13th Finance Commission Recommendations

The 13th Finance Commission (ThFC), constituted under the chairmanship of Dr. Vijay Kelkar, provided its recommendations for the period 2010-15. Its primary objective was to assess the financial position of the Union and State governments, suggest principles governing the distribution of tax revenues between them, and recommend measures to improve the quality of public finances. Key recommendations spanned fiscal consolidation, revenue sharing, debt management, and local government empowerment.

Fiscal Consolidation and Debt Management

ThFC strongly advocated for fiscal consolidation, urging both the Union and States to reduce their fiscal deficits. It proposed a roadmap for achieving a combined debt-to-GDP ratio of 68% by 2014-15. To incentivize fiscal prudence, the Commission linked debt relief to states’ performance in reducing revenue deficits. It recommended the gradual elimination of revenue deficit and emphasized the importance of efficient expenditure management, particularly by curtailing unproductive spending.

On debt management, the ThFC suggested the creation of a Consolidated Sinking Fund (CSF) at the state level to amortize debt. It also recommended the use of open market operations for efficient debt management and advocated for the establishment of independent debt management offices in states.

Tax Devolution

A cornerstone of the ThFC’s recommendations was the devolution of central taxes to the states. The Commission recommended increasing the states’ share in the net proceeds of shareable central taxes from 30.5% to 32%. This increase aimed to provide states with greater financial autonomy and resources for development. The commission retained the existing formula with minor modifications to the weights assigned to different criteria, for horizontal distribution among the states. The criteria used included population, fiscal capacity distance, area, fiscal discipline and tax effort.

Grants-in-Aid

Besides tax devolution, the ThFC also recommended grants-in-aid to states under Article 275 of the Constitution. These grants were intended to address specific needs of states, such as special category states, to promote local bodies, and to improve the infrastructure and services delivery. The Commission recommended substantial grants for local bodies, particularly Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs), to enhance their functioning and capacity to deliver essential services. This included grants for basic services, maintenance of civic infrastructure, and capacity building of local body officials.

Disaster Management

Recognizing the increasing frequency and intensity of natural disasters, the ThFC emphasized the need for effective disaster management. It recommended the establishment of State Disaster Response Funds (SDRFs) and the National Disaster Response Fund (NDRF) to provide immediate relief and rehabilitation in the aftermath of disasters. The Commission also stressed the importance of disaster preparedness and mitigation measures.

Other Key Recommendations

The ThFC highlighted the need for reforms in the power sector and urged states to improve the financial viability of their power distribution companies. It also focused on improving the efficiency and effectiveness of government spending and recommended measures to strengthen the audit and accounts system. The Commission underscored the importance of investment in infrastructure development, particularly in rural areas, to promote inclusive growth.

In conclusion, the ThFC’s recommendations aimed at strengthening the cooperative federalism by providing greater fiscal autonomy to states, promoting fiscal discipline, and enhancing the efficiency of public spending. Its focus on local government empowerment and disaster management underscored its commitment to inclusive and sustainable development.