Finance Commission (FC)

[ PUBLIC FINANCE ]

Optional Subject : Economics

By: Dr. Vibhas Jha

Twelfth Finance Commission ( XII FC )

Thirteenth Finance Commission ( XIII FC )
Fourteenth Finance Commission ( XIV FC )
Fifteenth Finance Commission ( XV FC )

By : Dr. Vibhas Jha

Introduction :

The Finance Commission is constituted by the President under article 280 of the Constitution, mainly
to give its recommendations on distribution of tax revenues between the Union and the States and
amongst the States themselves. Two distinctive features of the Commission’s work involve redressing
the vertical imbalances between the taxation powers and expenditure responsibilities of the center and
the States respectively and equalization of all public services across the States.

Vertical and horizontal imbalances are common features of most federations and India is no
exception to this. The Constitution assigned taxes with a nation-wide base to the Union to make the
country one common economic space unhindered by internal barriers to the extent possible. States
being closer to people and more sensitive to the local needs have been assigned functional
responsibilities involving expenditure disproportionate to their assigned sources of revenue resulting
in vertical imbalances. Horizontal imbalances across States are on account of factors, which include
historical backgrounds, differential endowment of resources, and capacity to raise resources. Unlike in
most other federations, differences in the developmental levels in Indian States are very sharp. In an
explicit recognition of vertical and horizontal imbalances, the Indian Constitution embodies the
following enabling and mandatory provisions to address them through the transfer of resources from
the Centre to the States.

In addition to provisions enabling transfer of resources from the Centre to the States, a
distinguishing feature of the Indian Constitution is that it provides for an institutional mechanism to
facilitate such transfers. The institution assigned with such a task under Article 280 of the
Constitution is the Finance Commission, which is to be appointed at the expiration of every five years
or earlier. Under the Constitution, the main responsibilities of a Finance Commission are the
following.

1. The distribution between the Union and the States of the net proceeds of taxes which are to
be divided between them and the allocation between the States of the respective shares of
such proceeds.

2. Determination of principles and quantum of grants-in-aid to States which are in need of such
assistance.

By : Dr. Vibhas Jha

 3. Measures needed to augment the Consolidated Fund of a State to supplement the resources of
the Panchayats and Municipalities in the State on the basis of the recommendations made by
the Finance Commission of the State.

The last function was added following the 73rd and 74th amendments to the Constitution in 1992
conferring statutory status to the Panchayats and Municipalities. These Constitutionally mandated
functions are the same for all the Finance Commissions and mentioned as such in the terms of
reference (ToR) of different Finance Commissions. To enable the Finance Commission to discharge
its responsibilities in an effective manner, the Constitution vests the Finance Commission with power
to determine its procedures. Under the Constitution, the President shall cause every recommendation
made by the Finance Commission together with an explanatory memorandum as to the action taken
thereon to be laid before each House of Parliament.

VERTICAL DISTRIBUTION

Initially, the Constitution provided for the sharing of only two Central taxes with States. Article 270
permitted mandatory sharing of the net proceeds of income tax levied and collected by the Union with
the States. Such proceeds assigned to States did not form part of the Consolidated Fund of India.

HORIZONTAL DISTRIBUTION

After making recommendations regarding tax devolution, it is the task of the Finance Commissions to
recommend its inter se distribution amongst States. The criteria used by the Finance Commissions for
the inter se distribution of tax shares across States can be broadly grouped under, a) factors reflecting
needs, such as population and income measured either as distance from the highest income or as
inverse, b) cost disability indicators, such as area and infrastructure distance and c) fiscal efficiency
indicators, such as tax effort and fiscal discipline. While the weightage assigned to population has
declined considerably, weightage assigned to income distance and efficiency factors has increased
considerably in recent years.

GRANTS-IN-AID

Horizontal imbalances are addressed by the Finance Commission through the system of tax
devolution and grants-in-aid, the former instrument used more predominantly. Under Article 275 of
the Constitution, Finance Commissions are mandated to recommend the principles as well as the
quantum of grants to those States which are in need of assistance and that different sums may be fixed

By : Dr. Vibhas Jha

for different States. Thus one of the prerequisites for grants is the assessment of the needs of the
States.

Grants recommended by the Finance Commissions are predominantly in the nature of general purpose
grants meeting the difference between the assessed expenditure on the non-plan revenue account of
each State and the projected revenue including the share of a State in Central taxes. These are often
referred to as ‘gap filling grants’.

TERMS OF REFERENCE (ToR) :

The Presidential Order listing out the main functions, additional matters and considerations constitutes
the ToR of a Finance Commission.

