- The possibility of the 15th Finance Commission (FC) using the 2011 census for revenue allocation has the political class and policy experts riled. The reason is simple; since the 1971 census (used by the 13th and 14th FCs), there has been a significant demographic divergence. Using 2011 census data will give states with the greatest increase in population an advantage in their share of revenue, relative to prior revenue allocations.
Population and States:
- Population, however, is not the only divergence between states. States that have gained the greatest numbers, like Bihar and Uttar Pradesh (UP), are also among the poorest.
- And states like Kerala and Tamil Nadu, that have gained tremendously in gross domestic product and welfare indicators, are experiencing reduced fertility rates, and have gained a lot less in population.
- The FC considers multiple factors at different weights, including demographics, in its allocations.
- And if the 15th FC uses the currently estimated 27.5% as the weight for the 2011 census (instead of 10% used in the 14th FC), the consequences would be dire for Tamil Nadu and Kerala.
There are arguments in favour of both approaches
Using the 2011 census data
- Since the demographically powerful states are the poorest, a case may be made for fiscal assistance from the Union government, and therefore a larger share in the distribution by the FC
- Using the 2011 census aids states like UP and Bihar, and in theory, benefits the greatest number of people
Using the 1971 census data
- States like Kerala and Tamil Nadu made investments in female literacy, healthcare, and reduced infant mortality, which led to a decrease in the rate of population growth
- Investments in education, healthcare and infrastructure along with sensible governance, have led to prosperity and therefore a larger fiscal contribution
- Using the 2011 census would mean that their policy successes are punished and the policy failures of badly governed states are rewarded
- Taking away the resources of successful states at this crucial juncture of their development also affects their future development and welfare outcomes
The long term solution:
- The only long-term solution is to foster genuine fiscal federalism where states largely raise their own revenue and face hard budget constraints, i.e. fiscal autonomy accompanied by fiscal responsibility
- It means reducing, if not eliminating, the system of the Union government receiving a large proportion of all revenue and then allocating that revenue among the states
India needs to move away from centralization-decentralization thinking
- India needs to move away from centralization-decentralization thinking, and embrace genuine fiscal federalism by permanently creating a fiscal power centre in the states. For the richer states, this is an excellent solution
- They raise a larger share of the revenue and will benefit immediately
- It allows these governments to take on long-term infrastructure and governance projects to benefit its citizens
What about the poor, more populous states?
- They will also benefit in the long run and not suffer too much in the short run.
- Citizens of these states will benefit in the long run because fiscal autonomy will put pressure on these governments to put their house in order. If these states do end up getting their fiscal priorities in order, a larger populace if governed well implies greater revenue, and therefore greater power for state parties governing these states in the long run.
- Budgetary crisis in these states in the short run need not harm citizens adversely because India constitutionally guarantees freedom of movement.
- While the governments of Bihar and UP may flounder, their citizens can move to greener pastures.
- Citizens of Bihar and UP already move to richer states for employment. This trend will strengthen with fiscal federalism.
The way forward
- The use of the 2011 census in the 15th FC is merely revealing the symptoms caused by the problem of centralizing fiscal decisions
- The solution is genuine fiscal federalism, where Indian states have both greater responsibility as well as greater control in their fiscal decision making and outcomes.