North Vs. South Flashcards
A political slugfest is brewing between the Centre and southern states over the 15th Finance Commission’s terms of reference (ToR).
The Finance Commission’s role
The Finance Commission is the constitutional structure which divides the finances of the country between the Centre and the states. In a departure from the earlier practice, which relied on data from the 1971 Census, the 15th Finance Commission’s ToR has stipulated that data should now be used from the 2011 Census.
A state’s population is a significant factor in determining how tax revenue is distributed. The reason why Southern states are upset is because they believe their share will get cut as they’ve manage to keep a check on population growth unlike several of the their North India counterparts.
These are the facts that are driving the fear of southern states that Northern states will benefit under the 15th Finance Commission. These states feel they are being punished for checking population growth while their Northern counterparts are being rewarded for their poor implementation of family control programmes.
After Jaitley and Modi rejected the allegations of southern states on Thursday that the ToR of the 15th Finance Commission was biased. They said that it would benefit states that took population control measures seriously.
The Union government has suggested to the Finance Commission to consider incentivising states who have worked on population control. By this yardstick, states like Tamil Nadu, which has devoted a lot of efforts, energy and resources towards population control, would certainly benefit,” the PM said.
The terms of reference of the new 15th finance commission have stirred a hornet’s nest, with states in South India expressing their dissent over it. Southern states are already paying more than what they receive from the central exchequer, and using the latest population figures to determine the size of fiscal transfers to states will benefit North India at the expense of the South, the argument goes.
The first big hole is that unlike what has been portrayed, this isn’t exactly a “North India vs South India” issue. Rather, it is more of a poor-vs-rich issue. As the chart below shows, southern states are not the only ones which disproportionately contribute more to centre’s funds. Western states such as Maharashtra and Gujarat and northern states such as Punjab and Haryana also contribute more than what they receive from Centre.
It is a given in any complicated political system that one area will support another. For example, what if the same logic is used by the richer districts or metropolitan areas to argue against transfer of resources to the poorer parts of states? Or from the cities to the villages?
A state that is starved of fiscal resources will be unable to invest in public goods required to close the income gap with other states, thus further increasing the divergence between states. This undercuts the political logic of the Indian Union; having the most populous areas of the country fall further behind is simply not politically sustainable.
This is not to argue for stasis on the part of the Finance Commission. In this particular instance, the southern states are correct that using 2011 data is a bad idea — but not for the reasons they have given. It is, in fact, a poor idea to give any weightage to population at all, as critics have pointed out over the years. It is a clumsy proxy by which to gauge a state’s fiscal needs. A balance between more granular( having various little details) criteria — development indicators, fiscal discipline, fiscal disabilities such as per capita income distance — is essential.
The northern states are currently deeply dependent on central transfers because of their weak tax bases. The goods and services tax (GST) could help them since it is levied on consumption rather than production.
There are always good reasons to ask whether liberal central transfers reduce the incentive of their state governments to invest in economic growth.
It is a very complicated political economy question, but the answer is not cutting their federal support but pushing them to adopt policies for more rapid economic growth as well as population control. This is not something that can happen overnight, but the example of how a state such as Rajasthan has broken out of the old Bimaru trap shows that it is not impossible.
Southern states will continue to assist the North in the foreseeable future. This is as it must be. The political idea of a country with as many centrifugal forces as India should not be held hostage to regional grandstanding.