The three constitutionally mandated responsibilities of a Finance Commission are the distribution
between the Union and the States of the net proceeds of shareable Central taxes, determining the
grants to States which are in need of assistance and recommending measures to augment the
Consolidated Fund of a State to supplement the resources of local bodies. These are mentioned as
such in the Presidential Order constituting a Finance Commission. In addition to the substantive
functions, any other matter can be referred to a Finance Commission in the interest of sound finance
under Article 280 (3) (d) of the Constitution.

By : Dr. Vibhas Jha

 Twelfth Finance Commission ( XII FC )

Twelfth Finance Commission , was appointed by the President of India on 1st November, 2002 under
the chairmanship of Dr. C. Rangarajan,

Terms of Reference (ToR)

In making its recommendations, the Commission shall have regard, among other considerations, to:-

1. The resources, of the Central Government for five years commencing on 1st April, 2005, on
the basis of levels of taxation and non-tax revenues likely to be reached at the end of 2003-04;
2. The demands on the resources of the Central Government, in particular, on account of
expenditure on civil administration, defence, internal and border security, debt-servicing and
other committed expenditure and liabilities;
3. The resources of the State Governments, for the five years commencing on 1st April, 2005, on
the basis of levels of taxation and non-tax revenues likely to be reached at the end of 2003-04;
4. The objective of not only balancing the receipts and expenditure on revenue account of all the
States and the Centre, but also generating surpluses for capital investment and reducing fiscal
deficit;
5. Taxation efforts of the Central Government and each State Government as against targets, if
any, and the potential for additional resource mobilization in order to improve the tax-Gross
Domestic Product (GDP) and tax-Gross State Domestic Product (GSDP) ratio, as the case
may be;
6. The expenditure on the non-salary component of maintenance and upkeep of capital assets
and the non-wage related maintenance expenditure on plan schemes to be completed by the
31st March, 2005 and the norms on the basis of which specific amounts are recommended for

By : Dr. Vibhas Jha

 the maintenance of the capital assets and the manner of monitoring such expenditure;
7. The need for ensuring the commercial viability of irrigation projects, power projects,
departmental undertakings, public sector enterprises etc. in the States through various means
including adjustment of user charges and relinquishing of non-priority enterprises through
privatization or disinvestment.
8. In making its recommendations on various matters, the Commission will take the base of
population figures as of 1971, in all such cases where population is a factor for determination
of devolution of taxes and duties and grants-in-aid.

In addition to the above, through a subsequent notification dated 31st October, 2003, the
Commission was asked to make recommendations on the following matters:

“(i) whether non-tax income of profit petroleum to the Union, arising out of contractual
provisions, should be shared with the States from where the mineral oils are produced; and
(ii) if so, to what extent.”

Salient Features of XIIFC Recommendations

1. Total Transfers recommended

The 12th Finance Commission has recommended a total transfer of Rs.7,55,751.62 crore ( share in
central taxes and duties Rs.6,13,112.02 Crore + Grants-in-aid Rs. 1,42,639.60 crore) to States during
2005-10 as against Rs.4,40,209.26 crore ( Rs. 3,76,318.01 crore as share in central taxes and duties +
Rs. 58,587.39 crore as grant-in-aid + Rs.5,303.86 crore as Centre's share of Incentive Fund) by 11th
Finance Commission for the five years period 2000-05, showing an increase of 71.68% over TFC
award period.

2. Grant in aid of States' revenues

The Non-plan grants under Article 275 of the constitution as per 12th Finance Commission are
significantly higher when compared with the corresponding grants for the period of 11th Finance
Commission 2000-05 as shown below:

By : Dr. Vibhas Jha

Under the scheme of transfer recommended by the TFC, the share of grants in the total transfer is 18.9
percent, whereas it was 8.1%, 11.1%, 13.8%,10.3% and 14.5% as per the recommendations of the last
five commissions.

3. Share in central Taxes

The share of the States in the net proceeds of shareable central taxes ( Vertical Devolution ) would be
30.5 percent during 2005-10 (during 2000-05 it was 29.5%). For this purpose, additional excise duties
in lieu of sales tax on textiles, tobacco and sugar are treated as a part of the general pool of central
taxes. If the tax rental arrangement for these three commodities is terminated and the States are
allowed to levy sales tax (or VAT) on these commodities without any prescribed limit, the share of the
States in the net proceeds of shareable central taxes shall be reduced to 29.5 per cent.

