The 11th Finance Commission Report: A Summary

The Eleventh Finance Commission (EFC), constituted under the chairmanship of A.M. Khusro, submitted its report to the Indian government in 2000, covering the period from 2000-2005. Its primary mandate was to recommend the principles governing the distribution of tax revenues between the Union and the States, and also among the States themselves. Furthermore, it was tasked with suggesting measures to augment the Consolidated Fund of the States and to deal with the problems arising out of the revenue gap after devolution.

One of the key recommendations of the EFC was related to the vertical devolution of taxes. The Commission recommended that 29.5% of the net proceeds of all shareable Central taxes be devolved to the States. This was a slight increase from the 29% recommended by the Tenth Finance Commission. This enhanced devolution aimed to provide States with greater financial autonomy and resources for development. A significant debate revolved around the inclusion of a “formula” for distributing tax revenues.

Regarding horizontal distribution of these funds among the States, the EFC employed a criteria based on a formula involving factors like population, income distance (the difference between a state’s per capita income and the highest per capita income among all states), area, infrastructure index, tax effort, and fiscal discipline. Notably, the Commission emphasized incentive-based transfers. This aimed to encourage states to improve their fiscal management and resource mobilization efforts. States with better tax collection and fiscal prudence were rewarded with a higher share of the devolved funds.

The EFC paid considerable attention to the issue of debt relief for States. Recognizing the growing debt burden of many States, the Commission recommended a scheme for debt consolidation and waiver. This scheme aimed to provide some respite to debt-ridden States and enable them to invest more in developmental activities. It also suggested measures to improve debt management practices at the State level.

Furthermore, the Commission addressed the issue of local bodies (Panchayats and Municipalities). It recommended grants to local bodies to improve their infrastructure and service delivery. These grants were tied to the implementation of certain reforms, such as the devolution of functions, funds, and functionaries to local bodies. This aimed to strengthen local self-governance and improve the quality of life at the grassroots level.

The Eleventh Finance Commission’s report played a crucial role in shaping the fiscal relations between the Union and the States in India. Its recommendations on tax devolution, debt relief, and grants to local bodies had a significant impact on the financial health and development of the States. The emphasis on incentive-based transfers also promoted fiscal discipline and efficiency in resource management at the State level. While the report’s suggestions were implemented with certain modifications by the government, the underlying principles of equitable distribution, fiscal prudence, and decentralization continue to guide fiscal policy in India. The emphasis on outcome based grants continues to be relevant in current fiscal distribution debates.