool and reduction in transfers to states.
Another issue is inclusion of internal security in the additional ToR. Internal security is largely a state subject, except for border security. Whenever a state needs additional security forces from the Centre, the state pays the cost of such deployment. The additional ToR goes against the commitment to promote cooperative federalism and empower states. This is more in the nature of coercive federalism. If the additional ToR is taken seriously by the Commission, there is a distinct possibility of reduction in transfers to states. There are occasions in the past when Commissions have ignored some of the considerations given in the ToR which they thought were not in the spirit of Constitutional provisions. As emphasised by Dr Rao, “The Commission is a constitutional body and while it should make fair assessments of the requirements of the Centre and the states, it should simply ignore this additional term.”
Former PM Dr Manmohan Singh said, “If at all the central government wants to tailor the Terms of Reference, it should be backed by a Chief Ministers’ Conference, which is now under the auspices of NITI Aayog; otherwise there would be a strong feeling that the (central) government is trying to rob the states of due resource allotment. I think that it is not good for the federal polity of our country and cooperative federalism we all swear by these days.”
Hopefully, at least now, the chairman of the FFC will reach out to all the state governments to discuss the additional ToR.
The mini coffee shop in our home
B Vinod Kumar
Vice Chairman of the Telangana State Planning Board