Mentors Comment:

The terms of reference (TOR) of the 15th finance commission have been under criticism from the southern states for various reasons. The question is therefore important for GS-1 paper. The question wants us to bring out the salient provisions of the TOR of the 15th finance commission and discuss how they would affect federalism and demographic lines in India on the North-South divide.

Directive word is Discuss, therefore, we have to write in detail about the important provisions of the TOR of the 15th finance commission and how they would affect the interests of southern states and whether it is at all that bad a situation for southern states in reality. 

• In the introduction, give a brief description of the 15th finance commission, its constitutional powers and mandate and criticism from southern states.

• In the main body, discuss in points, how the TOR of the 15th finance commission will affect federalism and what are the concerns of southern states. e.g. change in population base and the consequent change in resources allocation, power of the commission to review the award of its predecessor i.e 14th finance commission, increase in the share of centrally sponsored schemes, reversing the 14th Finance Commission’s efforts, etc. Keep your focus on population issues.

• In the next subheading, discuss how it is not an issue of North vs South actually.

• The third and final part of the answer will have the discussion on alternate suggestions or steps that can be taken to alley this fear of north vs south. Steps like equal weight for 2011 and 71 census, awarding better performing states, supporting states affected by migration, etc.

Answer:

The 15th Finance Commission was constituted under the chairmanship of N.K. Singh. to come up with the ratio in which the tax money that the central government raises gets divided among the states. The terms of reference (ToR) of Fifteenth Finance Commission have evoked a sharp response from southern states. The issue with the 15th FC is that commission shall use the population data of 2011, instead of 1971 data, while making its recommendations.

Problems of southern states:

• 2011 census data:

• The 15th FC has recognized population as an important criterion for distribution of taxes and said it will use data from the 2011 census, instead of 1971, while making recommendations for the five-year period beginning from 2020.
• Between 1971 and 2011, except Telangana, population shares of four southern states in total declined from 22.01% to 18.16%
• Between 1971 and 2011, population share has declined in 10 states other than the four southern states
• These are Assam, Goa, Himachal Pradesh, Odisha, Punjab and West Bengal
• Thus, use of the 2011 population would also affect economically less prosperous states like Assam, Odisha and West Bengal
• The southern states want the recommendations to be based on the 1971 census data. 
• This is because, as compared to northern states, south India has recorded significant progress in population control or in the replacement rate of population growth.
• Southern states opined that ToR was in contradiction to the principles of federalism enshrined in the Constitution and also would result in revenue loss to performing states.

2. Tax-sharing formula

• In the past, the tax-sharing formula was a combination of factors reflecting equity, need, and efficiency
• Population, being a neutral indicator of need, has been used by all 14 finance commissions
• Any finance commission is required to assess the financial needs of states for tax sharing and grants
• Binding commission’s work to a particular reference population is arbitrary and unfair to all the stakeholders including the Commission

But is it South vs North?

• The argument of the southern states that they have controlled the population growth is true but there is no proof that the northern states have supported the proliferation of the population through the policy measures.
• The southern states are not alone in the reduction of population share. Apart from the four southern states, there are many more states whose population share has reduced between 1971 to 2011.
• States like Gujarat, Maharashtra, Punjab, Haryana etc have also received lesser than what they have paid to the central government.
• When per capita income is compared with per capita transfers received the southern states are getting better devolution compared to northern states such as UP, Bihar.
• The 1971 population does not take into consideration the issue of migration, which is observed at a very large scale in today’s scenario. 
• The states such as UP appear to be dependent on the central transfers primarily because of their population. 
• In fact, certain parts of UP are richer than some of the regions in other states.
• FC has to ensure that the poorer states have adequate resources to promote socio-economic development, critical infrastructure, balanced regional development, etc.
• Taking the older population may not lead to the right amount of services to be provided by the states
• The concept of demographic dividend will only lead to results if the population is given access to the right education, nutrition, skilling, etc and the larger states in terms of population will require this kind of assistance

Alternative Way forward

• The one-size-fits-all model cannot deliver the desired outcomes of prosperity, elimination of poverty and national greatness in a vast and diverse nation of 1.3 billion people. 
• We need more flexible federalism, strengthening India’s unity and integrity, and allowing us to fulfil our potential.
• Therefore, creative options are needed to reduce this tension between states that have drastically different population growth rates.
• Hence giving mixed weightage to 2011 population as well as the population of 1971 is an option.
• Providing incentives to the states which have better performance in the population control reforms as well as encourage efforts to control population in states were fertility rate is still high. 
• Supporting states that have seen greater in-migration is also important.
• Any incentive or reward should be done through a grant mechanism instead of horizontal tax sharing
• Creative handling through the multitude of sensitive issues will help prepare the ground for the bigger battle for political delimitation that awaits in 2026.

Some of the concerns flagged against the 15th FC are unwarranted, while others are legitimate. But it is premature to jump to conclusions regarding the shares of the southern states as the FC is yet to come out with the weightages to various parameters to determine the horizontal formula. The states should indeed raise these legitimate concerns. However, they will hopefully do so in a spirit of cooperative federalism and keeping in view both the national interest as well as the overarching principle of equity among the states.