[This is a Guest Post by Tejas Popat.]
In a previous post, Devesh argued that the recommendations of the 15th Finance Commission [‘Commission’] violate the principle of equality. This infraction, he states, occurs due to the use of an arbitrary formula and its results. Though Devesh does not make it explicit, the inevitable consequence would be declaring these recommendations unconstitutional or, in the alternative, redistributing funds to take care of the resulting inequality. In fact, he alludes to the latter while providing a different means of enforcing the same i.e. Article 282. I only seek to disagree with Devesh on the scope of judicial review he envisages. My thought on the issue are as follows.
Working of the Commission
The duties of the Commission have been outlined in Article 280(3). Sub-clause (d) is of relevance here. It states that the Commission shall also make recommendations on “any other matter referred to the Commission by the President in the interests of sound finance.” This enables the President to circumscribe the scope of the Commission’s recommendations through the Terms of Reference [‘ToR’]. Based on these ToR, the Commission prepares a report containing its recommendations which is then laid before the Parliament. Therefore, there arise two areas of challenge. First, the recommendations of the Commission i.e. the outcome and second, the ToR i.e. the process.
Judicial Review of Recommendations
Let us first consider the recommendations. It is highly unlikely for the recommendations themselves to be the subject matter of judicial review. This is primarily because, as Article 281 states, the recommendations are only that – recommendations. They are not binding. Therefore, the question of judicial review does not arise. However, an unreasonable application of these recommendations can invite judicial review. An order which resorts to those recommendations becomes the subject matter of challenge and not the recommendations themselves.
This is evident in the COVID – 19 crisis. As was reported, the allocation under SDRMF by the Ministry of Home Affairs [‘MHA’] was on the basis of the recommendations of the 15th Commission. The Commission prepared a Disaster Risk Index for each state devised on the basis of first, the risk of a hazard and second, the vulnerability of each state (¶1-5, Annex 6.2 of the Commission’s Report). The catch here is that the ratio was primarily based on only four hazards, i.e floods, draughts, cyclones and earthquakes (¶5, Annex 6.2). Significantly, the Commission admits that, “due to an absence of a disaster database at the national level, developing a risk index of greater complexity and accuracy has been found to be difficult.” The Commission itself sounded abundant caution before making these recommendations.
I do not question the methodology of the Commission or its approach. The problem, in my opinion, lies in order of the MHA comparing apples to oranges i.e. using a formula devised for completely different set of disasters (in nature and magnitude) and blindly transporting it to the to COVID – 19 pandemic. As is analysed here, the formula was simply a misfit for the current crisis.
In such a situation, the order of the MHA which provided for such devolution blindly following the Commission’s recommendations ought to be challenged. Such executive orders ought to follow the administrative law standard of Wednesbury unreasonableness. They ought to take into account relevant considerations and exclude irrelevant considerations. Therefore, the MHA order on fund devolution, if judicially reviewed may fail this test.
Significance of Terms of Reference and Judicial Review
ToRs in my opinion can be challenged on the ground that they are contrary to Article 280(3)(d). Before dwelling on how the ToR may violate Article 280, it is necessary to understand why the ToRs are significant and the impact that they may have. This can be usefully explained by the example Devesh takes i.e. the ToR of the 15th Commission. Among many which have been detailed by V Bhaskar in his piece, we will explore two of those fault lines in the ToR of the 15th Commission here (these fault lines are explored in legal terms, not in terms of policy).
Devesh states that Kerala could not benefit from the COVID-19 relief fund because of the ratio recommended was faulty (See this piece for the exact cause and effect). That is correct. However, as V Bhaskar and the Report of the 15th Commission 2020-21 itself suggest, the genesis of the problem lies in the ToRs of the 15th Commission. The ToR mandated the Commission to use the 2011 census data when, for over many years, the 1971 census was relied on. Some states complained that the ToR penalized them despite having succeeded in their efforts at population control. This was because comparatively, greater the population, greater is the fund devolution. Therefore, using new data where certain states lowered their population since 1971 would obviously create inequities. The Commission responded to this in its Report in ¶3.19 as follows:
Para 8 of this Commission’s ToR specifies that “the Commission shall use the population data of 2011 while making recommendations.” Our immediate predecessor, the FC-XIV, 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 equalisation 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.
This mandate to use the census from 2011 was the first fault-line. The second comes in the phrasing of the ToR. V Bhaskar notes that the ToRs of the 15th Commission disabled it from employing need-based assistance as a criterion in determining the ratio of devolution. He states:
Clause 3(b) of Article 280 of the Constitution is usually merged with part of Article 275 (1) and included in the ToR of a ﬁnance commission. The ToRs of the last 12 ﬁnance commissions over the past 60 sixty years did so. The words “[state] which are in need of assistance,” however, do not ﬁnd place in the ToR of the XV-FC.
