Why Southern States are Rallying Together Over the Terms of the 15th Finance Commission

Modi and Jaitley found themselves on the backfoot this week, with the Prime Minister acknowledging in Chennai that states that had succeeded in controlling population growth needed to be rewarded.

New Delhi: A political slugfest is brewing between the Centre and southern states over the 15th Finance Commission’s terms of reference (ToR).

To forge a unified stand against what they see as a lopsided parameter, finance ministers from Kerala, Karnataka, Andhra Pradesh and the Union Territory of Puducherry met this week. Briefing the media over the deliberations held in the conclave, Kerala finance minister Thomas Issac said the ToR of the 15th Finance Commission are a threat to the federal system. He also said that this is a deliberate attempt to cut down tax devolution to the states and forcibly impose conditions on the states.

The next meeting will be held in Visakhapatnam early next month, in which Delhi, West Bengal, Odisha and Punjab are also expected to take part. There will also be attempts to bring Telangana and Tamil Nadu for the next conclave, said Isaac.

While Tamil Nadu did not participate in the recent conclave of finance ministers of southern states, it has, nevertheless, lodged its protest against the ToR.

The Finance Commission’s role

The Finance Commission is the constitutional structure which divides the finances of the country between the Centre and the states. In a departure from the earlier practice, which relied on data from the 1971 Census, the 15th Finance Commission’s ToR has stipulated that data should now be used from the 2011 Census. The 1971 data is also the basis for the distribution of Lok Sabha seats among India’s states.

A state’s population is a significant factor in determining how tax revenue is distributed. The reason why Southern states are upset is because they believe their share will get cut as they’ve manage to keep a check on population growth unlike several of the their North India counterparts.

Up to the 13th Finance Commission, the 1971 Census data was used exclusively, which was the last census before aggressive family planning initiatives were implemented. But then the 14th Finance Commission  gave a weightage of 10% for Census 2011 data that hurt states like Tamil Nadu badly.

A 50% weight was given to income distance, which measures the distance of a state’s income from the state that has the highest income. The remaining weight was given based on forest cover and general issues.

These are the facts that are driving the fear of southern states that Northern states will benefit under the 15th Finance Commission. These states feel they are being punished for checking population growth while their Northern counterparts are being rewarded for their poor implementation of family control programmes.

Between 1971 and 2011, Kerala and Tamil Nadu had population growth of 56% and 75% respectively – the lowest among all states – while most others saw their populations double. If Tamil Nadu had kept pace with other states, its population would be 20 million higher than it is. Similarly, Kerala’s population would be ten million more.

On the other hand, Uttar Pradesh, Bihar, Madhya Pradesh and Rajasthan saw an explosion in their population. Their combined population growth was nearly 50 million higher than the national pace of growth can justify.

This huge difference is very the reason why southern states feel that using data from the 2011 Census for allocation of Central resources is grossly unfair.

The two sides

The Tamil Nadu government has, in a statement, said it will stand to lose if the census year for calculating revenue distribution is changed from 1971 to 2011 – the same concern that was voiced by the conclave hosted by the Kerala government earlier.

“The Finance Commission’s recommendation to use the 2011 census for allocation of union tax revenue instead of 1971 census, would severely affect Tamil Nadu which has made rapid progress in population control in the last 40 years,” the statement said.

It further said Tamil Nadu chief minister E.K. Palaniswami has written a letter to the Prime Minister Narendra Modi, Union finance minister Arun Jaitley and chairman of the 15th Finance Commission N.K. Singh, flagging discrepancies in the ToR.

After Jaitley and Modi rejected the allegations of southern states on Thursday that the ToR of the 15th Finance Commission was biased. They said that it would benefit states that took population control measures seriously.

“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,” the prime minister said after inaugurating a building of a Cancer Institute (WIA) in Chennai.

“Let me tell you our critics seem to have missed something. The Union government has suggested to the Finance Commission to consider incentivising states who have worked on population control. By this yardstick, states like Tamil Nadu, which has devoted a lot of efforts, energy and resources towards population control, would certainly benefit,” the PM said.

Earlier, Jaitley had strongly defended the ToR of 15th FC, saying they rightly balance both the “needs” represented by latest population and “progress towards population control” very well.

A term of reference has also been added to recognise states which have done well on population control and to achieve replacement rate of population growth, Jaitley said.

Referring to the conclave of finance ministers of southern states, Jaitley said a needless controversy was being sought to be created that the ToR was loaded against any particular region of the country. “Nothing could be further from truth,” he said.