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NFC and population

April 20, 2018

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A SENSIBLE proposal aired by a number of experts at a UN-sponsored seminar deserves attention. The suggestion was to find a way to delink the flow of resources under the National Finance Commission Award from the population. Currently, under the seventh NFC Award, population holds 82pc weight in deciding the provincial share in the horizontal distribution of resources. The participants of the seminar were correct to point out that this creates a disincentive for provincial governments to run effective population control programmes and bring down fertility rates in their respective domains. At the moment, every census is followed by an argument between the provincial authorities over how much their share has been understated. A large part of the reason is because population plays a big role in a number of critical arenas of the federation — from deciding seat shares in parliament to the delimitation of constituencies and distribution of federal resources. Back in 1976, India was confronted with the same dilemma when one of the world’s largest population control programmes was launched there. It decided to freeze the distribution of resources according to the population shares of the 1971 census. The weight given to population in deciding the horizontal distribution of resources in the finance commission in India is 25pc.

The finance commission there gives greater weight to factors like per capita income and fiscal discipline when deciding allocations of tax revenues between the states. In approaching the question of horizontal distribution, the finance commission there put two principles at the forefront: equity and efficiency. After this, it capped the federal transfers initially at 37.5pc of gross revenue receipts, then slowly raised the cap to 39pc in successive years. In the horizontal distribution, the greatest weight (47.5pc) is assigned to what it calls the ‘fiscal capacity distance’, a measure used to evaluate the level of tax effort that every state is putting in to mobilise own revenues. To be sure, the freezing of population at 1971 levels has created its own problems over there, but the reduced weight given to population in the horizontal distribution of resources is instructive. Perhaps it is time to think of reducing this weightage here too, while increasing the weight given to revenue collection or generation, to ensure a proper alignment of interests away from the attempt to inflate population figures, towards mobilising provincial tax bases instead.

Published in Dawn, April 20th, 2018