Terms of reference of 15th Finance Commission
The reason why I have chosen this issue for writing is that it deals with distribution of revenue collected to states and also because there has been much controversy about this which I feel needs to be properly understood.
At the beginning at para 6 of the Notification under Article 280 of the Constitution, it has been said, “While making its recommendations, the Commission shall have regard, among other considerations”. That means this is not exhaustive, as the expression, "among other things". So the considerations in para 6 are more flexible but the areas where recommendations will be made as at para 7 are fixed. Under this head, we get items such as resources available, committed expenditure of Centre such as on Defence. Other items are balanced regional development, the impact of higher tax devolution in the 4th Finance Commission, the impact of GST and its implementation, etc.
Population
A major item which has led to the controversy is that the Commission shall use the population data of 2011 while making its recommendations. At the same time, the TOR (Terms of Reference) mentions at para 6 (ii) about efforts and progress made in moving towards replacement rate of population growth. If we read the two things together, there is no scope of saying, what some analysts have said, the southern states that have reduced the population rate by their own effort have been discriminated against. Some politicians have tried to make a political capital out of it and some analysts have also written that only because criticism sells better than appreciation. I justify the TOR on the ground that we cannot for all time be pegged to the 1970 census which is now nearly a half-century old. In fact, this is the best that could have done about the impact of population. The population issue is only one of the issues and it is to be seen along with the emigration of the interstate population. If the 1971 Census was allowed to be the basis, it would have been itself a source of rigidity.
Devolution of taxes
The main purpose is to decide upon the devolution of resources to the states. Some have held that the Constitution does not provide for any other thing except devolution and so the other issues can be ignored.
This is incorrect because in the Constitution at the Article 280 which deals with Finance Commission it is given at (3) (e) that “It shall be the duty of the Commission to make recommendations to the President as to any other matter referred to the Commission by the President in the interests of sound finance". So it cannot be said that devolution of revenue only should get the attention and not others.
Populist expenditure
The issue is to consider the expenditure by states on populist measures. Analysts ask what is populist. It has not been defined but then all terms cannot be defined. The general meaning in the popular parlance has to be accepted. Possibly the analysts have in mind loan waiver which is surely a populist measure. At some stage, the bull has to be taken by the horn. It is a better option to get such prickly issues discussed in meetings with the States, rather than taking a unilateral decision by the Centre.
Ease of doing business
The Commission has been asked to take into account the progress made in promoting ease of doing business by effecting related policy and regulatory changes. It is a complex issue, but a proper discussion with states in this regard shall lead to better ways of doing business, maybe by easing regulations.
Conclusion
Cooperative federalism will be promoted if all ticklish issues are discussed with the states and a consensus is derived
The issues are complex but they are now confronting the country. And the best suggestions are likely to come from the Commission after discussion with the States. A unilateral decision by the central government would have gone more against the concept of cooperative federalism than the other way round. I cannot agree with any analysis that the terms of reference to the 15th Finance Commission might undermine the positive momentum towards cooperative federalism. I hold that cooperative federalism will be promoted if all these ticklish issues are discussed with the States and a consensus is derived. All criticisms against the TOR are wrong.