Criteria and Relative Weights for determining Inter- se shares of States (Horizontal Devolution) by
11th Finance Commission and 12th Finance Commission has been as under:-

By : Dr. Vibhas Jha

 4. Overall transfers to States

The Commission has recommended that indicative amount of over all transfer to States may be fixed
at 38 per cent of the central gross revenue receipts, as against 37.5% of the gross revenue receipts of
the Central Government recommended by EFC for 2000-05

5. Non-plan Revenue Deficit Grant

A total non-plan revenue deficit grant of Rs.56,855.87 crore is recommended during the award period
for fifteen States. During the first year of the award period, non-Plan revenue deficit grant has been
recommended for fifteen States amounting to Rs. 15091.86 crore. By the last year of the award period,
only nine States would get non-Plan revenue deficit grants amounting to Rs.9,528.14 crore. Non-plan
revenue deficit grants are largely for special category States, except four non-special category states of
Kerala, Orissa, West Bengal and Punjab. The amount of the grant for each State having non-Plan
deficits is indicated in Annex-IV for each of the 5 years starting from the financial year 2005-06.

6. Grant for Education and Health

Eight States have been recommended for grants amounting to Rs.10171.65 crore over the award
period for the education sector, with a minimum of Rs.20 crore in a year for any eligible State.

Seven states have been recommended for grants amounting to Rs.5887.08 crore over the award period
for the health sector, with a minimum of Rs.10 crore in a year for any eligible State.

Grants for the education and health sectors are an additionality, over and above the normal
expenditure to be incurred by the States in these sectors. The Commission has recommended that
these grants should be utilized only for the respective sectors (non-Plan) based on certain
conditionalities specified by the Commission. Monitoring of the expenditure relating to these grants
will rest with the State government concerned.

7. Grants for maintenance of roads & bridges, public buildings and forests:

The 12th Finance Commission has recommended grants separately for maintenance of roads and
bridges, maintenance of buildings and forests as under:

By : Dr. Vibhas Jha

 ● A grant of Rs.15,000.00 crore over the award period has been recommended for maintenance
of roads and bridges.
● An amount of Rs.5000 crore is recommended as grants for maintenance of public buildings.
● Grant of Rs.1000 crore spread over the award period 2005-10 has been recommended by the
Commission for maintenance of forests.
● The maintenance grants are an additionality, over and above the normal maintenance
expenditure to be incurred by the states. These grants are to be released and spent in
accordance with certain conditionalities specified by the Commission.

8. Grants for heritage conservation

A grant of Rs.625 crore spread over the award period has been recommended for heritage
conservation. This grant will be used for preservation and protection of historical monuments,
archaeological sites, public libraries, museums and archives, and also for improving the tourist
infrastructure to facilitate visits to these sites.

9. Grants for State specific needs

The grant recommended by the TFC for State specific needs is in the pattern of the grant
recommended by EFC for the special problems of the States. The grant recommended by EFC for the
special problems of States was Rs. 1,129.00 crore. TFC has recommended an amount of Rs.7,100
crore as grant for States' specific needs . While these grants have been phased out equally over the last
four years, the Commission has observed that this phasing should be taken as indicative in nature. The
States may communicate the required phasing of grants to the Central government. The State-wise
allocations along with the purpose of the grants may be seen at Annex-VIII.

10. Grants for local bodies

The Commission 's mandate was to recommend as to the measures needed to augment the
Consolidated Fund of a State to supplement the resources of the Panchayats and the Municipalities in
the State on the basis of the recommendations made by the Finance Commission of the State.

The Commission has recommended a sum of Rs.25,000 crore for the period 2005-10 as grants-in-aid
to augment the consolidated fund of the States to supplement the resources of the municipalities and
the panchayats. This is equivalent to 1.24 percent of the shareable tax revenue and 0.9 per cent of
gross revenue receipts of the Centre as estimated by the Commission during the period 2005-10.

By : Dr. Vibhas Jha

The Commission has also recommended that an amount of Rs.25000 crore may be divided between
the panchayats and the municipalities in the ratio of 80:20.

Factors and weight adopted for working out inter-se allocation of the grant among the States:

11. Financing of relief expenditure

11.1 Calamity Relief Fund(CRF)

The Commission has made the following recommendations regarding Calamity Relief:-

● The scheme of CRF will be continued in its present form with contributions from the Centre
and the States in the ratio of 75:25.
● The size of the CRF for TFC 's award period is Rs.21,333.33 crore (Centre 's share of Rs.
16000 crore + State 's share of 5,333.33 crore).
● Under the recommendations of EFC for the 2000-05 the size of the CRF was Rs.11007.59
crore (Centre 's share Rs.8,255.69 crore and Rs.2,751.90 crore as States share). The size of
CRF as recommended by TFC is much larger than what was recommended by EFC even after
indexation for inflation.

