Uttar Pradesh is set to be a marginal loser in the ‘divisive pool of states’ following new formula that the 15th Finance Commission recommended for devolution of funds in its report for 2020-2021 that union finance minister Nirmala Sitharaman referred to in her budget speech in the Lok Sabha on Saturday.
While presenting the budget, the finance minister said, “In the spirit of cooperative federalism, I am pleased to announce that we have, in substantial measure accepted the recommendations of the commission (for 2020-2021).”
The commission makes recommendations on the division of net proceeds of taxes collected by the Union between the Centre and the states and among the states.
“Yes, UP’s share has come down only marginally from 17.959% to 17.931% in the divisive pool of states following a change in criteria and weight for horizontal devolution of funds,” a senior officer of the state government said. At 17.931%, UP’s share, however, is still the highest among all states, according to the commission’s recommendations.
The 15th Finance Commission has introduced demographic performance of states in ‘the need-based’ six point criteria recommended for horizontal devolution.
Under the changed criteria, the commission has given 15% weight to population, 15% percent to area, 10% to forest and ecology, 45% to income distance, 12.5% to demographic performance and 2.5% for tax effort.
{{/usCountry}}Under the changed criteria, the commission has given 15% weight to population, 15% percent to area, 10% to forest and ecology, 45% to income distance, 12.5% to demographic performance and 2.5% for tax effort.
{{/usCountry}}The 14th Finance Commission had given 17.5% weight to the population of 1971 and 10% weight to the population of 2011. It gave 15% weight to area, 7.5% to forest cover and 50% to income distance.
While introducing demographic performance as the criterion, the commission observed, “All the previous finance commissions since the sixth finance commission (1974-1979) have been mandated to use the population data of the 1971 Census while recommending their awards. After almost four decades, we have been mandated to the population data of the most recent Census for making our recommendations… This commission recommends a criteria of demographic performance performance by using a measure of total fertility rate (TFR) data of all states. This criteria has been computed by using the reciprocal of TFR of each state, scaled by population data of 1971. States which have achieved lower TFR will be scored higher on demographic performance whereas the states with higher TFR will be scored lower.”
Many southern states, in their memorandum given to the 15th Finance Commission, had raised concerns over the use of population data of 2011 for the purpose of devolution.
In its interim report, the commission, while referring to the objections of these states, said, ”Their concern is that the states which have controlled their population would be at a disadvantage if the latest population data is used instead of population data from the 1971 Census….Para 8 of this commission’s terms of reference (ToR) specifies that the commission will use population data of 2011 while making recommendations. .. Our immediate predecessor 14th Finance Commission had expressed the view that though the use of dated population data is unfair, it is bound by its ToR. This commission is of the view that fiscal equalization being recommended by it is for the present needs of the states and this is best represented by the latest census data. Given the specific ToR to use 2011 population data there is no further choice for this commission.”
Earlier, after admitting that 15th Finance Commission, was inclined to leave the vertical split in the divisive pool at the same level as recommended by 14th Finance Commission (42 percent) the commission recommended to reduce the same by 1% to 41% of the divisive pool and stressed on a need-based criteria for the horizontal devolution saying, “The basic objective of a horizontal division formula is to enable states to provide basic public goods and services with equivalent tax effort…..A fiscal gap exists in all the states due to structural mismatch between state’s own resources and their committed/development expenditure liabilities. To meet the first objective of filling the vertical gap of the states, any transfer of resources requires to be determined on a need based criteria. Per capita transfers based on population and cost disabilities need to be factored in for such purpose.”
Yashvir Tyagi, former professor of economics at Lucknow University, said, “The 15th Finance Commission has tweaked the criteria for horizontal devolution obviously in view of opposition to 2011 Census as the criteria for devolution of the central pool. UP has not been able to bring down its TFR to the desired levels while the southern states are much ahead. UP is losing only marginally as these recommendations are valid only for one year. It may lose more if immediate measures are not taken to control the state’s population,” said Tyagi.