The last resort

Honorable President,

The constitution of the 15th Finance Commission has come at a historic juncture when the essence of co-operative federalism is facing substantial challenges. The Finance Commission is a Constitutional body to ensure strengthening of intergovernmental fiscal relations and stability in resource transfer to the States. It is our earnest submission that this tradition should not be destabilised in any manner. Past experience reveals that the TOR of a Finance Commission by and large sets its mandate. In this context, the marked departures from past in the TOR of the 15th Finance Commission, in certain important areas, assumes significance. We have serious apprehensions on the impact of these not only on the government finances of the States in general and some States in particular but also on the fabric of federal polity.

The substantial difference in the TOR of the 15th Finance Commission, as compared with the TORs of the past ones is that it has been mandated to use Population based on 2011 census while making its recommendations (TOR 8). This can make the share of Andhra Pradesh, Karnataka, Tamil Nadu, Kerala Assam, Goa, Himachal Pradesh, Punjab, Odisha and West Bengal in the divisible pool of Union taxes fall  from the present, unless suitable corrections are made at the earliest. The share of the population of these States in total population has declined from 32.03 to 27.32 percent between 1971 and 2011 censuses. The use of 2011 census based Population can affect tax devolution in multiple ways, all of which would be particularly unfavourable to these States. This can have a deleterious impact on the government finances of the adversely affected States. Given these facts and circumstances, it is proposed that TOR 8 be deleted and the 15th Finance Commission be given a new TOR after factoring in the above cited genuine apprehensions. Population based on 1971 census, hitherto used by the Union Finance Commissions is to be considered as a basis, if the interests of the States which took social initiatives at a substantial fiscal cost are to be protected.

Another major item in the TOR which was so far not been there in the mandate of the previous Finance Commissions is the requirement to recommend whether Revenue Deficit grants should be devolved at all (TOR 5). The purpose of Revenue Deficit grants is to meet the post devolution Revenue Deficits of the States in order to ameliorate the vertical fiscal imbalances. Discontinuation of Revenue Deficit grants would accentuate the vertical fiscal imbalances impeding the States capacity to incur expenditure for developmental purposes. This will constrain their ability to discharge their obligations under Schedule VII of the Constitution. 

Besides the fiscal impact, the TOR on review of Revenue Deficit grants would also result in bypassing the provisions of Article 275 of the Constitution. It also travels beyond the provisions of Article. 280 (3) (b) of the Constitution which empowers the Finance Commission to “make recommendations to the President the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India”. The wordings of the Constitutional provision does not confer authority on the TOR of the  Finance Commission to bypass Article 275 and unnaturally expand the interpretation of Article 280 (3) (b). In our reasoned view, this part of the TOR 5 needs to be deleted. The TOR 6(vi) mandates the 15th Finance Commission to make recommendations on the conditions the Government of India may impose while providing consent under Article 293(3) of the Constitution for borrowings by the States. It is pertinent to point out that States which are indebted to the Centre are obliged to take permission from the latter while borrowing, and borrowing limits of the States are limited by the Fiscal Responsibility and Budget Management (FRBM) Acts legislated by the State Assemblies. Under these conditions, imposition of further conditionalities would further shrink the already limited fiscal space of the States.

It would also make the FRBM Acts passed by the State Assemblies lose their significance and Central discretion from time to time would, set borrowing  limits  overriding the statutes enacted by the State legislatures.  It is our strong view that this item of the TOR goes against the grain of fiscal federalism. The TOR (6) (iv) emphasises expenditure commitments of the Central Government much beyond the items in the Union List. Much of these expenditures arise out of the items in the State List. Moreover in a federal set up, State and Local Governments are equal stakeholders in striving for achievement of national development goals. Treating these as Central responsibility alone runs counter to the basic principles of federalism and is unfortunate. We submit that this TOR may be deleted.

The TOR 7 deals with performance-based  incentives. At the outset, it is not clear whether these incentives would  be given to States which have already made substantial progress in these areas by incurring substantial fiscal costs. Notwithstanding this, we would like to place our disagreement with a Constitutional body like the Finance Commission taking up monitoring of specific items which are in the Constitutional domain of the States. As the Finance Commission is not a permanent body, the monitoring would enable a Central scrutiny on States’ functioning and would not be conducive to the development of a healthy federal framework. Moreover, it would be a retrograde step from the present situation of Finance Commission refraining from suggesting specific grants and monitoring of performance. The Central Government is having adequate fiscal space outside the realm of Finance Commission transfers to give performance-based grants to the States.

The TOR 7(viii) on “control or lack of it in incurring expenditure on populist measures” needs to be deleted as it forays into the domain of electoral democracy in which welfare measures for the poor and the vulnerable are placed before the electorate while seeking their mandate. The term in the TOR is vague and is open to wide interpretations and distortions. Any welfare policy can be dubbed as populist and sought to be curtailed. It is noteworthy that many of the national flagship welfare schemes had their beginnings as a successful State-specific programme. In other words, States have acted as laboratories where the schemes were effectively implemented. While fiscal consolidation has been accepted by all States, the TOR cannot mandate a Constitutional body like the Finance Commission to hamstring the expenditure policies and priorities of State governments.  Based on the facts and implications highlighted by us, it is submitted that the only option available is to request the President to issue an amended TOR to meet the ends of justice and equity. Kind note may be taken of the fact that an early resolution of these issues raised by us would go a long way in restoring the spirit of cooperative federalism to its rightful place in our polity.