11.2 National Calamity Contingency Fund (NCCF)

● The TFC has recommended that the scheme of NCCF may continue in its present form with a
core corpus of Rs.500 crore. The outgo from the fund may continue to be replenished by way
of collection of National Calamity Contingent Duty and levy of special surcharges.
● The definition of natural calamity, as applicable at present, may be expanded to cover
landslides, avalanches, cloud burst and pest attacks.

By : Dr. Vibhas Jha

 ● The Center may continue to make allocation of food grains to the needy States as a relief
measure, but a transparent policy in this regard is required to be put in place.
● A committee consisting of scientists, flood control specialists and other experts will be set up
to study and map the hazards to which several States are subject to.
● The provision for disaster preparedness and mitigation needs to be built into the State plans,
and not as a part of calamity relief.

12. Fiscal Reforms Facility:

The 12th Finance Commission felt that the Fiscal Reform Facility introduced by the government on
the basis of the EFC recommendations did not play a significant role in bringing about an
improvement in the State 's fiscal position. Accordingly, the Commission has recommended that the
scheme of Fiscal Reform Facility may not continue over the period 2005-10, as the scheme of debt
relief as recommended by it obviates the need for a separate Fiscal Reform Facility.

13. DebtRelief:
The Commission 's mandate was to make an assessment of the debt position of the States as on 31st
March 2004, suggest such corrective measures, as are deemed necessary, consistent with
macro-economic stability and debt sustainability. Such measures recommended will give weight-age
to the performance of the States in the field of human development and investment climate.

14. Sharing of Profit Petroleum:

The issue of sharing of Profit Petroleum was added to the terms of reference of the Commission in
October, 2003. The Commission was required to make recommendations as to whether the non-tax
revenue of 'Profit Petroleum" arising out of contractual provision, be shared with the States from
where the mineral oils are produced, and if so, to what extent. Accordingly, the Commission has made
the following recommendation:-

● The Union should share the Profit Petroleum from NELP areas with the States from where the
mineral oil and natural gas are produced. The share should be in the ratio of 50:50.
● There need not be sharing of profits in respect of nomination fields and non-NELP blocks.
● The revenues earned by the Central Government on contracts signed under the coal bed
methane policy may be shared with the producing States in the same manner as Profit
Petroleum.

By : Dr. Vibhas Jha

 ● In respect of any mineral, if a loss of revenue is anticipated for a State in the process of
implementation of a policy, which involves production sharing, a similar compensation
mechanism should be adopted by the Central Government.

15. Contents of Fiscal Responsibility Legislation

Each State should enact a fiscal responsibility legislation, which should, at a minimum, provide for

● Eliminating revenue deficit by 2008-09;

● Reducing fiscal deficit to 3 percent of GSDP or its equivalent, defined as the ratio of interest
payment to revenue receipts;
● Bringing out annual reduction targets of revenue and fiscal deficits;
● Bringing out annual statement giving prospects for the State economy and related fiscal
strategy and
● Bringing out special statements along with the budget giving in detail the number of
employees in government, public sector, and aided institutions and related salaries.

By : Dr. Vibhas Jha

 Thirteenth Finance Commission ( XIII FC )

The Thirteenth Finance Commission (FC-XIII) was constituted by the President on 13 November
2007 to make recommendations for the period 2010-15. Dr. Vijay Kelkar was appointed the Chairman
of the Commission.

Terms of Reference (ToR)

In making its recommendations, the Commission shall have regard, among other considerations, to -

(i) the resources of the Central Government, for five years commencing on 1st April 2010, on the
basis of levels of taxation and non-tax revenues likely to be reached at the end of 2008-09;

(ii) the demands on the resources of the Central Government, in particular, on account of the projected
Gross Budgetary Support to the Central and State Plan, expenditure on civil administration, defence,
internal and border security, debt-servicing and other committed expenditure and liabilities;

(iii) the resources of the State Governments, for the five years commencing on 1st April 2010, on the
basis of levels of taxation and non-tax revenues likely to be reached at the end of 2008-09;

(iv) the objective of not only balancing the receipts and expenditure on revenue account of all the
States and the Union, but also generating surpluses for capital investment;

(v) the taxation efforts of the Central Government and each State Government and the potential for
additional resource mobilization to improve the tax-Gross Domestic Product ratio in the case of the
Union and tax-Gross State Domestic Product ratio in the case of the States;

(vi) the impact of the proposed implementation of Goods and Services Tax with effect from 1st
April, 2010, including its impact on the country’s foreign trade;

