The Finance Commission determines the devolution of allocation of state funds between the Centre and states, leading a wag to comment that the Commission is a dog which barks at the Centre and bites the states.
The 15th Finance Commission (FC) has led to a storm of protest on its proposal to change the base year of computation from 1971 to 2011; as the devolution of central resources to states hinges on population, southern states (Karnataka, Kerala, Tamil Nadu, Andhra Pradesh and Telangana and the Union territory of Puducherry) that have controlled their population will get a smaller share of the pie if the population dispensation is applied. Hence, they have been crying foul. The Finance Commission determines the devolution of allocation of state funds between the Centre and states, leading a wag to comment that the Commission is a dog which barks at the Centre and bites the states.
For a long time, the allocation of central assistance for state plans was governed by the Gadgil formula. The report of the 14th Finance Commission ran into an ice floe on the ground of denial of special status to Andhra Pradesh, but the clamour against the 15th Finance Commission has begun right from its very Terms of Reference (ToR) and does not bode well. The concern that led to a conclave of the finance ministers of southern states (Karnataka, Kerala, Telangana and Puducherry) in Thiruvananthapuram on April 10 was that the ToR of the Finance Commision violated the principles of federalism. If 2011 Census data is the determinant of devolution of taxes, duties and grants between the Centre and states and allocation of funds, this would be detrimental to Southern states whose populations have grown at a slower beat than that seen in other states, largely due to the effective population control policies and measures they have undertaken.
The 14th Finance Commission had taken the 1971 Census as the base with a weightage of 17.5% and assigned a weightage of 10% to the 2011 population figures, factoring in both—leading to a roughly equal treatment for states. Between 1971 and 2011, except for Telangana, the population of the four southern states in total declined from 22.1% to 18.16%. The use of 2011 data benefits states like Uttar Pradesh and Bihar and squeezes out the southern states. If we are to move to cooperative federalism, the ToR should be acceptable to all states.
Perhaps the Gadgil formula can be revisited and refined—for equitable and balanced growth, the needs of special states Assam, Nagaland and hill states should be taken into account as well. As per the formula, the balance of the central assistance, after disbursal to special category states, is to be allocated to the remaining states on the basis of the following weightage criteria:
* 60% on the basis of population
Population is not the only metric, nevertheless important, as there is a negative correlation between population and per capita income. Populous states have a larger number of people living below poverty line;
* 7.5% on the tax effort of individual states
This reflects the potential of states and their ability to garner resources to meet their needs;
* 7.5% going to states with special needs, i.e. droughts, floods, etc, to enable states to cope with sudden emergencies without derailing their plans;
* 25% to states whose per capita income is below the national average.
There was an element of discretionary allocation, too. This structure of devolution and Centre-state allocations must be clearly set out, but it is essential that it should not be perceived to be biased. There should be an element of flexibility that is inherent in the Gadgil formula if it is to be accepted. While it is untenable to use 1971 data—it has a marked skew—the need for funds of states at different stages of development requires specific attention; also, the population control efforts by the southern states, and their results, should not be punished. A framework of performance-based incentives needs to be put in place when it comes to finance panel recommendations.
Former executive director, RBI