Fund fight: Why population became a sticking point for Centre and states

-The Times of India

• What does the Finance Commission do?

In India’s federal structure, taxation powers and obligations for various services — like law and order, health, education — are unequally shared between the Centre and the states. Hence, the Constitution mandates the setting up of a Finance Commission (FC) every five years to recommend how revenues from central taxes should be shared between the Centre and the states. A fair distribution of tax revenues is necessary also so that public services are equally available to all people whether they live in the poorer or richer states.

In recent years, the Centre has gone beyond the FC mandate and has been transferring money equivalent to about half of its tax revenues to states.

These transfers can be through FC-mandated sharing, or through grants or by way of centrally sponsored schemes. Also, there are other types of financial support extended by the Centre to the states not covered by the FC. The FC deals only with revenue collected through taxes by the Centre (that is, corporation and income tax, customs and excise duties and, now, GST). These make up about two-thirds of central receipts.

• What was the formula given by the 14th FC to divide resources between states?

The broad principle of various FCs has been to take the different needs and capacities of states into account. The precise formula varies from one FC to the next.

The formula used by the 14th FC took into consideration population, demographic changes, area, a state’s per capita income, and its share of forest cover. These factors were assigned different weights and each state’s share was computed on that basis.

Although the base year for population was taken as 1971 (more population meaning higher share), the FC also gave some weight to population changes in the ensuing four decades. A larger area and higher forest cover also implied a higher share. The highest weight, however, was given to ‘income distance’ — a measure of how far the state’s per capita GSDP is from the top states. It implied that states with more poor people will get a higher than proportionate share of central taxes.

Apart from the states’ share, the FC also determined how much of central funds will be shared with panchayats and urban local bodies. The FC also mandated grants for certain states based on the level of fiscal stress they faced.

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The Times of India, 16 April, 2018,

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