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Finance Commission Considering Population Stabilisation for Allocating Funds to States

The Council, consisting of senior economists, said it would be realistic to use contemporary population data but weightage should be assigned to population and also rewards for population stabilisation policy.

Updated:May 19, 2018, 10:17 AM IST
Finance Commission Considering Population Stabilisation for Allocating Funds to States
15th Finance Commission chairman N K Singh.
New Delhi: Amid multiple state finance ministers protesting against the terms of reference, the newly constituted advisory council in its first meeting with the 15th Finance Commission raised the issue of population not being the only parameter for devolution of funds.

The Council, consisting of senior economists, said it would be realistic to use contemporary population data but weightage should be assigned to population and also rewards for population stabilisation policy.

Further, the Commission also accepted that while they cannot amend the terms, immediate addressal is a requirement.

The Council also added that the permissible limits on borrowings under fiscal consolidation roadmap need to be equally applicable to Centre and States in the context of overall macroeconomic framework.

The Finance Commission will submit its report by October 2019. The recommendations of the 14th Finance Commission, chaired by former Reserve Bank of India governor YV Reddy, are valid till 2020.

Additionally, issues of uncertainty pertaining to GST need to be fully factored in, said the Council. The officials also discussed whether providing an interim tax devolution plan till the states stabilise post GST should also be considered.

“Inadequacy of data in terms of GST and other schemes, and its reliability constituted a significant handicap in realistic revenue projection and other key variables like employment as well as in determining measurable criteria,” said the Finance Commission.

The Council also raised the issue of new context post abolition of Planning Commission which has altered the traditional system of resource allocation and consequently abolition of distinction between plan and non-plan funds.

Other roadblocks addressed include issues of rewards for past performance, taxation capacity of states and formulas on devolution, key challenges in making robust projections on GDP, pension liability, revenue realization and availability of resources beyond devolution for grants-in-aid.

The future of centrally sponsored schemes remained problematic with changing pattern of funding, discussed the officials.

Sources informed News18 that United Nations Development Programme has also offered help to the Commission and will be preparing a study paper. National Disaster Management Agency will also be meeting the Commission on September 3.

World Bank officials are also scheduled to meet the Finance Commission on July 31.

The 15th Finance Commission had on May 9 set up this Council to advise it on matters related to the Terms of Reference (ToR) that have come under attack from some non-BJP ruled states such as Andhra Pradesh and Kerala.

Some southern states criticised the ToR saying progressive states would lose revenue if 2011 Census was taken as base for devolution of central funds.

The panel advises the Commission on any issue or subject related to the ToR and provides assistance in the preparation of any paper or research study which would enhance the Commission’s understanding on the issues containing in its ToR.

Arvind Virmani, former Chief Economic Advisor; Surjit S Bhalla, Part-time Member of Prime Minister’s Economic Advisory Council; Sanjeev Gupta, a former IMF deputy director; Pinaki Chakraborty, Professor (NIPFP); Sajjid Chinoy of JP Morgan and Neelkanth Mishra of Credit Suisse India are the members of the panel.

Meanwhile, six non-BJP ruled states on Thursday petitioned President Ram Nath Kovind against the terms of the 15th Finance Commission for deciding the share of states in taxes collected by the Centre, and said that they violate the federal principle as well as infringe upon the Constitution.

In a memorandum signed by chief minister and finance ministers of Andhra Pradesh, Kerala, West Bengal, Puducherry, Punjab and Delhi, the states opposed some of the terms of reference (ToR) saying they "violate the federal principle as enshrined in the Constitution, erode autonomy of states, and bring significant financial hardship to all states".

Stating that some of the ToR are "qualitatively" different from those of previous Finance Commissions, the memorandum said changes will restrict the states from fulfilling their Constitutional obligations.

Opposing the ToR of the Commission, Andhra Pradesh Chief Minister N Chandrababu Naidu had in Amaravati said that progressive states would lose heavily if the 2011 Census was taken as the basis for devolution of central funds. Kerala Finance Minister Thomas Isaac, Andhra Pradesh Finance Minister Yanamala Ramakrishnudu, West Bengal Finance Minister Amit Mitra and others attended the conclave.

Last month, Kerala had hosted a conference of finance ministers of various states to discuss issues of common concern with respect to the Commission.

Responding to the concerns, Union Finance Minister Arun Jaitley had said on April 10 that there is no inherent bias or mandate in the ToR which could be construed as discriminatory against the states which have made good progress in population control.

He had said that a needless controversy was being sought to be created that the terms of reference of the Commission were loaded against any particular region of the country.

Pointing to the specific inclusion of reference — efforts and progress made in moving towards replacement rate of population growth — Jaitley had said it recognises the efforts of all the states which have done well in population control.

“This specific ToR would allow the 15th Finance Commission to propose a specific incentive scheme to reward the states which have achieved replacement level of population growth, and also, if the 15th FC wishes to do so, to assign appropriate weight to the progress made in population control while allocating resources,” Jaitley had stated.

Major Recommendation of Previous Finance Commission

For the period from April 1, 2015 to March 31, 2020, the 14th Finance Commission (FFC) was constituted in January 2013. It submitted the report on December 15, 2014.

One of the main recommendations that the last Finance Commission came up with was that of increasing the tax devolution rate to 42% from 32%. This means the Centre should allocate 42% of its tax revenue to states, largest ever. In the past, when Finance Commissions have recommended an increase, it has been in the range of 1-2%.

The last Finance Commission had YV Reddy, former governor of Reserve Bank of India, as its chairman. Members of the Commission included Abhijit Sen member, Planning Commission, Sushama Nath, former union finance secretary, M Govinda Rao, director, National Institute for Public Finance and Policy and Sudipto Mundle, dormer acting chairman, National Statistical Commission. The body had Ajay Narayan Jha as its secretary.

Bold Faces in Previous Finance Commissions

When former RBI governor C Rangarajan took over as the chairman of the 12th Finance Commission, the fiscal balance of both the Centre and states were deteriorating due to compliance issues of value added tax (VAT) and the states complaining of diminishing tax revenue due to the same.

The then chairman almost doubled the transfer of money from the Centre to the states from Rs 4.40 lakh crore in 2005 to Rs 7.55 lakh crore in 2010.

The 14th finance commission as mentioned also took sharp steps in favour of the states. There were reports also doing the rounds that the last commission did not work in unison and there was a letter of dissent from Planning Commission member Abhijeet Sen.
| Edited by: Nitya Thirumalai
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