Home > politics > policy > Why 15th Finance Commission is in the eye of a storm

The terms of reference of the 15th Finance Commission have drawn protests from many states, especially from the south, over its mandate to use 2011 Census data over the 1971 Census data for resource allocation. Here’s a look at the issue.

What does the Finance Commission do?

The Finance Commission is a constitutionally-mandated body established once every five years to devise a formula for distributing net tax proceeds between the centre and the states as well as among states and local bodies. The recommendations of the 15th Finance Commission (FFC) will come into effect from 1 April 2020.

Why is FFC in the news?

The terms of reference of the FFC as decided by the centre have been criticized by various non-BJP ruled states, especially the southern ones, as being against the spirit of fiscal federalism. The centre has mandated to the FFC that population data for determining states’ share of tax revenues should be based on the 2011 Census, rather than the earlier practice of using the 1971 Census.

What’s the problem with using Census 2011 data?

The southern states, as well as states such as Odisha and Punjab, have succeeded in reducing their population growth rates in recent decades while the growth rates of most northern states including Bihar and Uttar Pradesh have remained high. Southern states allege that if FFC uses the 2011 Census data, more resources will be transferred to the northern states, thus penalizing states that have succeeded in controlling population.

How have the centre and FFC reacted?

Prime Minister Narendra Modi said last month that the allegation of favouring northern states over southern ones was “baseless". Finance minister Arun Jaitley has said that although the 14th FC had no specific mandate to use the 2011 census, it had rightly allocated 10% weight to the 2011 Census population data to capture demographic changes since 1971 and make a realistic assessment of the needs of states. FFC chairman N.K. Singh has said that the commission will try to strike a balance between rewarding efficiency and taking care of equity.

Are the dissenting states satisfied with the explanation?

No. These states—Kerala, Karnataka, Andhra Pradesh and the union territory of Puducherry—met in Thiruvananthapuram on 10 April to protest against the terms of reference. West Bengal, Punjab and Delhi joined them at the Vijayawada conclave of finance ministers on 7 May and passed a resolution against the provisions. The states will now present a memorandum to the President seeking an amendment to the terms of reference of the FFC.

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