The finance minister of Kerala, followed by the chief ministers of Karnataka and Andhra Pradesh, has put an angry spotlight on the debate on how to share the nation’s tax kitty. In increasingly strident tones, they are complaining that the southern states are getting short-changed when it comes to dividing the nation’s tax kitty.
There is fear that the 15th Finance Commission might use the 2011 Census to determine the share of each state in the nation’s resources. In doing so, the richer and less populous states in South India may end up contributing more than they receive. This is the simplistic version of the debate, and it ignores the fact that all states are part of a national project of balanced economic development, as was pointed out in an editorial in this newspaper.
Richer regions contribute to the well-being of poorer regions, and redistribution happens in all modern democracies. Finance commissions are a constitutional mechanism to ensure some degree of logic and transparency in the allocation rule. Over the years, their main criteria have been population and backwardness. The latter is captured by per capita income. But since Indian states exhibit a continuing divergence in economic development, a trend contrary to the global trend among rich and poor countries, the divisible resources are going increasingly to the poorer states. These also happen to have much higher fertility rates, hence their population share is rising. The divide has a north-south dimension, although states like Maharashtra, Bengal and Odisha too exhibit lower fertility rates.
But let’s step back and look at the bigger elephant in the room. This is the question of delimitation. India’s Constitution puts an upper limit of 550 elected members in the lower house of Parliament. These are people’s representatives, and the country’s lawmakers. They are chosen by the people through the electoral process, and each is a winner from his or her constituency. Until the early 1970s, it was the general practice to redraw constituencies based on the most recent population available, but the total number of members was constant. The idea of redrawing was to have each member of Parliament (MP) represent roughly an equal number of voters, hence the redrawing of constituencies.
This desire for “equality" of representativeness may smack of more recent sentiments like “one nation one tax", but it is indeed quite a reasonable requirement. Just like in the exercise of dividing up the nation’s tax revenue, here too the concept of population lurks with potential menace. We may desire “equality" of constituencies, but economic development and demographic patterns do not develop uniformly across the country. Some states have achieved zero population growth while others still have very high fertility rates. This pattern too has a north-south dimension. It is as if the economic centre of gravity is shifting south and the political centre of gravity is shifting north.
Anticipating this discomfiting development long ago, Parliament passed an amendment during the Emergency years in 1976, freezing all delimitation as per the 1971 census, up to the census of 2001. Also, even after the redrawing of constituency boundaries, the total number of MPs per state was kept frozen. In 2000, another amendment postponed the day of reckoning to 2026. Thus, only after 2026 will we consider changing the number of seats in Parliament. Till then, everything is frozen as per the 1971 census. Remember, in 1971, India’s population was 548 million, and by 2031, the first census after 2026, it may well be close to 1.4 billion. The great apprehension is that redrawing boundaries and distributing the existing 550 MPs might mean that the south will lose a lot of seats to the north. Even if more members are added to the Lok Sabha, that incremental gain will mostly go to the northern states.
As such, one of the distortions and anomalies created by the 1971 freeze, which applies to national elections, is that we have constituencies as small as 50,000 and as large as three million residents. Thus, there is a skew in the number of voters each MP represents in Parliament. Is that, then, sufficiently representative?
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The dilemma before the 15th Finance Commission is perhaps easier to resolve. Perhaps the weightage given to population can be reduced to 10%, or even 5%. The focus could be on other parameters like per capita income and intrastate inequality. The commission, after all, is expected to enable balanced regional growth, without seeming to provide perverse incentives, as if it is rewarding backwardness. Hence, some element of incentives for own fiscal effort and fiscal discipline can be expected. Newer aspects like direct devolution to the lowest tiers of government, or giving credit for an increase in forest cover and improvement in health indicators, are all possible.
But it is not too early to begin addressing the issue of delimitation at the national level. As such, the state election commissions (unlike their central counterpart) have to undertake delimitation every five years. It’s a hazardous task which earns them no friends and lots of enemies. But all state commissions do it, and eventually everyone accepts their verdict. Just as the nation took more than 12 years to come to a consensus on “one nation one tax" (i.e. the roll-out of the goods and services tax), a national consensus exercise should be started to sort out issues much before 2026.
Ajit Ranade is an economist and a senior fellow at the Takshashila Institution, an independent centre for research and education in public policy.
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