• 10

  • Likes

The “Terms of Reference” (ToR), recommended by the Fifteenth Finance Commission have led to the re-emergence of the long-standing debate of revenue sharing between the Indian states, as it met a sharp response from the southern states. Finance Commission’s ToRs were released on April 9th, 2018, which led the unprecedented conclave in Thiruvananthapuram by the finance ministers of Karnataka, Telangana, and Puducherry coming together to point out the violations of principles of federalism the ToRs would bring.[1]

The claim made, broadly, is that the Fifteenth Commission’s proposal to use the 2011 Census figures as the basis to allocated union tax revenues will adversely affect Tamil Nadu and Kerala’s share the union tax revenue. The basis for this claim is that southern states have (through a combination of improved health and education) reduced birth rates and total fertility rates far more than the northern states, and allocating union tax revenues on the basis of population will “punish” the southern states for achieving positive results, and implementing aggressive family planning initiatives. 

The previous 14th Finance Commission tried to increase the share of Census 2011; however, only 10% weight-age could be given to the 2011 data.[2] Until the 13th Finance Commission, the practice was to use 1971 Census data entirely, which was the last census before aggressive family planning initiatives were implemented. Before 2014, with the Planning Commission in place, states used to get more money than what was constitutionally mandated. Moreover, even Union ministries distributed money for specific schemes (for example, the National Rural Employment Guarantee Act). However, with the dissolution of the Planning Commission, the role of the Finance Commission has increased more than ever, specifically in decisions pertaining to allocation of resources. 

According to the 1971 Census, the southern states’ population was 24.7 percent of the total population, whereas, according to the 2011 Census data, it had fallen to 20.7 percent. Taking a look at absolute growth percent in population from 1971 to 2011, Kerala and Tamil Nadu had an absolute growth rate in the population of 56% and 75% respectively, the lowest among all states[3]. Therefore, determining the share of states in revenue completely on the basis of headcount is negative incentive to not undertake population control measures in order to receive funds. Another ramification of changing the resource allocation method would be political. Parliament passed the 91st amendment to the Constitution in 2001 to freeze the number of seats for each state till 2026. In case, 2011 Census is taken a base to decide the increase and/or allocation of seats in the Parliament in another eight years; southern states will end-up losing representation in Parliament as well. 

Having said that, between 1971 and 2011, population share has declined in 10 states other than the above mentioned southern states. These are Assam, Goa, Himachal Pradesh, Odisha, Punjab and West Bengal[4]. It might be premature to assume that the states with a decline in population will receive lower transfers, for the fifteenth Finance Commission has been asked to propose measurable performance-based incentives for efforts and progress made by states in moving towards replacement rate of population growth. Also, the challenge of designing performance-based incentives is in line with the commission’s mandate. However, these designs will need to factor in political economy constraints, especially the priorities of state governments, some of which may be deemed populist measures by the commission. It is wise to remember that the incentives and measures the 12th Finance Commission introduced while making allocation did help to enhance fiscal discipline in many states after that. 

In addition, merely because the ToRs of the commission require it to use 2011 census data does not mean that it cannot use any other census data. Even the previous Finance Commission had a clause requiring it to use the 2011 census data but after consultations and discussion with relevant stakeholders. The 2011 census data was given only 10% weight-age and the 1971 census data 17.5% weight-age. The country’s fiscal framework itself has undergone a significant change with the implementation of GST. The revenue sharing is yet to become clear because of constant changes being made by the government, although initial data suggests that it might favour the most important southern state in the discussion, Tamil Nadu. 

Southern states have also alleged that the current government is biased against them, in favour of Hindi speaking states. However, finance commissions generally have equal representation and categories are formed, if any, on the basis of varied fiscal capacity at various stages of development and not the linguistic lines. Finance Commissions also aim to reward efficiency and the short and long-term implications for public finances, which has never been easy, even in the best of times. 


[1] Report by the Indian Express, "Finance Ministers from Soth India meet over 15th Finance Commission”, Published on April 10th, 2018, Accessed on April 24th, 2018 (indianexpress.com/article/india/finance-ministers-pinarayi-vijayan-meet-live-updates-15th-finance-commission-5131127/)

[2] 4th Finance Commission Report, Page 106, Population and Demographic Change, 8.25, Accessed on April 24th,  2018(http://www.prsindia.org/uploads/media/Report%20Summaries/14th%20Finance%20Commission%20Report.pdf)

[3] State wise population, Accessed on April 25th, 2018, (http://statisticstimes.com/population/population-of-indian-states.php)

[4] State wise population, Accessed on April 25th, 2018, (http://statisticstimes.com/population/population-of-indian-states.php)

Share this article

Written By Parth Gupta

Economics Undergrad (Batch 2019) | Panjab University, Chandigarh

Leave A Reply