15th Finance Commission

Summary

This Forum of Free Enterprise booklet, edited by Sunil S. Bhandare and sponsored by the Shailesh Kapadia Memorial Trust, compiles three Livemint articles (all May 2018) by four senior Indian economists on the contested Terms of Reference (ToR) of the 15th Finance Commission, constituted in November 2017 and due to submit its recommendations by October 2019 for the award period 2020–25. The collection addresses the most politically charged provision of the ToR — the shift from 1971 to 2011 census population data for determining state shares — as well as the appropriate size of the vertical divisible pool, the use of GST data for measuring taxable capacity, migration-related fiscal strains, and the governance of cities. Bhandare’s editorial introduction identifies five cross-cutting themes on which all three articles converge: the intellectual case for using current (2011) population figures, the constitutional question of whether the divisible pool share should be fixed by amendment rather than by each FC, the equalization logic of the formula, the role of GST in revealing true relative taxable capacities, and the neglect of urban local bodies.

Essays

Essay 0

Sunil S. Bhandare’s Editorial Introduction traces the constitutional basis of the Finance Commission under Article 280, reviews the landmark 14th FC decision to raise the states’ share in the divisible pool from 32% to 42%, and contextualises the 15th FC’s controversial ToR. Bhandare summarises the three collected articles in five pointed observations: all three authors converge on endorsing 2011 census figures; Rangarajan and Srivastava raise the possibility of a constitutional amendment to fix the vertical share permanently; all authors argue that equalization and growth need not be in conflict; Rajaraman highlights GST as a new tool for measuring taxable capacity and flags the problem of temporary migration; and Pethe dissents from the 42% devolution rate, arguing it should be reduced to 36%, while also pressing for better fiscal provision for urban local bodies.

• Article 280 mandates a Finance Commission every five years; fourteen have been constituted before the 15th FC.
• The 14th FC’s unprecedented jump from 32% to 42% state share in the divisible pool forms the baseline context.
• All three essays endorse using 2011 census population data and reject the 1971 freeze as ‘irrelevant and long-outdated’.
• Rangarajan and Srivastava float the idea of a constitutional amendment to fix the vertical share, removing it from FC discretion.
• Pethe controversially argues that the 42% devolution rate was wrong-headed and recommends reduction to 36%, while also advocating fund-flows to urban local bodies.

The Southern Alliance and the 15th Finance Commission

By Dr. Indira Rajaraman

Rajaraman’s essay responds to the April 2018 meeting of finance ministers from Tamil Nadu, Kerala, Karnataka, and Puducherry who convened at Thiruvananthapuram to protest the 15th FC’s ToR — specifically the direction to use 2011 census data. She dismantles the claim of anti-southern bias in this shift, arguing that the fall in southern states’ statutory shares over the past two decades predated FC-14 and largely reflects faster economic growth, which is a legitimate formula outcome rather than discrimination. She then turns constructive, making two significant arguments: first, that the arrival of GST provides, for the first time, a direct measure of relative taxable capacity across states, reducing the need to rely on imperfect state domestic product proxies; and second, that temporary migration — not captured in census counts — creates real fiscal strains on destination states that are not adequately compensated. She concludes by defending the institutional independence of finance commissions from their ToR, noting that a strong tradition exists by which commissions deal with their terms as they choose.

• The southern states’ declining statutory share since the mid-1980s is largely due to faster economic growth — a formula consequence, not an anti-southern bias.
• More than 90% of the post-2000 drop in southern shares happened before FC-14, while the 1971 census freeze was still in force.
• GST provides the first close approximation to relative taxable base across states, reducing reliance on state domestic product as a proxy.
• Temporary migration (estimated at 9 million per year net, or 27 million gross) creates infrastructure strains on destination states not reflected in census-based entitlements.
• Delhi, as a Union territory, is excluded from FC calculations even though it is the largest migrant destination; Rajaraman suggests a carve-out from the divisible pool for Union territories.
• Finance commissions have an established institutional tradition of treating their ToR freely — the independence of the commission is itself a safeguard.

Why 15th FC ToR flaws need to be addressed urgently

By Dr. Abhay Pethe

Pethe’s article opens by establishing the Finance Commission’s constitutional function as the arbiter of grant-in-aid to states and local bodies for ensuring equity in public service delivery. He focuses on two specific ToR elements: the population census basis and the composition of the commission itself. On population, he strongly endorses switching to 2011 figures, dismissing the ‘Business As Usual’ north-south divide argument as premature and arguing the 15th FC has the capacity to manage the transition through adjusted weighting. He attributes the real risk of north-south division not to the census change but to the commission’s lack of southern representation. The essay continues past the 20 pages rendered.

• The Finance Commission determines grant-in-aid to states and local bodies under Article 280, aiming for equity in public service delivery across India.
• The 1971 census, used as the basis for the last ten FCs with NDC support, is described as ‘an irrelevant and long-outdated statistical dataset’.
• The current population is the best measure of states’ ‘need’; even Panchayati Raj Institutions and Urban Local Bodies computations already use latest population figures.
• The north-south divide argument is challenged as a ‘Business As Usual’ scenario that underestimates the 15th FC’s ability to reduce weight on the population criterion.
• The more probable cause of north-south tension is the commission’s lack of representation from southern states — a composition problem, not a formula problem.