Heed the federal framework

Heed the federal framework

Context

The Finance Commission must respect principles of equity and fairness in allocating resources between Centre, States

Vital for unity

• The Centre’s capacity to mobilise resources is far greater than that of the States, but the States are required to undertake development expenditures that far exceed their revenue generating capabilities
• GST and demonetisation: States have received a double blow in the form of demonetisation and the Goods and Services Tax (GST). The freedom of States to raise resources has been restricted by the introduction of the GST. They now have hardly any major tax left with them to make a difference to State resources.

Demographic differences

• Using the population data of 2011 as the base for tax devolution should not reduce the allocation of resources to States that have successfully reduced their rate of population growth
• These States have incurred huge fiscal costs in order to achieve a lower population growth and healthy demographic indicators
• They have made substantial investments on education, health and directly on family welfare programmes.
• Bringing down the rate of growth of population does not mean less expenditure for States
• On the contrary, it creates new commitments by the States to those in the labour force and to senior citizens.

Fiscal Consolidation not the task of the FC

It is not the task of a Finance Commission to recommend “road maps for fiscal management” or to impose its perception of what policies are good for the people of the States. That is for democratically elected State governments to decide.

Revenue deficits

To discontinue post-tax devolution of revenue deficit grants would go against the principle of cooperative federalism

Shouldn’t take residual approach

• The Finance Commission should not take a “residual approach” to the question of vertical devolution
• The approach should not be that of distributing what is left over after providing for the requirements of the Centre

Attempt to micro manage

• The terms of reference are unprecedented in asking the 15th Finance Commission to consider proposing performance-based incentives beyond those relating to fiscal responsibility, population and devolution to local bodies
• This reflects the viewpoint and ideological inclinations of the Central government and is an attempt to micro-manage the fiscal domain of the State governments.

Attack on the federal structure

• For the Finance Commission to propose “measurable performance-based-incentives” is nothing short of an attack on the federal structure mandated by the Constitution
• It is not the duty of the Finance Commission to venture into the realm of day-to-day governance

Not for the Finance Commission to declare this or that policy as “populist

The elected governments of States will decide what policies are appropriate for our people.

• Any measure, from welfare pensions for the poor and weaker sections of the society to food assistance, can be termed as “populist” and recommended to be curtailed
• This strikes at the root of a democratic polity in which State governments are free to implement welfare measures, albeit within conditions of fiscal responsibility.

No squeeze of the fiscal space available to the Union government

It is not correct that the fiscal space available to the Centre has shrunk following the 14th Finance Commission recommendations

Argument: The argument today that an increase in devolution from 32% to 42% led to a reduction of the fiscal space available to the Union government is not borne out by the evidence

What happened? : In practice, when implementing the award of the 14th Finance Commission, the Union government cut allocations to several Centrally Sponsored Schemes in 2015-16. The cutback was almost equal to the amount received by the States as a whole on account of the rise in share of taxes and duties.

Conclusion

The Finance Commission must facilitate diversity and a democratic path of development by respecting principles of equity and fairness in allocating resources between the Centre and States in India.