12th Finance Commission Recommendations (India)

The 12th Finance Commission (XII FC), headed by Dr. C. Rangarajan, submitted its report to the President of India in November 2004. Its recommendations covered the period from 2005-2010 and aimed to improve fiscal federalism and address imbalances between the Union and State governments.

Key Recommendations:

• Tax Devolution: The XII FC recommended increasing the State’s share in the Union’s net tax revenue from 30.5% to 30.5%, remaining constant but suggesting a new approach for revenue sharing. This aimed to provide States with greater fiscal autonomy and reduce their dependence on discretionary transfers.
• Grant-in-Aid: Recognizing the varying needs of States, the Commission recommended grants-in-aid under Article 275 of the Constitution. These grants were categorized as:
  • Non-Plan Revenue Deficit Grants: Provided to States with projected revenue deficits to bridge the gap. The objective was to eliminate revenue deficits by 2008-09.
  • Grants for Education: Focus on improving elementary education infrastructure and quality.
  • Grants for Health: Addressing gaps in health infrastructure and services, particularly in rural areas.
  • Grants for Local Bodies: Strengthening local governance through financial support to Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs). These grants were conditional upon the implementation of certain reforms at the local level.
• Debt Relief: Addressing the issue of unsustainable State debt, the Commission proposed a debt consolidation and waiver scheme. States were encouraged to consolidate their debt owed to the Central government and were offered waivers based on their fiscal performance. This aimed to improve States’ debt sustainability and fiscal space.
• Fiscal Discipline and Management: The XII FC strongly emphasized the need for fiscal consolidation and improved financial management at both the Union and State levels. It recommended the enactment of Fiscal Responsibility Legislation (FRL) by States to set targets for reducing fiscal deficits and debt.
• Disaster Management: Recognizing the vulnerability of India to natural disasters, the Commission recommended strengthening disaster preparedness and mitigation measures. It proposed funding mechanisms for disaster relief and rehabilitation.
• Monitoring and Evaluation: The Commission stressed the importance of effective monitoring and evaluation of government programs and schemes to ensure efficient use of resources and achievement of desired outcomes.
• Central Plan Assistance: The Commission suggested a shift towards formula-based allocation of Central Plan Assistance to States, aiming for greater transparency and objectivity.

Impact and Significance:

The recommendations of the XII FC had a significant impact on fiscal federalism in India. The increased tax devolution and grants-in-aid provided States with greater resources to address their developmental needs. The debt relief measures helped States to reduce their debt burden and improve their fiscal position. The emphasis on fiscal discipline and management encouraged States to adopt sound fiscal policies.

However, the implementation of some recommendations faced challenges, particularly regarding the elimination of revenue deficits and the effective utilization of grants by local bodies. Nevertheless, the XII FC’s recommendations laid a strong foundation for improved fiscal relations between the Union and States and contributed to India’s economic development.