Terms of Reference of fifth Finance Commission are an encroachment into States’ functions

Finance-Commssion-23-2-18By KM Seethi*

The Fifteenth Finance Commission’s (FFC) Terms of Reference (ToR) have generated a lot of criticism across a wide spectrum of thinking, especially among the South Indian states. The States which have already been affected with the winding up of the Planning Commission, as well as with the introduction of the Goods and Services Tax (GST) regime, are up in arms against the FFC’s lopsided methodology under its ToR. The South Indian States are now mobilising themselves against the unjust ToR which will deprive them of a legitimate share of funds from the Union Government.

The role of the Finance Commission (FC), appointed by the President every five years under Article 280 of the Constitution, is very crucial in Centre-State financial relations in India. As a Statutory body, FC is generally seen as a quasi judicial entity having the legitimate powers to negotiate between the Union government and the State governments with a view to settling on the share of Central revenues to be given to the States. The FC also decides the amount of grants to the States “in need of assistance” under Article 275 of the Constitution. However, the role of FC as an independent agency is progressively undermined by the Union Government over years.  It is so palpable in the case of the FFC, both in its composition and the ToR.

The role of FC has already been weakened with the erstwhile Planning Commission’s reborn entity, Niti Ayog and the neoliberal raj of successive governments. The composition of the FFC is self-explaining. There is apparently no representation of the States’ interest in the Constitutional body. All members, except Dr. Anoop Singh (Georgetown University), have connections with Union Government in one way or other. The Chairman N.K.Singh is a former bureaucrat and currently a BJP man. While serving with the Finance wing of the Government, Singh had handled affairs with the IMF, World Bank and UNDP—a perfect fit for an austerity regime.

As per the Government of India notification (PIB 2018), the FFC is expected to “review the current status of the finance, deficit, debt levels, cash balances and fiscal discipline efforts of the Union and the States, and recommend a fiscal consolidation roadmap for sound fiscal management.” It will “take into account the responsibility of the Central Government and State Governments to adhere to appropriate levels of general and consolidated government debt and deficit levels, while fostering higher inclusive growth in the country, guided by the principles of equity, efficiency and transparency.”  The Commission will also examine whether revenue deficit grants be provided at all.

The main issues for consideration by the FFC include “the impact on the fiscal situation of the Union Government of substantially enhanced tax devolution to States following recommendations of the 14th Finance Commission, coupled with the continuing imperative of the national development programme including New India – 2022; the impact of the GST, including payment of compensation for possible loss of revenues for 5 years, and abolition of a number of cesses, earmarking thereof for compensation and other structural reforms programme, on the finances of Centre and States; efforts made by the States in expansion and deepening of tax net under GST; efforts and Progress made in moving towards replacement rate of population growth; progress made in increasing tax/non-tax revenues, promoting savings by adoption of Direct Benefit Transfers and Public Finance Management System, promoting digital economy and removing layers between the government and the beneficiaries; and the progress made in sanitation, solid waste management and bringing in behavioural change to end open defecation.”

The FFC constituted in pursuance of clause (1) of Article 280 of the Constitution, with effect from 27 November 2017 (Government of India 2017) is expected to submit its recommendations by 30 October 2019, covering a period of five years commencing 1 April 2020.

The most important point to be noted about the ToR is that the FFC will use the population data of 2011 while making its recommendations. As K.K. George and K.K. Krishnakumar (2018) observe, this clause in the ToR is “against the assurance given in the parliament with a view to (encouraging) control on population, a national goal then and also now.” This policy was endorsed by the National Development Council (NDC) in its 33rd meeting and reiterated in the National Population Policy in 2000. “The fact that the period for which the distribution of Lok Sabha seats among states was frozen (42nd Amendment to the Constitution) was extended to another 25 years in 2001” is also to be considered here.

George and Krishnakumar (2018) point out that the ToR of FFC will affect Kerala badly insofar as the state “has the lowest growth rate in population between 1971 and 2011 (56.4 %) as against a growth rate of (120.8 %) for India.” Consequently, the amount the state would have lost over its presently allocated share if FFC had used the 2011 population would be considerable. According to them, the losers include Special Category states like Assam and Himachal Pradesh and low income states like Odisha. However, States like Haryana, Gujarat, Uttar Pradesh, Rajasthan and Maharashtra would make gains. George and Krishnakumar warned that Kerala would be the second highest looser on this account with Rs.7800 crores during the five year period. Though all south Indian States are losers, Tamil Nadu will be the highest loser with a loss of more than Rs.10000 crore.

