The 13th Finance Commission: Key Aspects and Recommendations
The 13th Finance Commission (ThFC), constituted in 2007 and chaired by Dr. Vijay Kelkar, was a crucial body tasked with recommending the principles governing the distribution of tax revenues between the Union Government and the State Governments in India. Its recommendations covered the period from April 1, 2010, to March 31, 2015, and played a significant role in shaping the fiscal landscape of the country.
A primary objective of the ThFC was to enhance fiscal federalism, ensuring a more equitable and efficient allocation of resources to promote inclusive growth across all states. To achieve this, the Commission meticulously reviewed the revenue and expenditure positions of both the Union and State Governments, taking into account their respective developmental needs and fiscal capacities. The Commission’s terms of reference included addressing issues related to debt sustainability, fiscal consolidation, and the efficient delivery of public services.
One of the most significant recommendations of the ThFC was an increase in the states’ share of the Union’s divisible tax pool to 32%, a substantial increase from the 30.5% recommended by the 12th Finance Commission. This increase aimed to provide states with greater financial autonomy and flexibility to address their specific development challenges. The Commission also emphasized the importance of maintaining fiscal discipline and advocated for a gradual reduction in the combined debt-to-GDP ratio of the Union and State Governments.
The ThFC proposed a formula for horizontal tax devolution, which determined the share of each state from the divisible pool. This formula gave considerable weight to factors such as population, fiscal capacity distance (the gap between a state’s per capita income and the highest per capita income among all states), area, and fiscal discipline. The inclusion of fiscal discipline as a factor aimed to incentivize states to manage their finances prudently.
Beyond tax devolution, the ThFC also made recommendations regarding grants-in-aid to states. These grants were categorized into revenue deficit grants, special area grants, and grants for local bodies. Revenue deficit grants were intended to help states cover their non-plan revenue deficits. Special area grants were earmarked for states with unique developmental challenges, such as hilly states and those with a high concentration of tribal populations. The Commission also recommended significant increases in grants to local bodies, both rural and urban, to strengthen their capacity to deliver essential public services.
Furthermore, the ThFC stressed the importance of improving the quality of public expenditure and advocated for reforms in areas such as public procurement, financial management, and performance monitoring. It also emphasized the need for greater transparency and accountability in government operations.
In conclusion, the 13th Finance Commission’s recommendations had a profound impact on India’s fiscal federalism. By increasing the states’ share of tax revenues, providing targeted grants, and emphasizing fiscal discipline, the Commission contributed significantly to empowering states and promoting more balanced and sustainable economic development across the country. While subsequent Finance Commissions have built upon its work, the ThFC remains a landmark in the evolution of India’s fiscal architecture.
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