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Progressiveness of Finance Commission
The implications of the recommendations of the Fourteenth Finance Commission on finances of Bihar as a result of changes in the tied, untied and overall union devolution are identified. The data reveals that there is an increase in tax devolution, but its share in grants, plan and non-plan, has come down drastically, hardly reflecting any increase in the total resources transferred. In reality, there has been a decrease of 1.3 percentage points in the share of tax devolution for Bihar between Thirteenth and Fourteenth Finance Commissions. Along with the revenue loss due to liquor ban, this loss has huge financial implications for Bihar’s exchequer.
The authors are grateful to the referee for comments and suggestions and also thankful to Shaibal Gupta (director, Centre for Economic Policy and Public Finance, Asian Development Research Institute) for his continuous encouragement.
The recent debate induced by southern states on the Terms of Reference (ToR) of Fifteenth Finance Commission does not augur well for the sovereignty principle of federalism. The debate proves to be “South versus North,” but in reality, it is between the “developed and underdeveloped” states. These states have been rewarded for 50 years by the previous finance commissions for adhering to the population control norm. Now, as per the presidential order, the latest population (Census 2011) is included as one of the devolution criteria in the ToR of the Fifteenth Finance Commission. It should be noted that an increase in population of any backward state is not a wilful choice. Rather, this is the basic characteristics of a weak economy in most of the backward states. It is well known that the Fourteenth Finance Commission has already considered the 2011 population as demographic change. Even then, the developed states benefited the most by the award of the Fourteenth Finance Commission compared to the Thirteenth Finance Commission. Thus, the argument of the southern states that they will suffer major losses due to inclusion of population 2011 in tax devolution is not justified. This debate targets most of the backward states like Bihar, Uttar Pradesh (UP), Rajasthan, Madhya Pradesh and so on. Among these states, Bihar lies in the lowest rung.
Upholding the spirit of federalism, a finance commission should function as an intermediary between the union and state governments. The finance commissions can neutrally redress fiscal inequalities only if the union and state governments decide jointly on its constitution and ToR. The Constitution provides for the necessary institutional framework, financial and functional division of responsibilities between the union and the states, and a defined mechanism for intergovernmental transfer to address the existing vertical and horizontal imbalances. To address these imbalances, the finance commissions have been given a constitutional mandate to decide on: (i) the proportion of tax revenue to be shared from union to the states and among the states; and (ii) the principles which should govern the grants-in-aid to states; and (iii) other issues which are reckoned as important to the finance commission. In this backdrop, this paper attempts to address the latest devolution through the Fourteenth Finance Commission, with respect to Bihar, to represent the case of most of the backward states in the country.
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