Finance Commission 13 Recommendations

The 13th Finance Commission (ThFC), headed by Dr. Vijay Kelkar, presented its report and recommendations for the period 2010-2015. These recommendations significantly impacted the fiscal landscape of India, influencing revenue sharing between the Union and States, and promoting fiscal consolidation.

Key Recommendations

Vertical Devolution: The Commission recommended increasing the States’ share in the Union’s net tax revenue from 30.5% to 32%. This aimed to provide greater fiscal autonomy to States, enabling them to better address local needs and development priorities. The ThFC justified the increase based on the augmented resource requirements of the States.

Horizontal Devolution: The ThFC continued using a formula-based approach for distributing the States’ share among themselves. The formula assigned weights to various factors reflecting needs, equity and performance. This included population (25%), fiscal discipline (23.5%), income distance (47.5%), area (5%), and infrastructure (negative weightage of -1%). The emphasis on fiscal discipline was a noteworthy attempt to incentivize prudent financial management by the States.

Fiscal Consolidation: The Commission advocated for ambitious fiscal consolidation targets for both the Union and States. It suggested reducing the revenue deficit to zero and the fiscal deficit to 3% of GDP by 2014-15. For States, it linked debt restructuring and grants to adherence to these fiscal targets, further promoting responsible fiscal behaviour.

Goods and Services Tax (GST): A strong supporter of GST, the ThFC underscored its potential to enhance tax efficiency and revenue collection. It recommended the early implementation of GST, viewing it as a crucial reform for India’s indirect tax system. The commission also suggested a compensation mechanism for States to address potential revenue losses during the initial years of GST implementation.

Local Bodies: The Commission increased grants to local bodies significantly, earmarking them for basic services like sanitation and drinking water. It also emphasized the importance of strengthening the financial accountability and capacity of Panchayati Raj Institutions and Municipalities to ensure effective utilization of these funds.

Disaster Management: The ThFC reviewed the existing Calamity Relief Fund (CRF) and National Calamity Contingency Fund (NCCF) and recommended enhancing funding for disaster management. It also stressed the need for proactive disaster preparedness and mitigation measures at the State level.

Other Recommendations: Other significant recommendations included improvements in public sector undertakings, better targeting of subsidies, and strengthening of the audit and accounting systems of both the Union and State governments.

Impact

The ThFC’s recommendations had a substantial impact on Centre-State financial relations. The increased devolution empowered States to undertake development projects more effectively. The emphasis on fiscal consolidation fostered greater financial discipline. The focus on local bodies led to improved provision of basic services at the grassroots level. While not all recommendations were fully implemented, the ThFC laid a crucial foundation for fiscal reforms in India and shaped the debate on fiscal federalism.