Northern states may benefit under 15th Finance Commission

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New Delhi: North Indian states like Bihar and Chhattisgarh with higher rates of population growth may become relative winners compared to their southern and eastern counterparts under the 15th Finance Commission (FFC), with the government asking the commission to use the latest census data of 2011 for allocation of resources, against 1971 census data used earlier.

The terms of reference (ToR) of the FFC chaired by former revenue secretary N.K. Singh, also a member of the ruling Bharatiya Janata Party, were notified by the Narendra Modi government in November. Apart from Singh, members of the commission are former economic affairs secretary Shaktikanta Das and adjunct professor at Georgetown University Anoop Singh. Former chief economic adviser Ashok Lahiri and NITI Aayog member Ramesh Chand are part-time members. The Commission, whose recommendations will be in force for the five years starting 1 April 2020, has been asked to submit its report by 30 October 2019.

Among major states of India, Bihar (25.1%), Chhattisgarh (22.6%) and Jharkhand (22.3%) have the highest decadal (2000-2011) population growth rates, according to the 2011 Census. Graphic: Paras Jain/Mint
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“The Commission shall use the population data of 2011 while making its recommendations,” the ToR issued by the finance ministry said.

Among major states of India, Bihar (25.1%), Chhattisgarh (22.6%) and Jharkhand (22.3%) have the highest decadal (2000-2011) population growth rates, according to the 2011 Census. On the other hand, southern and eastern states like Andhra Pradesh (11.1%), West Bengal (13.9%) and Odisha (14%) have among the lowest decadal population growth rates. Punjab, a North Indian state with one of the lowest population growth rates (13.7%) is rather an exception.

Many analysts consider the earlier practice of not referring to the current population while providing resources to the state governments whose main concern is to provide social and economic services to its population was archaic and distortionary. This practice was sometimes justified by some as disincentivizing states from letting their population proliferate, although there was no evidence that any state did follow such a policy. However, it resulted in lower standards of services provided by the state governments to its citizens. Such a static provision also did not take into account the effect of net migration on the state population.

D.K. Srivastava, chief policy advisor at EY India said the government is right in asking the FFC to use the 2011 data, as one has to be realistic while allocating resources and whatever information one uses needs to be up to date.

“The ToR of the Commission also asks it to give premium towards reducing birth rate. Finally, it will depend on what approach the Commission takes. However, it seems states with larger population may gain relatively,” he added.

The ToR of the FFC has moved away from the more conventional ToRs of the previous FCs in many respects. Seeking to strike a balance between the rights and responsibilities of states in a federal structure, the centre has asked the FFC to offer fiscal incentives to states that perform well on parameters such as improved sanitation and fewer populist measures.

The Commission has also been asked to propose measurable performance-based incentives in areas such as efforts made by the states in expansion and deepening of the tax net under the goods and services (GST), and efforts and progress made in moving towards replacement rate of population growth, which refers to the total fertility rate that will result in a stable population without increasing or decreasing it.

FFC will also consider achievements made by states in implementation of flagship central schemes and building disaster resilient infrastructure, reaching sustainable development goals, and quality of expenditure. Progress made in increasing capital expenditure, improving the quality of such expenditure and promoting labour-intensive growth have also been included in the ToR for the Commission.

The Commission will arrive at the figures after reviewing the state of finances, deficits, debt levels, cash balances and fiscal discipline efforts by the central and state governments.