ISSUE: DEVOLUTION BY 15TH FINANCE COMMISSION
WHAT ARE THE CRITERION USED?
The Fifteenth Finance Commission (FC) has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes.
ABOUT 15TH FINANCE COMMISSION
The Finance Commission is a constitutionally mandated body that decides, among other things, the sharing of taxes between the Centre and the states. Article 280 (1) requires the President to constitute, “within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary”, an FC “which shall consist of a Chairman and four other members”.
Under Article 280(3)(a), the Commission must make recommendations to the President “as the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds”.
Accordingly, the Commission determines a formula for tax-sharing between the states, which is a weighted sum of the states’ population, area, forest cover, tax capacity, tax effort and demographic performance, with the weights expressed in percentages.
This crucial role of the Commission makes it instrumental in the implementation of fiscal federalism.
15th Finance Commission
The report of the Fifteenth FC, along with an Action Taken Report, was tabled in Parliament on Saturday. The Commission has reduced the vertical devolution — the share of tax revenues that the Centre shares with the states — from 42% to 41%. The 1 per cent decrease in the vertical devolution is roughly equal to the share of the erstwhile state of Jammu and Kashmir, which would have been 0.85% as per the formula described by the Commission.
The population parameter
The population parameter used by the Commission has been criticised by the governments of the southern states. The previous FC used both the 1971 and the 2011 populations to calculate the states’ shares, giving greater weight to the 1971 population (17.5%) as compared to the 2011 population (10%). The Fifteenth FC has reasoned that the terms of reference leave it with no choice but to use the 2011 population; it has also argued that in the interest of fiscal equalisation, it is necessary to use the latest Census figures.
The use of 2011 population figures has resulted in states with larger populations like Uttar Pradesh and Bihar getting larger shares, while smaller states with lower fertility rates (the number of children born to a woman in her life) have lost out.
The combined population of the Hindi-speaking northern states (Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan and Jharkhand) is 47.8 crore. This is over 39.48% of India’s total population, and is spread over 32.4% of the country’s area, as per the 2011 Census. They also get a slightly more than the proportional share of the divisible pool of taxes (45.17%).
On the other hand, the southern states of Tamil Nadu, Kerala, Karnataka and undivided Andhra Pradesh are home to only 20.75% of the population living in 19.34% of the area, with a 13.89% share of the taxes. This means that the terms decided by the Commission are loaded against the more progressive (and prosperous) southern states.
The demographic effort
In order to reward population control efforts by states, the Commission developed a criterion for demographic effort — which is essentially the ratio of the state’s population in 1971 to its fertility rate in 2011 — with a weight of 12.5%. States such as Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, and Telangana have fertility rates below the replacement rate, or the number of children that have to be born to a woman of reproductive age in order for the population to maintain itself at the current level without migration.
Income distance criterion
The total area of states, area under forest cover, and “income distance” were also used by the FC to arrive at the tax-sharing formula.
Income distance is calculated as the difference between the per capita gross state domestic product (GSDP) of the state from that of the state with the highest per capita GSDP, with states with less income getting a higher share in order to allow them to provide services comparable to those provided by the richer ones.
The Commission used the per capita GSDP of Haryana as the reference for calculating the income distance, and gave it a weight of 45%, down from the 50% assigned by the 14th FC. The weight assigned to state area was unchanged at 15%, and that of forest cover was increased from 7.5% to 10%.
ISSUE: IMPORTANCE OF HONESTY FOR CIVIL SERVANTS
Honesty or absolute integrity, truthfulness and hard work without indulgences form an inherent part of the life a civil servant whose sole objective is to efficiently deliver services to the public.
It is a travesty of truth to conclude that honesty has a huge cost. Honest decisions and truthful implementation of law do entail risks and difficulties in a society which fails to respect the rule of law in letter and spirit.
Indeed, a society infected by various forms of perversions and delusions does not deserve to find absolute virtues in the instruments of State, be that legislature, executive or judiciary, which are mandated to serve without discrimination and to deliver justice efficiently without fear or favour.
It thus follows that in the rat-race to grab key posts, competing claims are not necessarily based on merit; desired prerequisites at times are superseded by undesirable additional attributes of incumbents. Such carefully hidden distortions do get manifest ultimately.
How many public servants have actually suffered for discharging duties in accordance with the statutory provisions? Suffering cannot be reckoned in terms of transfers and being shunted to peripheral posts for some time. These are simply tools deployed by the polity to subjugate bureaucracy.
To my assessment and experience, every post howsoever peripheral in bureaucratic parlance has potential to improve the delivery of public service.
It is neither the post nor tenure that define the contributions of a bureaucrat; what counts is quality and quantity of work done with systemic improvements. Indeed, identification with specific political dispensation affects decision-making ability. Those with expertise in ‘wheeling-dealing’ forget that some day someone else will write their obituary.
Honesty is priceless, with no trade-offs. An honest person may face occasional scrutiny, but in the long run he can’t lose.
ISSUE: DISCONNECT BETWEEN BUDGET AND ECONOMIC SURVEY
WHY IN NEWS?
Although over the years there have been differences of focus between the Economic Survey and Budget, the disconnect is much greater this year. While the Survey makes a detailed analysis to identify the causal factors and states, “A sharp decline in real fixed investment induced by a sluggish growth of real consumption has weighed down GDP growth from H2 of 2018-19 to H1 of 2019-20”, the Budget speech states, “the fundamentals of the economy are strong and that ensured macroeconomic stability”. Not surprisingly, when the existence of the problem itself is denied, it is difficult to find solutions.
The Budget speech by the finance minister ran for over two-and-a-half hours, until she could not carry on any longer. Unfortunately, it fell short. It did not contain what is required to revive the investment climate and growth. In fact, most of what she read in the Part A related to the subjects that come within the constitutional domain of the states and the action will have to be taken by them. Even with respect to subjects like agriculture, irrigation and rural development, a careful analysis reveals that the allocations appear higher mainly in relation to the sharply reduced expenditures in 2019-20.
Not surprisingly, the market response to even the measures like an increase in insurance cover for bank deposits, reduction in individual income tax rates and abolition of dividend distribution tax was not very enthusiastic.
On tax reforms, while the abolition of dividend distribution tax was expected, the reforms in individual income tax complicates the tax by creating six brackets. The best practice approach to tax reform is to broaden the base, reduce the rates and reduce the number of brackets to make it a simple tax. Clearly, the main objective of any tax is to raise revenue. The government could have simply phased out the tax concessions, indexed the brackets for inflation and reduced the rates of tax with appropriate adjustment in the brackets. Raising of customs duties is clearly retrograde.
Rather than integrating the economy with global value chains and making it competitive, it takes us back to the import substitution era in the name of “Make in India”.
The impact of fiscal developments on the states’ finances is clearly adverse. The shortfall in tax devolution in 2019-20 from the budgeted amount works out to Rs 1.53 lakh crore and the total shortfall in transfers amounted to Rs 1.41 lakh crore. Besides starving funds for various projects, this has serious repercussions on budget management at the state level. It seems the wait for a rescue of the slowing economy has become longer.