Recommendations of the 15th Finance Commission

Recommendations of the 15th Finance Commission

Background Context: The assessment outline (report) of the Fifteenth Finance Commission, in parallel to the Report of the Action performed, was recently put forward in Parliament.

Recommendations of the 15th Finance Commission

How revenue has been divided? 

  • FC has contemplated the population of 2011 with forest coverage, geographical area of the state, and “demographic performance” to reach the states’ share within the divisible puddle of taxes. 
  • In order to recompense India’s population control efforts by respective states, the Commission devised a criterion for demographic labour and effort — which is actually the ratio of the state’s population in the year 1971 to its birth-rate in 2011 - with a notable weight of 12.5%. 
  • The entire or complete area of states, the area under vegetation cover, and “income stretch” were also employed by the Finance Commission to reach and formulate the tax-sharing formula.

State-wise distribution: 

  • There is a considerable or notable decline in shares of the states from southern India, except Tamil Nadu – the state of Karnataka is top of the list for losing the most.
  • Shares of the states with a fertility rate below the substitution level have increased moderately, these states are Himachal Pradesh, Maharashtra, Punjab and Tamil Nadu.
  • Contrary to this, shares of the states with fertility rate very low have decreased moderately, these states are Andhra Pradesh, Karnataka and Kerala. 
  • Unfortunately, the state of the Karnataka is at the losing side. According to RBI assessment report on state finances, Karnataka has the highest tax GSDP ratio (2017-2018).
Recommendations of the 15th Finance Commission

Criticisms:

The population criteria employed by the Commission has been denounced by the governments of the southern states.

The earlier “Finance Commission” used both the 1971 and the 2011 populations data to formulate the states’ shares, allowing greater weight to the 1971 population (17.5%) in collation to the 2011 population (10%).

Unfortunately, results from FC are disturbing, the consideration of the 2011 population advocates, giving a better share to states with larger populations (Uttar Pradesh and Bihar) and states with lower population and fertility rate is left out.

The combined population of the following states Bihar, Jharkhand, UP, MP, Rajasthan is 47.8 crore (i.e. 39.48% of the total population-India). According to the 2011 census, these five states are also responsible for 32.4% of Indias’ geographical coverage.

Contrary to this, states from southern India accommodate only 20.75% of the population living 19.24% of the geographical area and 13.89% portion of taxes. These southern states are Andhra Pradesh, Kerala, Karnataka and Tamil Nadu.

These terms decided by the Finance Commission seem to be the offending and against the Southern states, hence might need re-considerations or may need better options for deciding shares.

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