Fourteenth Finance Commission: Has Federalism Arrived?

The Fourteenth Finance Commission’s(FFC) recommendations and the subsequent spin on it by both the Prime Minister and editorialised news reports have made it sound as if federalism in India has finally taken off. Is that the case though?

To begin with, it’s useful to understand what the original demand was. The AIADMK, for instance, made that part of its election manifesto: a constitutional amendment so that the revenue raised from the states through cess etc should be equally shared with the state in question. A radically different and truly “federal” request.

What the FFC did  instead was raise the overall share of all states as a percentage. The FFC’s discussion on this even says they settled for it since an amendment did not look possible. FFC89The second option that the FFC has chosen transfers more money than previously to all states combined; but that was not the original demand. This comes no where near the demand of: the state where the collection of taxes happens should get its share based on that collection straight. It’s understandable why Dr YV Reddy decided to to opt for what he did: after all, the commission he headed has no powers to amend the constitution. But what is a blunt increase in the volume of money pumped out is somehow sought to be passed off as a a paradigm shift in federalism which it surely isn’t. This system is still one where one partner gets the revenue generated in the others’ domain and then decides how much the other should even get of that. The other aspect is how this devolution takes place and how the FFC arrived at the relative weights of the various parameters. The end result is, weightsffc   And remember the factors of Demographic Change and Forest Cover have been introduced in the FFC. Both these factor are a significant cost to states like Tamil Nadu,

  • which have low fertility rates and therefore their demographic change is among the lowest[1]
  • have low forest cover because of their geography and because the state has extremely high degrees of urbanisation

It’s interesting to see what the states themselves sought these weights to be. As one’d expect, Tamil Nadu, West Bengal and Maharashtra which were populous states historically but have shown a remarkable decline in fertility rates since, want the population of 1971 to be accorded maximum weight and that of 2011 nothing at all. Bihar, Madhya Pradesh and Uttar Pradesh want 2011 population to be accorded maximum weight and none at all to the base year of 1971 as the terms of reference for Finance Commission states.popuffc


The FFC has a discussion on the various requests put forward by the states. But it does not seem to explicitly state how it arrived at the final weights. And these weights seem to be a simple middle path between Tamil Nadu and Uttar Pradesh; at least that’s what it appears to be to the untrained eye. An odd end point for a group of gifted Economists.

The result of all this is, taxes collected in Maharashtra, Tamil Nadu, and Haryana will end up funding BIMARU states. One could argue this is progressive taxation. In that it aims to get from rich states and give it to poor ones. There may or may not be merit to that form of progressive taxation, but it certainly can’t be called ‘paradigm shift in federalism’. Federalism in essence is what happens when the unit of political discourse is the state, not the Union of India. And this FFC explicitly sticks with its unit of discourse as India.