The upcoming 16th Finance Commission has a highly critical task at hand | Mint

The upcoming 16th Finance Commission has a highly critical task at hand

The prospect of a Lok Sabha that’s structurally likely to tilt more in favour of north Indian policy priorities will steepen the 16th FC’s allocative challenge.
The prospect of a Lok Sabha that’s structurally likely to tilt more in favour of north Indian policy priorities will steepen the 16th FC’s allocative challenge.

Summary

  • State poll results make Indian federalism look robust, but fiscal tensions are inevitable. The 16th Commission will have to be very careful if delimitation is done during its award period.

From an electoral lens, Indian federalism would seem in fine fettle, with state governments routinely voted in and out amid much political fanfare. Of the five states that went to polls this autumn, as many as four saw incumbent parties ousted from power. Fiscally speaking, however, our federal system faces slowly emerging tensions. Spare a thought for the 16th Finance Commission (FC), whose terms of reference were approved last week by the Union Cabinet. Set up under Article 280 of the Constitution to recommend how tax revenue should be shared between the Union and states (and among states themselves), FCs have never had it easy. In a scenario where resources are limited while the demands on them are virtually unlimited, they must perform a trapeze act. If the term of an FC coincides with a basic shift in the fiscal relationship between the Union and states—as with the 15th FC, which saw GST launched in 2017—then its job is tougher still. Even so, the task before the 16th FC will be truly unenviable. This is because a Lok Sabha constituency rejig may overlap with its span of coverage from 2026-27 to 2031-32.

In accordance with a Vajpayee government decision of 2001, a long-overdue delimitation exercise is to be undertaken following the “first Census after 2026." Covid got in the way of the 2021 headcount, but this one delayed further or even the next due in 2031 could trigger—and form the basis of—a re-allocation of Lok Sabha seats among states. This is unlikely to go down smoothly, as differing rates of population growth would amplify the share of northern states in Parliament. While the underlying rationale is sound, as we must reduce if we can’t eliminate today’s inequity in representation, wherein each Member from a populous state represents many more voters than an MP from elsewhere, our southern and western states that stand to lose share of voice at the national level would be far from amused. As they have done far better on population stability, diminished political heft at the Centre would seem like unjust desserts. What makes this situation particularly piquant is that the demographic success of these states has been accompanied by faster economic expansion and thus a rising relative contribution to the country’s coffers. Although taxation is meant to play equalizer, how mop-ups are split could prove contentious in the context of these trends.

Over the years, successive FCs have tried to bring about some convergence in standards of living across states through a variety of transfers. As pointed out by former Reserve Bank of India governor, D. Subbarao in a recent newspaper op-ed, “For every rupee they contribute to the Centre’s taxes, richer states like Tamil Nadu and Maharashtra get back less than a rupee while poorer states like Bihar and Jharkhand get more than a rupee." While some cross-subsidization of poorer states by richer ones is inevitable in a country of sharp disparities, how much further it can go remains a question. Already, the sense has grown that India’s better performers are bearing a burden for states that use their resources less wisely. This in itself could test the resilience of our federal set-up as we go along. The prospect of a Lok Sabha that’s structurally likely to tilt more in favour of north Indian policy priorities will only steepen the 16th FC’s allocative challenge. What’s in the country’s best long-term interest would have to guide its approach. A delicate political economy balance needs to be struck.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App