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Alter Finance Commission's TOR by invoking CCSR reports


MAY 14, 2018

By TIOL Edit Team

Such step should settle Centre-States rift row over TOR

THE show-down between the Centre and 11 States over terms of reference (TOR) for fifteenth Finance Commission (FFC) is cause for deep concern. Both the Centre and the States are at fault.

Prime Minister Narendra Modi, who, as Gujarat CM, had raised several issues from States' standpoint, did not bring in any refreshing change in Centre-States interface. No one knows better than him the Centre's condescending approach towards the States. Sadly, Cooperative Federalism is one domain where his words and actions don't match.

Prime Minister is the captain of Team India. The buck stops at him when it comes to resolving tensions that are normal in a huge, complex federal set-up. Tensions should, however, not be allowed to simmer into events that we regret later.

In the instant case as in inter-state water disputes, PM has let controversies build up. We urge him to regularly address macro socio-economic issues with the chief ministers. The appropriate forums for interface are: Inter-State Council, Governing Council of Niti Aayog or special conference of Chief Ministers that can be convened anytime.

Instead of toning down the Centre's big-brother stance, Mr. Modi has simply embraced policies adopted by previous regimes. He thus last month dismissed aggrieved States' at public function in Chennai. He stated: "An issue that has been raised by certain vested interests over the last few days... Baseless allegations are being made about the ToR of the 15th Finance Commission being biased to the states of a particular region".

Mr. Modi was obviously referring to Southern States charge that adoption of 2011 census population data for determining devolution of resources to States would penalize them for achieving population control. Their apprehension is that 2011 data would result in transfer of lesser resources to South and more to Northern States, whose population has grown faster.

Southern States thus want continuation of 1971 population data as the basis in TOR. There is a merit in adoption of 2011 data as we find later in this edit.

PM could have easily changed this perception if his staff had done meticulous homework for him. He missed an opportunity to fulfill States long-standing demand for TOR should be framed in consultation with the States.

It is here pertinent to quote the stance on a Task Force (TF) that assisted Commission on Centre-State Relations (CCSR). Report of TF forms part of the seven-volume report submitted to UPA Government in April 2010.

CCSR's recommendations were discussed by ISC during July 2016 – the only ISC meeting organized so far by Modi Government. The Government has not made public the decisions arrived at ISC. This reflects poorly on the state of cooperative federalism.

TF on ‘ Constitutional Scheme of Centre-State Relations' recommended that "There should a formal process of consultation between the Centre and States before finalising the TORs of the Finance Commissions”.

Keeping in view the requirements of a healthy federal system,TF opined: "There is no need for the Central Government to put forward extremely detailed TORs. The Finance Commission should be free to determine its approach with reference to provisions of Article 280 ”.

Notified on 27th November 2017, FFC's TOR are indeed very comprehensive. They have an element of political overtones such as Modiji's New India-2022.

All previous PMs have invoked their vision for New India/Dream India but those were not sneaked in TOR of FC, which is a constitutional body.

More important is the fact that the Centre always put on the back burner FC's recommendations that result from TOR's elaboration. The Standard and stale explanation is that such non-binding recommendations would be examined in due course.

When that has always been the known fate of FC's non-binding recommendations, Should the Union Government not leave it to FC to decide its comprehensive approach to improve entire India's fiscal health?

In any case, the Centre can put its exhaustive views in its memorandum to the FFC. The Central Government can also articulate its views on diverse issues in the replies to formal questionnaire issued by FC. All States do that.

While benefiting from TF's wisdom, CCSR has given specific recommendations on Centre-State financial relations.

CCSR's notable recommendations include: 1) ToR of future FCs should be formulated in such a way that the additional commitments of States on account of pay revision are fully taken into account; 2) The scope for raising more revenue from the taxes mentioned in article 268should be examined afresh. This issue may be either referred to the next Finance Commissionor an expert Committee be appointed to look into the matter; and 3) There is a case for reviewing the present arrangement regarding resource sharing between the Centre and the States and giving a share of the offshore royalty to States.

CCSR's another major recommendation is: "The additional expenditure liabilities on States on account of the implementation of Central legislations should be fully borne by the Central Government. An institutional mechanism should be put in place to verify the additional cost and to ensure reimbursement of such additional costs to States. It is recommended that issues giving rise to such liabilities may be included as a part of permanent Terms of Reference of the Finance Commission”.

The Centre has overlooked all these recommendations of CCSR and its TF while preparing TOR. It, however, chose to incorporate a recommendation relating to population data that is a major bone of contention for aggrieved States.

Pointing out that successive FCs have been given the mandate to utilize 1971 census data for devolution of resources among the States, TF stated: "It is difficult to see the relevance of 1971population census data when population of all States was about 54 crore, whereas 2001census puts the all-India population at more than 100 crore. Even if the implicit objective is to penalize States, which have done less well in comparative terms in controlling population growth, the determination of the suitable incentives should be left to the Finance Commission”.

Banking on 47 years old data defies logic. States should thus accept 2011 data.

FC's TOR should, however, be reworked in such a manner that it rewards substantially States that have controlled its own population but also assimilated well the migrants from over-populated and relatively backward States.

Aggrieved States' other concerns, such as asking FC to consider discontinuing revenue deficit grants, merit resolution.

It is now the duty of the Centre to reach out to States to resolve issues. And the best way for doing is to be abide by recommendations of CCSR. The ball is in the Union Government's court.

As Gujarat CM, Mr. Modi pitched for early implementation of CCSR recommendations. Four years have passed since he took over as PM and yet no action on this front.

Let the foremost champion of cooperative federalism make amends by issuing additional/modified TOR.


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