KOCHI: The need to integrate the elderly population as a criteria for intergovernmental fiscal transfers is gaining momentum, potentially benefiting states like Kerala with a proportionally larger elderly population.
States like Kerala, which successfully controlled their population growth, saw their share of tax receipts decrease following the 15th Finance Commission’s recommendations. The Commission’s use of the 2011 census, instead of the 1971 census, disproportionately affected these states. They have long argued that they are being penalised for their achievements in population control, as the newer census data reduced their share of tax revenue.
Kerala is hosting a conclave of five opposition-ruled states on Thursday in Thiruvananthapuram to discuss strategies for ensuring their fiscal needs are addressed in the upcoming 16th Finance Commission.
A recent policy paper by the National Institute of Public Finance and Policy, ‘Tax Transfers and Demographic Transition: Empirical Evidence for 16th Finance Commission’ (August 2024), authored by Yadawendra Singh and Lekha Chakraborty, highlights the necessity of considering the elderly population in formula-based intergovernmental fiscal transfers.
The study suggests that incorporating the elderly population (60+ years) into the tax devolution formula could significantly alter resource distribution among states, benefiting those with higher elderly populations. The authors recommend that the Sixteenth Finance Commission should consider demographic changes by incorporating the share of the elderly population to working-age population ratio as a criterion to promote a more equitable and efficient allocation of resources. The 15th Finance Commission recommended a weightage of 12.5% for demographic performance, 45% for income distance, 15% each for population and area, 10% for forest and ecology, and 2.5% for tax and fiscal efforts for horizontal devolution.
However, Yadawendra Singh pointed out that relying on the 2011 Census figures for devolution purposes has created a horizontal imbalance, negatively impacting states like Kerala that have made significant progress in demographic transition.
“India’s population pyramid has a broad base, indicating a large young population, which narrows towards the top, representing a smaller elderly population. In contrast, Kerala’s population pyramid is broader at the top, with approximately 24.15% of males and 27.53% of females aged 60 and above. Other states with higher percentages of elderly populations include Goa, Tamil Nadu, Punjab, and Himachal Pradesh, all with over 10% of their population aged 60 and above,” he told TNIE.
Mohan R, a former IRS officer and expert on finance commissions and tax devolution, acknowledged that Kerala’s tax share has been significantly impacted in the last FC recommendation. He pointed out that Kerala being a high per capita state, faced additional challenges, including a disadvantage in the distance criterion.
He emphasised that the state deserved a tax share roughly in the range of 2.5-2.75 %, which is proportional to its share of population.
“The Finance Commission must strike a delicate balance, ensuring that citizens across India receive basic services at comparable costs, regardless of their place of residence. The states in India are at different levels of development, and the Finance Commission must consider these historical disparities while making its recommendations,” he added.
While Mohan recognised the flexibility of the Finance Commission to address issues like the share of elderly, marginalised, or morbid populations, he cautioned against incorporating additional criteria into fiscal transfers, as it could help one state while hurting others and create schisms in the polity. Instead, he recommended unconditional grants, as mentioned in Article 275, to achieve horizontal balancing and bridge the shortfall. He advocated for a straightforward and simple tax devolution formula to ensure equity and fairness.
Sthanu R Nair of IIM Kozhikode emphasised that incorporating the elderly population as a criterion for devolution made sense only if states had a concrete policy to protect the interests of the elderly. “This ensures that the devolved funds are utilised effectively for the welfare of the elderly,” he noted. However, he expressed doubts about the existence of such policies in any Indian state.
Yadawendra Singh highlighted India’s ongoing demographic transition, characterised by a declining fertility rate.
Traditional criteria for fiscal transfers, which have historically focussed on population size, economic backwardness, and fiscal weakness, are becoming increasingly inadequate, he said.
He pointed out that the share of the elderly in the total population had increased significantly (from 5.6% in 1951 to 8.6% in 2011) and would continue to rise rapidly in the near future. Given that the elderly are largely dependent on others and require more care in terms of healthcare, pensions, and social security, Singh argued that states with a higher proportion of elderly citizens needed more resources to provide these essential services.