15th Finance Commission & the controversy

Southern states like Karnataka and Tamil Nadu have criticised the use of the 2011 population census by the 15th Finance Commission as a basis for the devolution of taxes from the Central government to the States. Both expressed concern that this move would result in lower resource allocation to the southern States.

But why does the year of the census become a deciding factor? And are the southern States particularly affected? 

Finance Commission

The Finance Commission, set up in 1951 under Article 280 of the Constitution, basically decides how revenue has to be distributed between the Centre and the States. In addition, the Commission also decides the principles on which grants-in-aid will be given to the States.

15th Finance Commission

The 15th Finance Commission was constituted on November 27, 2017 and is headed by N.K. Singh. The panel also includes Shaktikanta Das and Anoop Singh. This Commission is slated to submit its recommendations by October 31, 2019. The recommendations, to be observed for a period of five years, will kick in from April 1, 2020.

The constitution of each Finance Commission is announced by a gazette notification. The notification comprises terms that list out the Commission’s work and considerations, called the Terms of Reference.

In the notification issued on November 27, 2017, the ToR recommended, “the Commission shall use the population data of 2011 while making its recommendations.”

Why is the Census important?

According to the Constitution, there are four areas in which population is used as a factor

1 . Manner of Election of President (Article 55)

2 . Composition of the House of the People (Article 81)

3 . Composition of the Legislative Assemblies (Article 170)

4 . Reservation of seats for Scheduled Castes and Scheduled Tribes in the Legislative Assemblies of the States (Article 330).

Articles 55 and 170 are especially important as they deal with the delimitation of constituencies for both Lok Sabha and Rajya Sabha. The population figure is also used for the devolution of taxes.

This does not, however, mean that the entire amount to be disbursed is based on the population – only a certain percentage of the funds. In the case of the 14th Finance Commission, that was 25%. Some of the other factors that the Commission takes into account are per capita income, area, and fiscal discipline.

What is the significance of the 1971 Census?

Before the 42nd Constitutional Amendment of 1976, the calculations behind the number of Lok Sabha seats was based on “population as ascertained at the last preceding Census of which the relevant figures have been published.”

But the 1971 Census figures showed a dramatic increase in population, after which the concept of family planning was introduced at the policy level, according to research. This meant that States that complied with policy would lose out on all the areas where population was taken into account. Hence, the 42nd Amendment picked the 1971 Census as the base for all calculations and froze it till the 2001 Census. The 84th Amendment further extended that to the first Census after 2026, which will be the Census of 2031.

So where does the Finance Commission come into all this?

According to the Constitution, aside from what is written down, the Union government can refer any other matter to the Finance Commission in the interest of sound finance. Using this provision in the Constitution, the Union government has been including in the terms of reference to successive Finance Commissions, provisions that reflect the Union government’s view of the States’ fiscal situation.

The decision to adopt the 1971 Census first appeared in ToR of the Seventh Finance Commission, in 1976.

Why are some states opposed to the use of 2011 figures for the devolution of taxes?

The usage of the 2011 Census is being opposed for the same reason the usage of 1971 Census was made mandatory – to make sure States that have worked on population control do not lose out on benefits.

While States like Uttar Pradesh, Maharashtra and Bihar have more than doubled their numbers in the intervening years, southern states like Tamil Nadu, Karnataka and Kerala have relatively slower growths. The exception to this is Andhra Pradesh — the State went from around four-and-a-half crore people to more than eight-and-a-half crores.

Uttar Pradesh’s population grew at a steady rate of just above 25% in the decades succeeding the 1971 census, whereas the growth rate of that of Kerala dropped from 19.24% in 70s to 14.32% and 9.43% in the next two decades. UP’s growth rate for the 2000s is 20.09%. Kerala’s is just 4.86%.

The concerns expressed by the States in 1976 which necessitated the freezing of seat allocation on the basis of 1971 population figures would appear to hold good even today and have to be addressed to the satisfaction of all stakeholders.