Question

What are the terms of reference of the 15th finance commission? Critically analyze whether terms of reference is against the spirit of cooperative federalism?

Answer 1

Under Article 280, President constitutes a Finance Commission (FC) every fifth year for sharing the union taxes with the states. The 15th FC was set up under the chairmanship of NK Singh to suggest measures for the five years from 2020 to 2025 for improving the fiscal federalism.

Terms of reference are the guidelines by central government to 15 th finance commission on the basis of which finance commission has to frame report.

Main guidelines under terms of reference: 1.Principles governing the Vertical devolution of taxes between union and states.

1. Principles governing the Horizontal distribution between the states.
2. Grant in aid to states, supplement the resources of PRI, ULBs from states’ Consolidated funds.
3. Performance Based incentives for States.

Cooperative federalism is a concept of federalism in which federal, state, and local governments interact cooperatively and collectively to solve common problems, rather than making policies separately or clashing over a policy in a system dominated by the national government. There are many apprehensions among the states regarding Terms of reference.So It seems that it is against the spirit of federalism.

Terms of reference (TOR) and apprehension of the state:

1. Performance Based incentives for States: Under 15th FC TOR, commission will recommend performance-based incentives to the states depending on following parameters Efforts made in expansion of GST tax-net : Manipur can’t do as much as Maharashtra in deepening the GSTtax net, owing to the variety of economic, geographic and political factors.

Efforts made in achieving replacement level of population growth : Northern states’ total fertility rate higher, so they’re apprehensive

2. Principles governing the Vertical devolution of taxes between union and states : 14th FC had recommended 42% vertical devolution. 15th FC TOR asks the commission to examine the impact of 42% devolution on Union government, including its New India- 2022 Vision (Housing for all, doubling farmers’ income). States fear that Union will use it as an excuse to keep more funds to itself, and the devolution may be reduced to less than 42%.

3. Census-2011: 14th FC had used Census1971 formula for horizontal distribution of taxes among states. Census- 1971 population was given 17% weight i.e. more populous state will get mode funds. 15th FC is ordered to use the Census2011 data.

Southern states have reduced their fertility rate between 1971 to 2011 , whereas Northern states could not achieve so due to poverty, illiteracy and healthcare infrastructure.So, Southern states fear Northern states will get proportionately more funds, if Census2011 is used.

Positives in Terms Of Reference for promoting Cooperative federalism:

1. Controlling the expenditure on populist measures: Many state governments are running populist schemes without consideration of fiscal discipline like freecycle, debt waiver and free mobile etc. So directly or indirectly it is loss of public money. In such sense Terms of reference is right steps to promote cooperative federalism by maintaining fiscal discipline.
2. Efforts made in achieving replacement level of population growth : These are the right steps in terms of population control. So state government should take in positive terms.Due to huge population growth, there is a burden on natural resources. So in such case such guidelines will only promote cooperative federalism
3. There is also the argument when the resources will be allocated on the basis of the 1971 census then high populous state will be at a disadvantage. How these state will do human development with less allocation when the population is very high . So in such sense terms of reference is right steps to promote cooperative federalism.

Way Forward:
There are some positives and negatives in terms of reference. 15th finance commission should take apprehension of state into its consideration so fulfill its constitutional responsibility and promote the vision of fiscal federalism.