 Hello and welcome to NewsClick. Today we have with us Thomas Isaac, the Finance Minister of Kerala. We are going to discuss the recent issue with the Finance Commission regarding how much should be allocated to states based on the population. 2011 figures is what they are suggesting it be done, not 1971 as it has been for the last 50 years. What is the reason for wanting to change the 1971 figure? There is a growing perception many quarters that something as a position which is the three decades though cannot be the basis of calculation today. But people forget that when the population policy was announced in 1977 all states were assured you would not be discriminated because you have successfully implemented the population policy. And it was then formally announced that 1971 census figures would be used for all in the state distribution in the Finance Commission say in the representation to the parliament and so on. Now that is being changed. Now what has happened is between 1971 and 2011 say population of Kerala, Tamil Nadu, Andhra and so on increased only by 50 percent. But Rajasthan, UP, Madhya Pradesh and so on increased by 150 percent. So the whole relative size of populations have undergone such a drastic change. If you are going to use the 2011 figures as a weightage say a state like Andhra is estimated to lose something like 40,000 crores going by the formula of the last finance commission Kerala by 20,000 crores. Now these are numbers that we cannot afford to bear. It will totally unsettle our finances. So slowly this realization has been spreading, this quite has been spreading. Now at the same time I want to be very open that back when there should be a criterion for in the say distribution of resources. The poorer states, more backward states should get more support, financial support. There is no doubt regarding that. But at the same time this has a regional dimension also. All southern states population growth has been much slower and therefore is a southern states that generally stands to lose. West Bengal population decline, Punjab yes. So there are other states also. But there is this phenomenon that southern states are losing their share. But the whole criticism regarding the finance commission should not be reduced to this population weightage. There are more fundamental issues. Such as? This is a big assault on federalism itself and also I would say on democracy. Because now in finance commission all the stakeholders of eco status should be given eco consideration, sender and state. But there is greater consideration for the sender. Central government is using the finance commission as an instrument to impose their vision of development on the states. Let me put it this way. Kerala, from the beginning of our state formation we have chosen a different development trajectory. We have invested in education, healthcare, other social infrastructure so that now the quality of life of ordinary citizens in Kerala is much higher than the stuff we have. You have invested in the people, not just expanding capitals. That is right. And therefore instead of doing that suppose we had built a few dams, then there is no recurring expenditure. Dam is built, expenditure is made, finished. But if you are building instead of that 100 colleges, then you have recurring expenditure of the salaries of the teachers. So the development path we have chosen has results in much higher recurring revenue expenditure. While other states particularly in North India and so on, they are never invested in social infrastructure. They are recurring expenditure on social infrastructure which is very small. And therefore it will be very difficult, almost impossible Kerala to match balance the revenue receipts of revenue expenditure. We will have a high dose of revenue expenditure. On the other hand for other states will be much simpler tasks. Now suppose somebody mechanically says no, no, no, no, you have to balance your revenue expenditure and revenue receipts. You cannot have a revenue deficit. If you have a revenue deficit, we would not give you resources. Then you are infringing upon my state's autonomy. But this revenue expenditure and income that you received that you are talking about does not include what goes to the central coffer which also states have a share. So it is only about that, that is right. See all states have their revenue expenditure. Now the principle in economics is that expenditure is done best by the tier of government which is nearest to people. On the hand, the collection of tax is best done by the tier of government which is farthest from the people. They are insulated from popular agrarats. So Indian constitution has concentrated all revenue rates in powers of the sender while all social expenditures are with the state governments. Therefore there is a mismatch between the revenue and the expenditure. Therefore constitution has instituted this finance commission up to be appointed every five years to determine what proportion of the sender revenues has got to states A, B how it should be distributed between the states. So essentially the central kitty also has a state share that is the basic understanding of the constitution. That is elementary federalism. It is a constitutional right to the states. And constitution does not envisage sender using this as an instrument to impose its vision of development. So they are saying now your resource transfer will be also influenced determined by you following certain conditions that you are reaching certain fiscal charges. Now this time they have gone beyond the normal references to say one, you have to incentivize finance commission certain programs like for some ease of doing business. We will measure ease of doing business and money has to be given for that. The efficiency of implementation of sender is a flagship programs that have to be incentivized. Now these are not aspect, you know constitution of India does not look at things in this manner you see. They are trying to introduce programs into the domain which are constitutionally state and then using the instrument of finance commission to impose it on the state. So two problems one is that you violate what was the constitutional guarantee given to the population policy that the states would not be affected by it. And the second is you disturb the constitutional provision by what would be the allocation of the fiscal allocations as well as the responsibility of the state to spend the money the way they want. Yes that is right. For example there is a terms of friends which says what conditions can be imposed upon sender's permission allowing the states to borrow. Now there are no conditions on borrowing you see except that you cannot borrow more than this. Now they are thinking of linking it to conditions they may say if we are going to borrow this much money directly then you cannot give guarantee for public sector to borrow. All sorts of conditions can come in you see. These are not done like that. For example they have said we should consider the demand arising from say implementation of India 2020. Nobody knows what this stuff is India 2020. It is India free of debt. Sanitation is India free of poverty. The kind of the kind of vision. Now the federal government wants to have money for that. Actually these are constitutionally the domain of the states. They are already thinking of drawing up some centrally sponsored program and want the finance commission to ensure that sender would have money for this you see. At the expense of the states allocations. Allocations. I have tried some of those attempts or friends