13th Finance Commission Report Summary

finance commission submits final report president

The Thirteenth Finance Commission (ThFC), constituted under the chairmanship of Dr. Vijay L. Kelkar, submitted its report to the President of India on 30th January 2010. Its recommendations covered the period from 2010-11 to 2014-15. The commission aimed to promote cooperative federalism, improve the quality of public spending, and ensure fiscal stability and sustainability.

Key Recommendations:

Fiscal Consolidation: The ThFC strongly emphasized fiscal consolidation, urging both the Union and State governments to reduce their debt levels and improve their fiscal deficits. It recommended specific deficit targets for the Union government, suggesting a reduction in the revenue deficit to zero and a fiscal deficit of 3% of GDP by 2014-15. Similar targets were set for states, encouraging them to enact and adhere to Fiscal Responsibility Legislation.
Tax Devolution: The commission recommended maintaining the share of states in the divisible pool of central taxes at 32%, the same as the Twelfth Finance Commission. However, it proposed a new formula for inter-state distribution that gave significant weight to fiscal capacity and fiscal discipline. The criteria included population, fiscal discipline, distance from the highest per capita income, and tax effort. The inclusion of “forest cover” as a new criterion aimed to incentivize states to preserve their forest resources.
Grants-in-Aid: Recognizing the need for additional support to states, the ThFC recommended various grants-in-aid, including revenue deficit grants, special area grants, and grants for local bodies. Revenue deficit grants were provided to states projected to have a revenue deficit post-devolution. Special area grants aimed to address specific needs of states, such as infrastructure development in backward regions or dealing with the impact of natural disasters.
Local Body Grants: A significant focus was placed on strengthening local bodies (Panchayats and Municipalities). The commission recommended substantial grants for these institutions, earmarked for basic services like water supply, sanitation, and roads. These grants were conditional on the local bodies having elected bodies, maintaining accounts, and holding regular elections. This aimed to enhance their autonomy and improve service delivery at the grassroots level.
Debt Consolidation and Relief: The ThFC recommended a scheme for debt consolidation and relief for states. This involved restructuring existing state debts to improve their debt sustainability. The scheme was linked to states adhering to fiscal consolidation targets and improving their public finances.
Disaster Management: The commission emphasized the importance of effective disaster management. It recommended strengthening the institutional framework for disaster preparedness, mitigation, and response. It also proposed a revised formula for the allocation of funds for disaster relief.
Public Sector Undertakings: The commission recommended that state governments should review the performance of their Public Sector Undertakings (PSUs) and initiate reforms to improve their efficiency and profitability. It also suggested that states should explore the possibility of disinvestment in PSUs where appropriate.
Goods and Services Tax (GST): While the GST was not yet implemented during the ThFC’s tenure, the commission strongly advocated for its introduction, recognizing its potential to simplify the tax system, improve tax compliance, and boost economic growth.

The Thirteenth Finance Commission’s recommendations aimed at promoting fiscal responsibility, equitable distribution of resources, and improved governance at all levels. Its emphasis on strengthening local bodies and incentivizing good fiscal management contributed to a more balanced and sustainable fiscal framework for the country.