The study by George and Krishnakumar  says that “the minimum potential loss for Kerala calculated based on the devolution of previous Fourteenth Finance Commission, according to the changes in the ToR of the Fifteenth Finance Commission, is about Rs.16,000 crore. Even with a weightage of 17.5% for population, by using 2011 population in place of 1971 population, it was estimated that Kerala would have lost Rs.7,800 crore. Any increase in the weightage of this criterion and the increase in the income distance criterion will further increase the potential loss of the State,” according to the study.

It is in this background that Finance Minister of Kerala T.M. Thomas Isaac argued that “the ToR drawn up in an arbitrary manner should be frozen and the suggestions of the States should be given due weightage. The proposal to use the 2011 census as the basic data for devolving 30% resources to the States would amount to penalisation of States such as Kerala and Tamil Nadu that have effectively curbed population growth and addressed social, educational and economic backwardness,” he said. The meeting of the finance ministers of the Southern States thus holds relevance (The Hindu BusinessLine, 9 April 2018).

Centre-State relations in India in the areas of finances and economic and social planning have drawn considerable attention in recent years. Intergovernmental fiscal relations are expected to facilitate the Centre and the States to discharge their constitutional responsibilities in an effective and efficient manner, whose vital task is to maximize the welfare of citizens. There have been attempts to study the working of the existing arrangements between the Union and States under the Constitution of India, the healthy trends in place and the verdicts of courts in regard to powers, functions and responsibilities, among other things, in the sphere of financial relations, economic and social planning and sharing of resources. Yet, these analyses seldom find a favourable response from the Centre.

Many states had already expressed reservations about the parameters set by the FCs from time to time. For instance, KM Mani, the Finance Minister of Kerala under the UDF dispensation, had underlined the need for according more weightage for population in the parameters of the 14th Finance Commission’s award for States. He said that a revision of the parameters of the Finance Commission was imperative if Kerala should get more resources. It was noted then that while the 32 per cent reserved for States from the divisible pool of tax revenue was itself inadequate, the criteria fixed for each State under the FC was unscientific.

As a result, Kerala’s share had gone down from 3.05 per cent awarded by the 11th Finance Commission (2000- 2005) to 2.66 per cent by the 12th commission (2005- 2010) and 2.3 per cent by the 13th commission (2010- 2015). Among the criteria for distribution of resources among States, population had a weightage of 25 per cent and fiscal capacity distance 47 per cent while geographical area got a weightage of 10 per cent and fiscal discipline 17.5 per cent. This was seen as detrimental to States like Kerala. So the history of reservations of the South Indian States goes back to earlier FCs.

Obviously, the States in South India have reservations about the ToR that has been fixed for the new commission. These terms are nothing short of an encroachment into the States’ functions. The left parties have already pointed out that the Union government has been  engaged in undermining the independent overarching role of the Finance Commission, and thereby making it an instrument for imposing upon them a uniform set of neoliberal policies. They have serious objections to the ToR of FFC.  The constitutional provision under Chapter 1 part 12, for the vertical and horizontal distribution of the net proceeds of taxes or grants, makes these an unconditional right of the states.

However, since the 11th Finance Commission, the Union government has been trying to make these grants conditional, especially the grants for bridging the non-plan revenue deficits and other special purpose grants. The left parties have been opposing the neoliberal fiscal reforms and “rule based” uniform Fiscal Responsibility Budget Management Acts. They see these terms of reference “as a continuation of the Centre’s efforts to use devolution of resources as an instrument to enforce compliance with neo-liberal measures.”  Thus, questions have been raised with respect to the impartiality and objectivity of the Commission, its ToR, the scenario of states’ fiscal autonomy, perpetuation of vertical imbalance, problems of devolution and grants, the debt burden of the State governments and the most critical challenge of strengthening the local self governments.


Government of India (2017): Ministry of Finance (Department of Economic Affairs) NOTIFICATION New Delhi, the 27th November 2017, http://www.egazette.nic.in/WriteReadData/2017/180483.pdf

George. K.K. and Krishnakumar, K.K. (2018):  “Terms of Reference of the Fifteenth Finance Commission: Implications for Kerala Is the Cooperative Federalism on the Back Foot?,” CSES ISSUE BRIEF, April 2018.

PIB (2018) “Fifteenth Finance Commission invites suggestions/views from general public, institutions for higher inclusive growth,” 22 February, Press Information Bureau, Government of India, Ministry of Finance, http://pib.nic.in/newsite/PrintRelease.aspx?relid=176724

*Professor, School of International Relations and Politics, Mahatma Gandhi University, Kerala and former Honorary Director, KN Raj Centre for Centre-State Financial Relations.  He can be reached at kmseethimgu@gmail.com

This article originally appeared in countercurrents.org




Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s