12th Finance Commission of India

The 12th Finance Commission of India was constituted on November 5, 2002, under the chairmanship of Dr. C. Rangarajan. Its primary mandate was to make recommendations regarding the distribution of tax revenues between the Union and the States, as well as principles governing grants-in-aid to the States, for the period 2005-2010.

Key Recommendations

• Tax Devolution: The Commission recommended that the share of states in the net proceeds of Union taxes and duties be kept at 30.5% for the period 2005-10, a marginal increase from the 29.5% recommended by the Eleventh Finance Commission. This aimed to provide states with greater fiscal autonomy.
• Fiscal Consolidation: The 12th Finance Commission emphasized the importance of fiscal consolidation at both the Union and State levels. It recommended a debt restructuring scheme linked to fiscal performance, encouraging states to reduce their debt burden and improve their financial management. This scheme involved a debt write-off and a consolidated sinking fund for states.
• Grants-in-Aid: In addition to tax devolution, the Commission recommended grants-in-aid to states under Article 275 of the Constitution. These grants were intended to address specific needs, such as special category states, local bodies, and to improve infrastructure. The Commission also recommended grants for education, health, and environment.
• Local Bodies: Recognizing the importance of local governance, the 12th Finance Commission recommended significant financial support to Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs). These grants were earmarked for improving basic services like water supply, sanitation, and infrastructure at the local level. The Commission stressed the need for proper accounting and auditing of funds allocated to local bodies.
• Calamity Relief: The Commission reviewed the existing Calamity Relief Fund (CRF) mechanism and recommended changes to improve its effectiveness. It suggested a higher state contribution to the CRF and emphasized the importance of disaster preparedness and mitigation measures.

Impact and Significance

The recommendations of the 12th Finance Commission had a significant impact on the fiscal relations between the Union and the States. The increased tax devolution provided states with greater resources to finance their development programs. The emphasis on fiscal consolidation encouraged states to improve their financial management and reduce their debt burden. The grants-in-aid helped address specific needs of states and improve essential services.

The Commission’s focus on local bodies helped strengthen local governance and improve basic services at the grassroots level. The recommendations regarding calamity relief helped improve disaster preparedness and response. Overall, the 12th Finance Commission played a crucial role in promoting fiscal stability and balanced development in India.