Why the DMK thinks the 15th Finance Commission will be unfair to South India

Government accounting rarely becomes the stuff of mass politics. In that, the reaction of politicians to the 15th Finance Commission is unusual. Constituted every five years, a Finance Commission apportions taxes collected by the Union government to India’s states. The recommendations of the 15th Finance Commission, constituted last year, will come into play between 2020 and 2025.

Yet a significant change in the terms of reference for the latest Finance Commission has led to sharp reactions from Tamil Nadu’s Opposition Dravida Munnetra Kazhagam as well as from actor-politician Pawan Kalyan of Andhra Pradesh. Both worry that this change will harm states in the South, which have significantly lower population growth rates as compared to the Hindi-speaking states in northern and central India.

Divide the pie

While India is a union of states, it is still a significantly centralised polity, with taxing powers highly skewed in favour of the central government. To fix this imbalance, the first finance commission was appointed in 1951 in order to distribute a portion of the Centre’s taxes back to the states.

Population is one of the factors used to decide the ratio in which taxes are allocated to each state. However, given India’s widely-differing population growth rates in each region, population data used to determine these allocations was frozen at 1971 Census figures since the Seventh Finance Commission (incorporated in 1978).

This principle was changed during the 14th Finance Commission, which introduced 2011 Census population data into the calculation for the first time. Set up in 2013 for the period 2015-2020, this commission decided that the distribution of local body grants to states would be done with 90% weighting given to population data from the 2011 Census.

While tax money transfers to local bodies are relatively small, the 15th Finance Commission has decided to apply this principle to all tax transfers. In November, the Union government announced that “the [15th Finance] Commission shall use the population data of 2011 while making its recommendations”.

1971 population data freeze

While the revenue sharing formula the 15th Finance Commission will use will take a few years to finalise, the Centre’s decision to include 2011 population data in the process is significant in itself given that this actually penalises states for controlling their population. This is something India’s politicians are actually acutely aware of, which is why 1971 Census population data was so far being used to calculate such tax allocations. In fact, even in Parliament, the number of seats each state has in the Lok Sabha and Rajya Sabha is in proportion to the state’s population in 1971. This population data freeze – related to the Finance Commission and Parliament – is driven by the massive gulf between the fertility rates of various states. But the change in the 15th Finance Commission has shaken things up.

On Sunday, Pawan Kalyan, Telugu actor and founder of the Jana Sena party, criticised the Union government’s move to use the 2011 Census Data to drive the 15th Finance Commission’s recommendations. “Is the success of South Indian states going to be used against them by [the] Union of India?” asked Kalyan. He referred to an article published on the news website The Wire, titled The 15th Finance Commission May Split Open Demographic Fault Lines Between South and North India, and said: “This article flags a genuine concern that population-based formula for sharing tax revenues between states and Centre would hurt south Indian states”.

This is not the first time concerns over unfair tax extraction and allocations by the Union government have surfaced in Telugu politics. On Sunday, M Murlimohan – an MP from the Telugu Desam Party, which rules Andhra Pradesh – expressed reservations over the manner in which taxes were being distributed amongst the states of the Union. “We are contributing more to the Central pool in the form of taxes than any other state barring Maharashtra,” Murlimohan told the New Indian Express. “Then why the Union Government is treating us in a step-motherly manner.”

He added: “Now, if the mindset of the Union Government does not change, all southern states might have to come together to form a separate entity.”

Parliament next?

The issue was also picked up by MK Stalin, the Leader of the Opposition in Tamil Nadu and working president of the Dravida Munnetra Kazhagam, who wrote that the use of the 2011 Census data by the 15th Finance Commission represents a “threat to the state governments’ financial autonomy” and will punish states for successfully controlling population growth. He added: “On behalf of the Dravida Munnetra Kazhagam, I ask that the recommendations of the 15th Central Finance Commission should be based on the Census of 1971.”

Stalin also took the matter further when he argued that the Centre’s decision to use 2011 Census data for revenue sharing with states seemed to be a bid to eventually move towards using 2011 Census data to determine the number of Parliamentary seats allocated to states. If this were to be done, several southern states, including Tamil Nadu, which have succeeded in controlling the growth of their population, will be allocated fewer seats in the Lok Sabha and Rajya Sabha, reducing their representation in Parliament.

The ferment over the 15th Finance Commission does not come in a vacuum. Politics over such federal issues has reared its head for the first time since the 1960s, with political parties looking to use state identity to counter the Bharatiya Janata Party’s expansion across India under the Hindutva banner. This has led to politics over language. In Bengaluru for example, there is strident opposition to the use of Hindi in metro stations. In the upcoming Karnataka election, Chief Minister Siddaramaiah seems keen on using Kannada nationalism as a major issue in order to get re-elected. Similarly, Tamil Nadu was opposed to the Goods and Services Tax as it saw the new financial regime as a threat to the state’s autonomy.