11th Finance Commission Recommendations

The Eleventh Finance Commission (EFC) was constituted in 1998 under the chairmanship of A.M. Khusro to review the financial position of the Union and States and to make recommendations on the distribution of tax revenues between them for the period 2000-2005. The Commission aimed to address issues of fiscal imbalances, promote fiscal discipline, and ensure equitable resource allocation among the states.

Key Recommendations

The EFC recommended maintaining the share of states in the net proceeds of shareable central taxes at 29.5%, which was marginally higher than the 29% recommended by the Tenth Finance Commission (TFC). This increase was intended to provide greater resources to the states to meet their developmental needs.

For distribution among states, the Commission moved away from the Gadgil-Mukherjee formula used by previous commissions. It gave significant weight to equity concerns by according importance to distance from the highest per capita income state. The criteria used and their respective weights were:

• Population (1971): 10%
• Income distance: 62.5%
• Area: 7.5%
• Infrastructure Index: 7.5%
• Tax effort: 5%
• Fiscal Discipline: 7.5%

The Commission emphasized the need for states to improve their fiscal management and recommended linking a portion of central transfers to fiscal performance. The inclusion of “Fiscal Discipline” as a criterion was aimed at incentivizing states to adhere to responsible fiscal policies and reduce their revenue deficits.

The EFC also made recommendations concerning grants-in-aid to states. It proposed grants for specific purposes, such as improving infrastructure, promoting education, and strengthening local governance. The Commission recognized the importance of strengthening local bodies (Panchayats and Municipalities) and recommended increased funding for them.

Furthermore, the Commission addressed the issue of debt sustainability of states and recommended debt relief measures. It proposed a debt swap scheme to enable states to replace high-cost borrowings with lower-cost borrowings. The Commission also suggested the creation of a sinking fund by the states to manage their debt obligations.

In conclusion, the Eleventh Finance Commission’s recommendations focused on enhancing fiscal federalism by providing greater resources to states, promoting fiscal discipline, and ensuring equitable resource allocation. The commission’s emphasis on equity and fiscal performance indicators marked a shift towards a more nuanced approach to resource sharing between the Union and States.