Not fair: Finance Commission's terms of reference stray from propriety

Many southern politicians have drawn considerable attention to the fact that the terms of reference (ToR) for the Fifteenth Finance Commission (FFC), as drawn up by the Centre, have said the basis for the population counts relevant for the division of funds must be the 2011 Census and not, as it was in the past, the 1971 Census. Between 1971 and 2011, except Telangana, the population share of four southern states in the total declined from 22.01 per cent to 18.16 per cent. As such, the use of the 2011 Census for sharing resources would mean a decline in the flow of resources to these states. The southern states claim that this will skew the allocation of central funds in favour of states with large populations such as Uttar Pradesh and Bihar. 

While attention has so far been fixed on this issue, it appears that there are other aspects of the ToR which suggest that the Centre has not chosen to respect the unique nature of the Finance Commission, the constitutional vehicle for ensuring that the sharing of tax revenue is updated properly. Although the FFC is supposed to do an impartial job of dividing up revenue and, thus, is not an extension of the central government and its priorities, it could be argued that, in fact, the Centre has managed, through control of the ToR, to make its priorities the FFC’s priorities. This is the opposite of the spirit underlying, for example, the Goods and Services Tax Council and, therefore, a notable step backwards for “co-operative federalism”. For example, the ToR of the FFC demand that it considers “the impact on the finances of the Union government of substantially enhanced devolution to the states following the recommendation of the Fourteenth Finance Commission coupled with the continuing imperative of the national development programme, including New India 2022”. It is unprecedented for one Finance Commission to be asked to sit on judgement on another. It certainly appears that the government is seeking, through the ToR, to order the FFC to claw back funds that its predecessor had devolved to the states.

It is also jarring to see one of the central government’s many schemes and proposals (New India 2022) name-checked in the ToR as if it is a priority for a constitutional body that is responsible only for ensuring the continuing health of Indian federalism. The FFC is also encouraged to find ways of reducing “populist expenditure”, which is again puzzling. It is not a super-government. It is simply a way of dividing a shared pool of revenue between the Union government and various states. It should not pronounce thereafter on what measures are “populist” or otherwise appropriate, and what are not; that is beyond its competence. In this country, such determinations are the right only of duly elected and accountable representatives of the people.

The FFC should restrict itself to its constitutional function, to devise and update a formula that divides revenue among the various levels of government. It should ignore all other aspects of its ToR. And the Centre should ensure that in future such ToR are examined and agreed upon by a federal body, such as the National Development Council used to be.

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