Again, the ToR handicapped the Commission from applying any mode of devolution, which included need-based devolution. Once the Commission is bound by the ToR, such mandates create severe difficulties in the functioning of the Commission. In any case, one conclusion is inescapable – the ToR has direct causal link with the recommendations of the Commission. This is primarily because the ToRs are binding and therefore, dictate the manner in which devolution takes place.
Judicial Review of ToR
This brings me to the next aspect – the scope of judicial review of ToRs. Before turning to the scope of judicial review, it is necessary to understand the place of the Commission in the constitutional scheme.
The Commission is an independent body intended to advise the President, and through him the Parliament, on matters of fiscal policy. Article 280 does not allow any superintendence by the President in matters of the Commission. It merely allows the President to ask for recommendations on issues. This power, as Babasaheb Ambedkar recognized during the Constituent Assembly Debates, was enabling in nature. Without such references he said, the Commission could not function. Therefore, Article 280(3)(d) does not confer power on the President to define the manner of work of the Commission. It only allows him to define the scope of its work. Three other speakers (Shibban Lal Saxena, Hriday Nath Kunzru and Upendra Nath Barman) seemed to suggest that the Finance Commission would be independent in determining the principles on which fund allocation must take place. Such independence is a necessary ingredient for a Finance Commission to stay true to its constitutional intent.
Keeping this in mind, we will now proceed to define the scope of review. Speaking of ToRs in Nair Society’s Case, the Supreme Court remarked,
It is, furthermore, difficult for us to comprehend as to on what basis, while appointing Narendran Commission, in the terms of reference, the State of Kerala could say that the maximum benefit should be given to a particular section of people. In view of the decision of this Court in Rama Krishna Dalmia & Ors. vs. Shri Justice S.R. Tendolkar & Ors., it is no longer res integra that the terms of reference while appointing a commission may be subject to judicial review.
Though in a different context, this absolute proposition is problematic. It makes the ToR as a whole subject to judicial review. In our situation, such an exercise would involve the judiciary adjudicating on matters of fiscal prudence in determining what ought or ought not to be part of the ToR. In my opinion however, what is judicially reviewable is not the terms themselves but, the nature of the terms involved. By this, what is impugned is the competence of the President acting under Article 280(3) to define the Commission’s working beyond “referring matters.” Therefore, when ToRs include mandatory terms limiting or expanding the manner of the Commission’s work, those terms by virtue of their nature, are ultra vires the power of the President under Article 280(3)(d). Conversely, only ToRs which ask for advice (of an inquiring character) or those which nudge the Commission to adopt a course of action (recommendatory character) ought to be constitutionally permissible.
This is necessary for two reasons. The first is to maintain the independence of the Finance Commission and not allow the enabling power in Article 280(3)(d) to be used as means of superintendence over the Commission’s manner of working. Second, is to ensure that the Commission can truly fulfil its constitutional role as a “Fourth Branch Institution”, because, the result (the recommendations) will only be as fair and true to the idea of federalism as the formula (the ToR).
Therefore, the scope of judicial review in case of a ToR of a Finance Commission ought to be limited to testing its vires vis-à-vis the powers vested to the President under Article 280(3)(d).
To illustrate, the change in the ToR of the 15th Commission excluding a need-based devolution as discussed above would be unconstitutional. This is on two counts. First, because Article 280(3)(d) does not allow the President to limit the Commission’s manner of working. Consequently, the ToR is ultra vires the power under Article 280(3)(d). Secondly, because the ToR impinges on the independence of the Commission which is guarded by the scheme of Article 280. The ToR disallows the Commission from referring to the principle of need-based devolution enshrined in Article 275(1). Therefore, it seeks to override the power of the Commission which would have otherwise allowed it to refer to the principle. Such a ToR, which circumscribes the independent functioning of the Commission, ought to be unconstitutional. This rule applies equally to the mandate of using census data. It ought to be left to the prudence of the experts whether the new data ought to be used and if yes, which census data should be employed. As is evident in the extract quoted above, the 14th Commission disagreed with the ToR but could not proceed to make independent recommendations. Therefore, if the Commission ought to be a truly independent body, the nature of ToRs need to be reassessed.
As Article 280(3)(d) states, the principles of sound finance and its contours are the expertise of the Commission. ToRs which attempt to invert this scheme to suggest the modes and manner of achieving sound finance are a severe infraction of the constitutional framework.
- The author thanks Prof. Agnidipto Tarafder, Mahima Cholera, Rishabh Mohnot and Aryan Agarwal for their comments on this piece.