Will finance panel resolve southern states’ concerns?

The Terms of Reference (ToR) of the 15th Finance Commission (FC) has been controversial ever since it was written. The most debated issue in the ToR is that the “Commission shall use the population data of 2011 while making its recommendation”.

The southern states have vociferously opposed the idea of using 2011 population data as doing so would result in their share of the divisible pool of resources being drastically reduced. Since the seventh FC, the panel has by consensus used the 1971 population data for all purposes for which population is taken as a factor, such as devolution of taxes, duties and grants-in-aid.

The 42nd Amendment to the Constitution in 1976 froze the number of representatives in the Lok Sabha (on the basis of population) at 1971 level for 25 years. It served as an incentive for state governments to pursue the agenda of population stabilisation. Further, by the 84th Amendment in 2001, the freeze was extended for 25 more years, that is, until 2026, to achieve population stabilisation and promote sustainable development. The 14th FC used 1971 population mainly, but also considered post-1971 demographic changes by giving a certain weightage to 2011 population data, as provided in its ToR.

A comparison of the 2011 population of the southern states with the 1971 figures reveals that their share in the country’s total population has commendably declined. The southern states, namely Andhra Pradesh, Telangana, Karnataka, Kerala and Tamil Nadu constituted 22% of total population in 1971, and their share had declined to 18.15% in 2011. When compared to other states in India, the southern states have put in remarkable efforts to reduce population growth. Given these facts, the usage of 2011 population figures as a criterion for devolution of resources would definitely hit them.

However, it should be kept in mind that the Centre has to cater to the needs of the present population and not that of 1971. Then, the question would be, what is the reward for those states that have sincerely put in efforts to reduce population growth? The 15th FC was also asked in the ToR to propose performance-based incentives for the states for the efforts and progress made in moving towards the replacement rate of population growth.

The National Health and Family Survey-4 indicates an all-India replacement rate of 2.2. The United Nations Population division defines a total fertility rate (TFR) at 2.1 children per woman. Considering that benchmark, the southern states have done well in controlling total fertility rate below 2.1.

Karnataka had a TFR of 1.9 in 2011 (1.8 in 2016), Tamil Nadu 1.7 (1.6 in 2016), Kerala 1.8 (1.8 in 2016) and the united Andhra Pradesh 1.8 (AP 1.7, Telangana 1.7 in 2016). In contrast, Bihar had the highest total fertility rate at 3.6 in 2011 (3.3 in 2016), followed by Uttar Pradesh at 3.4 (3.1 in 2016), Rajasthan 3.0 (2.7 in 2016) and Madhya Pradesh 3.1 (2.8 in 2016) among the major states in India.

Rise in ageing population

The reduction in replacement of population has brought about significant changes in the age structure of the populations in the states. India presently is on the cushion of a demographic dividend. Undoubtedly, there is an increase in the labour force but, on the other side, there is a rise in the age 60-plus population, and it is expected to increase further. This trend will certainly create substantial fiscal burden on the state governments in terms of providing old-age pensions, health facilities, etc.

Another concern is the rising urban population. As per 2011 census, nearly 42% of the population in southern states live in urban areas, up from 31.6% in 2001. Some 773 towns were added in the southern states in this period. Given these facts, the 15th FC should consider and factor in these demographic changes while making recommendations.

The direction to go by the 2011 population data is not the only concern of the southern states. There are other issues, too, in the ToR. One such is asking the 15th FC to examine whether revenue deficit grants should be provided at all. Southern states have made sincere efforts to reduce revenue deficits. In fact, Karnataka has a revenue surplus, though it is only marginal. Generally, revenue deficit grants were provided to fill the post-devolution gaps, if any.

Presently, there are many factors that make providing revenue deficit grants crucial. First, there are systemic reforms in the indirect taxes with the introduction of GST. It is proposed by the union government that revenue losses under GST will be compensated to the states for a period of five years from the date of GST introduction. We do not know what GST collections will be like after that period. If there is a decline in revenues, it will hurt states’ finances. Hence, the unforeseen effect of GST collection is a point of concern.

Second, following the central pay revisions, many states have also been forced to revise pay and pensions, which again burdened their finances. Undeniably, there will be similar revisions in the future. Third, given the socio-economic spending needs vis-à-vis their revenues, states require more transfer of resources from the Centre.

Lastly, there is an increase in debt levels of states after the adoption of the Ujjwal DISCOM Assurance Yojana (UDAY) scheme. If states’ expenditure needs are not met through their own revenues and transfers recommended by the FC, the deficit has to be compensated, at least partially. Given these facts, not providing revenue deficit grants would further worsen states’ finances. Moreover, it is against Article 275(1) and Article 280(3b) of the Constitution. Let us hope that the 15th FC resolves the concerns of the southern states.

(The writer is faculty at Fiscal Policy Institute, Bengaluru)