The Thirteenth Finance Commission

The Thirteenth Finance Commission (ThFC), constituted under Article 280 of the Indian Constitution, was tasked with recommending the principles governing the distribution of tax revenues between the Union Government and the State Governments for the period 2010-2015. Chaired by Dr. Vijay Kelkar, the Commission submitted its report in December 2009.

Key Recommendations:

The ThFC made several significant recommendations aimed at promoting fiscal federalism, enhancing efficiency, and ensuring equitable distribution of resources. Some of the most prominent include:

• Vertical Devolution: The Commission recommended increasing the states’ share in the divisible pool of central taxes from 30.5% to 32%. This aimed to provide states with greater resources to address their developmental needs.
• Horizontal Devolution: The criteria for distributing the states’ share were modified. The Commission placed greater emphasis on fiscal capacity distance (the gap between a state’s own revenue and its assessed needs) and area, recognizing the importance of geographical factors and the challenges faced by states with lower revenue-generating capacity. Population, fiscal discipline (reflected through tax effort), and forest cover also continued to be relevant criteria, though their weights were adjusted.
• Fiscal Consolidation: The ThFC emphasized the need for both the Union and the States to adhere to fiscal prudence. It suggested specific targets for reducing revenue deficits and debt levels, encouraging responsible fiscal management. A roadmap was proposed for eliminating revenue deficit altogether.
• Debt Restructuring and Relief: Recognizing the debt burden of some states, the Commission recommended debt restructuring and debt relief measures, contingent upon states adhering to fiscal consolidation paths. This aimed to provide some financial breathing room to states burdened with high debt levels.
• Local Body Grants: The Commission allocated substantial grants to local bodies (Panchayats and Municipalities) to support their functioning and enable them to provide essential services. These grants were largely untied, allowing local bodies to prioritize their spending based on local needs. Specific provisions were made for improving data on local body finances and performance.
• Disaster Management: The ThFC addressed the increasing importance of disaster management. It recommended the creation of dedicated funds at both the national and state levels to effectively respond to and mitigate the impact of natural disasters. The aim was to enhance preparedness and resilience in the face of calamities.
• GST Implementation: The Commission strongly supported the introduction of the Goods and Services Tax (GST) and advocated for a well-designed GST framework to improve tax efficiency and reduce distortions.

Impact and Significance:

The Thirteenth Finance Commission’s recommendations had a significant impact on the fiscal relations between the Union and the States. The increased devolution of central taxes provided states with greater resources, allowing them to address developmental challenges. The emphasis on fiscal consolidation and debt management encouraged responsible fiscal behavior. The grants to local bodies empowered them to provide better services to citizens. The ThFC’s report laid the groundwork for further reforms in fiscal federalism and contributed to a more equitable and efficient allocation of resources across the country.