The Finance Commission has nothing to do with setting the terms of reference while the government maintains the terms of reference (ToR) is fair and equitable, said Chairman NK Singh.

On Tuesday, finance ministers from Kerala, Karnataka, Andhra Pradesh and Puducherry met in Kerala to discuss their concerns on the 15th Finance Commission.

The terms of reference recommend the 2011 census be used to calculate population for allocation of union tax revenue, instead of the 1971 census. The South Indian states feel that this would adversely affect their revenue collection because they have proactively implemented population control measures.

Finance Minister Arun Jaitley defended the terms of reference in a Facebook post where he alleged that the southern finance ministers were creating a "needless controversy", adding that "nothing could be further from truth."

He wrote, "The terms of reference of the 15th Finance Commission rightly balance both the 'needs' represented by the latest population and "progress towards population control" very well. There is no inherent bias or mandate in the terms of reference of the 15th Finance Commission which can be construed as discriminatory against the states which made good progress in population control."

Haseeb Drabu Former FM of J&K and Govinda Rao Member of 14th Finance Commission to discuss the concerns raised by state governments.

Edited Excerpts:

Do you believe that there is merit in the argument being made by the southern states?

Drabu: Frankly no, I have issues with the terms of reference of the Finance Commission, but that is about the design of those terms of reference and how a number of things that have happened have not been included. As regards the specific issue being raised by the southern states I am not in agreement with that. Principally the fact that 1971 should be used as a measure, but there are variety of reasons for this if you take 1971 even as you have 2011, you are creating a mythical figure of population; because if you look at the core understanding of the Finance Commission as outlined in the constitution you need to provide public services or equation of public services across population and it is realistic to take 2011.

There is an argument that in terms of population control that it might adversely affect those states, but then please recognise that only 10%, so far is based on population and there are enough ways in which the 15th Finance Commission can work out a system whereby they compensate those states that have done better population control. There are number of statistical measures one can think of which would actually bring back the balance. But I strongly feel that the 14th Commission did the right thing to take 2011 figures and not 1971.

Well the 14th Finance Commission took both 1971 as well as 2011, so you don't necessarily agree with the argument that has being presented by the southern state though you did say that you have other issues with the ToR. I'll come to that in just a bit. But let me go across to Mr. Govinda Rao, member of the 14th Finance Commission. The 14th Finance Commission had no specific mandate to use the 2011 census data, but you did. In fact you allocated what was a 10 percent weightage to the 2011 population. Do you believe that there is justification to the argument that has being presented by southern states and the finance minister’s argument is that the terms of reference of the 15th Finance Commission also very specifically allow for the Finance Commission to propose specific incentives to reward states that have done well on population control so is this much ado about nothing?

Rao: Let me first of all correct you factually, it is not correct to say that the southern states met only to discuss on the issue of population. In fact there are several contentious issues in the terms of reference and in fact they had flagged six different contentious issues. Population issue is one of them because it concerns them. The issue of whether population is and let me also correct my good friend Haseeb Drabu that population is not 10%. In fact the previous Finance Commission listing if you take both 1971 and you know 2011 population it becomes a 27.5 percent that is 17.5 plus 10 percent so they are concerned about that.

Now whether there is a logic, I mean there are number of other issues which is not the only issue that is one of the things that I want to correct. If you use 2011 some states gain some states lose and if you are talking about what should be the correct population to be used I will say the current population not even 2011 population. Because the objective of the Finance Commission is to enable the states to provide comparable levels of services to comparable tax effort. When you say comparable levels of services to state means the services for the current population and not 2011 or to 1971 population. So in other words everybody is barking the wrong tree and the question is why did the terms of reference had to say anything about the population at all.

So you are questioning why the terms of reference had to specifically talk about population. So let me quote to you what the former finance minister is saying. The former Finance Minister P Chidambaram says that the terms of reference are seriously flawed. Even Mr. Drabu seems to have objections with the terms of reference. You said that it is not just populations, there were six other different issues that the state finance ministers spoke about, so what are your key objections Govinda Rao with the TOR?

Rao: Now there are several objections that I have number. One - never in the history of this country the Finance Commission has been asked to review the recommendation made by the previous Finance Commission and ask that Commission to make provision for various schemes that they are going to come up you for New India 2022 which basically implies that I am going to create more and more centrally sponsored schemes, you reduce the tax devolution and then give me more money number one.

Number two never in the history of the Finance Commission has the terms of reference said you may examine whether the revenue deficit grants should be given at all. Article 275 means for that. Third - in para 7 of the terms of reference there are a number of performance indicators that have been given and the Commission has been asked to take into account these indicators. The question is these are all relating to the centrally sponsored schemes on state subjects.

I mean basically telling that - in fact they are even giving grants under article 282 itself is questionable and you give that grant and constitutionally there are serious problems. There are several things like this basically saying that I am giving a charity to the states and therefore you have to take into account the performance that I suggest you. Then there is something called populist scheme. You give Rs 80,000 crore for your bank recapitalisation, whose mistake is it? I mean are you not supposed to think in terms of that. You asked the State's tax authority to be taken into account, why is that the central tax authority is not to be taken into account? There are series of flaws in this particular thing. In fact I will use the very strong words to say that this is against the entire federal spirit and central government seems to be thinking that they are giving a charity to the states.