saying how to discourage populism, populist measures. Who is this finance commission to determine what is populist and what is not. This is a political domain you see. There is no objective. If I don't like something it is populism. If I like it it is not populism. That is right. So giving loan waiver to farmers can be considered populism. Giving school noon feeding can be considered populism. So these are not in the domain of proper domainal finance commissions. So I will say this will be undemocratic not just federalism asking the finance commission to determine how to control populist measures. So finance commission was supposed to do a technical exercise based on essential principles which have been laid down in the constitution. How the allocation should take this in that in this case they are also bringing in whole bunch of things the center would like to do. That is precisely what I am saying. Federal structure envisages states have a certain fiscal space in which they must have the maximum autonomy. Now to undertake activities in the domain it requires resource transfer from the center. Now resource transfer is going to be with conditions which will determine what I should do in my domain you see that is unacceptable. Now as I said there are two sets of issues here. Is it a part of VJPs shall we say vision that the nation states should be quote unquote far more central. They were never happy with the federal state identities of each state being there and so on. And or is it a short-term measure that how using the center we can consolidate our political power in various states. You are absolutely right. VJP has coined this strength term cooperative federalism. As if federalism means states cooperate. That is why we have the nation state. So the basic starting point the premise is that states don't cooperate and there is a lot of conflict going on and therefore we need to emphasize a cooperative federalism which is far from the truth. What the trend in India ever since the constitution was adopted has been trend to its greater and greater centralization. Many powers which were in the state list have moved to concurrent list and some of that to central list. The fiscal dependence of states have only increased. The fiscal powers were being curtailed through tax regimes like GST and so on. The trend has states central government started drawing up centrally sponsored programs. Constitution you won't find a word like that. In constitution you do what is in your domain then give the rest of the money to states now centrally sponsored program. And here definitely is a move to a greater centralization in the federal system. It is an attempt to curtail the fiscal space of the state governments. See for example there is a strange thing. They have said your revenue deficit has to be 0. Well I say it is very difficult for me but I will try I will bring down the revenue deficit 0. But if your revenue deficit is 0 then what do you borrow for? Only for capital expenditure. Then why should you put a ceiling on capital expenditure? We have been focusing upon social spending. Now there is urgent need to have capital investment. Therefore I want to borrow more not for revenue expenditure for capital expenditure. Why should I be stopped? So I have been very criticizing this FRBM act which anyway has not been observed by even by sender also in India. But now they have set up a review committee of FRBM act. That is fiscal responsibility. Budget management act 2017 that report has been submitted. Jaitly has said he is accepting the recommendation in the budget speech. Now those fellows say well that debt GDP ratio has to be reduced to 40 percent for sender and 20 percent for state. If you want to reduce it to 40 plus 20 then the fiscal deficit to the sender will have to be reduced to 2.5 from 3 and state government to 1.7. It is atrocious here. I do not know it means simply disempowering the entire state governments. They will have no money to function. So it is essentially an attempt to major attempt to ensure rule governance by rule rather than by popular mandate. So essentially create dependence of the states on the center to the extent they do not have political space. The fiscal space is being constrained in order to control the political space. The states are increasingly going to be agency of central government in implementing programs. It comes agency function. Now this was the function of the local government before 73, 74 constitutional amendment. So everybody speaks about decentralization forgetting that decentralization also means transferring power from the sender to state from state to local government. But now with respect to state government what is happening is that they are being reduced to certain agency functions. See now with GST there is absolutely no financial powers. I mean there is nothing. See my budget speech now has no section called the taxes that increasing or decreasing. I have to collect, get accept tax I would get from GST. The state governments are virtually reduced to the status of glorified municipalities. That is what state governments are because they have no taxation powers actually. What is the way forward? How do you fight? See one GST can be reformed. There is this is doing business people who are saying symbol tax one rate no I do not believe in that. I think there must be a range within which state can choose and fix that tax particularly when it comes to GST. It does not affect anybody else. That component of the GST which goes to the state a part of the GST half of it goes to center half of it goes to state. My argument has been well the bad component it goes to state let it be in range so that every state can increase or decrease. Second by 50-50 let us make 60 percent of the revenue goes to state 40 percent goes to center. So within an administration rate of power to the state government and so on. See the reform of GST is important so that at some level state rights are protected that is one. Two remove this conditionalities on transfer of center funds. If you want certain norms to be evolved let us sit down together as states and center in the national development council and discuss it. This is not something to be determined by a bureaucrat or a scholar a technical body. No these are things matters that should be discussed. They can determine the division that the constitution gives them the right but the policy of development that is not to be determined by the commission national development council that should be the right forum convened let us discuss and let there be a consensus on that. So I would say the 15th finance commission okay the terms of reference is given but they have a high degree of freedom to choose. They should desist that temptation of determining agenda of development of states they should not put further conditionalities. Then it is a discretion how much to give etc but this they should not do to convene NDC let us discuss about this terms of reference how it should be modified or how it should be what should be the policy. Now there can be consensus on so many things and we accept it rather than it being imposed from outside agency and three now GST is in such a trouble well let's discuss what modification should be done. Thank you very much Ajax for being with us we will come back to you with further developments as it goes along. Yes I think we are entering an important area of center state relations federalism in the country and we need us news click to also discuss it at different times that's all the time we have for news click today please keep watching news click.