Mr Drabu I would like you to react to that. There are several issues that Mr. Govinda Rao has pointed out and he seems to be echoing what we have heard from the Kerala finance minister, Thomas Isaac, when he says that the terms of reference of the 15th Finance Commission will destroy the federal cooperative structure of the nation. Mr. Govinda Rao saying that this is against the federal spirit, it is constitutionally also a problem. Would you agree?

Drabu: I would tend to agree with Govinda Rao. The issue really is that the things he referred to, the populist schemes, and the review of it, the terms of reference have serious value judgments being made. Like he said about the whole issue of reviewing the 14th Commission, the terms of reference do say that there has been a substantial hike. The 14th Commission tried to do something very interesting, and I think it was correct in doing so, raising the devolution and trying to reduce the expenditure writing by the center. Now the center may not have been able to reduce expenditure writing, so it is trying to go back and I think that is a flawed thing.

However, my principal objection to the terms of reference is that it does not adequately factor in the emergence of perhaps India's first genuinely federal institution which is the GST Council. Now it has implications on number of ways in which things are done. For instance, the GST Council, I remember someone said that Finance Commission is a dog that barks at the center and bites the states. Now the same cannot be said about GST Council, and this is why I emphasise that GST Council is India's first genuinely federal institution. While drafting the terms of reference, the GST Council, GST regime, seems to have been thought of more as a tax collections system, rather than a fair amount of change in the entire fiscal federal set up because states and centers have pooled their sovereignties.

Now it has implications I said, first that why should there be a member for the Planning Commission or the Niti Aayog? Earlier it was relevant because Planning Commission was doing the planned part and Finance Commission was doing non-planned. Now that we have moved to revenue and capital I see no role for the Niti Aayog to be there. Instead, somebody from the GST Council had been nice because what they will eventually devolve, will be decided by the thing. Now this has also serious implications because unless the GST Council and the Finance Commission are on the same page, it can create a constitutional crisis because at the end of the day, if there is a hierarchy of institutions, GST Council with elected members from all states will be higher up, it is more a Brahmin in the hierarchy of institutions than the Finance Commission. So that recognition has not been done.

Second, I think the important point is that we have also moved from a production base tax, to a consumption tax. Now this will have implications on emergence of deficits; how will that pan out? The Finance Commission should have been given enough leeway to work out this in a different form. I think we need a second generation Finance Commission which could handle the entire nature of change in the fiscal federal system post the emergence of GST and GST Council. I think that is where my principal objection stems from. Then of course there are these issues like populist schemes, revenues, and others which do actually don't augur well for the system at all.

Dr. Rao let me end then by asking you, so far the government has stated very categorically that there is no reason for them to amend the terms of reference. You and Mr. Drabu both have pointed out some serious flaws that you see with the manner in which the terms of reference have been framed. If the government were to go back to the drawing board assuming that they were to take these objections on board, prioritise for us what are the top three things that they need to amend.

Rao: Let me first react to what Haseeb Drabu said. I really do not think GST Council should be represented in the Commission for a very different reason. Number one, Constitution doesn't lay down either the Planning Commission or the Niti Aayog or GST Council member; that is one. More importantly, every member of the GST Council is a representative of a particular state or the Union government and there is a serious conflict of interest that will come in when you put a member of the state. Therefore it would be better to have independent experts rather than getting in member of another particular state. So there will be conflict of interest issue; that is one.

Number two, now as far as the Finance Minister's reaction is concerned, I really don't know why he reacted first of all because this is the presidential terms of reference, this is not the terms of reference of the finance ministry. Constitutionally, this is the president who has given the terms of reference and finance ministry has no business to comment on that. That is more a political comment and I would like to ignore that particular comment. Let us put the constitution at the central piece of thing, more than anything else, when the 9th Finance Commission was built, the terms of reference said the Commission shall adopt an arbitrary approach and there were serious objections raised by Mr. E K Nayanar who was the then chief minister.

The chairman of the Commission wrote to all the state chief ministers saying that we have the right to use whatever, Article 280 sub clause four allows me to use whatever approach and methodology that I want to use and you will consider various approaches including the arbitrary approach in dealing with that. However, in doing that, we will do just equitable and adjust an equitable and sort of uniform approach to both Union and states.

Now here, one possibility is that it is not just the Southern states, on a common contingency too, if they go and then represent to the President, President may cause it to be sent back to the finance ministry or ask for their comments and then make amendments. What amendments you have to make, I think this performance-related incentive that they are talking about, they have to get rid of that.

There is one further issue that is the Article 293(3) which basically says that when the state governments borrow, if they are indebted to the center, they have to take the permission of the center to borrow. In that they said, that you please ask whether we can put conditions there, which means that conditions for borrowing -- whether those conditions will be used in the tax devolution grants which will be completely inverting the Constitution. So there are lots of corrections and it is a very badly drafted terms of reference.

First Published:Apr 11, 2018 9:01 PM IST