By : Dr. Vibhas Jha

(vii) the need to improve the quality of public expenditure to obtain better outputs and outcomes;

(viii) the need to manage ecology, environment and climate change consistent with sustainable
development;

(ix) the expenditure on the non-salary component of maintenance and upkeep of capital assets and the
nonwage related maintenance expenditure on plan schemes to be completed by 31st March, 2010 and
the norms on the basis of which specific amounts are recommended for the maintenance of the capital
assets and the manner of monitoring such expenditure;

(x) the need for ensuring the commercial viability of irrigation projects, power projects, departmental
undertakings and public sector enterprises through various means, including levy of user charges and
adoption of measures to promote efficiency.

In making its recommendations on various matters, the Commission shall take the base of
population figures as of 1971, in all such cases where population is a factor for determination of
devolution of taxes and duties and grants-in-aid.

The following additional item was added to the terms of reference of the Commission vide
President’s Order published under S.O. No. 2107 dated 25 August 2008 .

“8.A. Having regard to the need to bring the liabilities of the Central Government on account of oil,
food and fertilizer bonds into the fiscal accounting, and the impact of various other obligations of the
Central Government on the deficit targets, the Commission may review the roadmap for fiscal
adjustment and suggest a suitably revised roadmap with a view to maintaining the gains of fiscal
consolidation through 2010 to 2015.”

Salient Features of XIIFC Recommendations

VERTICAL DEVOLUTION
1. The share of States in the net proceeds of the shareable Union taxes was set at 32 percent, 1.5
percentage-points higher than the recommendation of the Twelfth Finance Commission. It
has also recommended that the total transfers to the States on the revenue account be
subjected to an indicative ceiling of 39.5% of the gross tax revenues of the Centre.

By : Dr. Vibhas Jha

HORIZONTAL DEVOLUTION
2. The formula for horizontal devolution is given below:

GRANTS
3. The Commission recommended thirteen different grants, aggregating to Rs. 258,581 crore.
This included grants for local bodies, revenue deficit, disaster relief, elementary education,
roads and bridges, water sector management, forest, unique identity project, performance
incentives, district innovation fund, statistical system, employee and pension database and
some State specific grants.

4. The inter-se share of local bodies grants was on the following basis:

i. Rural local bodies: 50 per cent population, 10 percent distance from highest per
capita income, 15 per cent index of decentralization, 10 percent geographical area, 10
percent scheduled caste/scheduled tribe population, 5 percent Finance Commission
local body grants utilization index
ii. Urban local bodies: 50 percent population, 20 percent distance from highest per
capita income, 15 percent index of decentralization, 10 percent geographical area, 5
percent Finance Commission local body grants utilization index.

OTHERS
i. The Commission recommended that revenue deficit be progressively reduced and
eliminated, followed by achievement of revenue surplus by 2013–2014.
ii. Fiscal deficit to be reduced to 3 percent of GDP by 2014–2015.
iii. A target of 68 per cent of GDP for the combined debt of Union and states was set.
iv. It suggested that the Medium Term Fiscal Plan (MTFP) be reformed and made a statement
of commitment rather than a statement of intent.

By : Dr. Vibhas Jha

 v. The Fiscal Responsibility and Budget Management Act, 2003 needs to be amended to
mention the nature of shocks which shall trigger relaxation in targets.
vi. Initiatives should be taken to reduce the number of Centrally Sponsored Schemes (CSS)
and to restore the predominance of formula-based plan grants.
vii. States need to address the problem of losses in the power sector in a time-bound manner

Grants-in-Aid of Revenues of States under Article 275 of the Constitution

5. The Commission has recommended grants-in-aid of revenues of States for non-plan revenue
deficit, elementary education, environment related issues, improving outcomes, maintenance
of roads and bridges, local bodies, disaster relief, GST implementation and state specific
grants under Article 275 of the Constitution.

Non Plan Revenue Deficit Grant

6. The Commission has assessed the revenues and expenditure of the States for the period
2010-15 and has projected the deficit for each State after taking into account the amount of
share in Central taxes for that State. The Commission has recommended a grant of Rs. 51800
crore to meet this deficit for eight States. The Commission has also recommended a

By : Dr. Vibhas Jha

 performance incentive grant of Rs. 1500 crore for three special category States of Assam,
Sikkim and Uttarakhand that have graduated out of Non Plan Revenue Deficit. The
Government has accepted this recommendation.

Grant for Elementary Education

7. The Commission has assessed the requirement of providing elementary education for each
State based on the Sarva Shiksha Abhiyan norms and recommended to provide a grant of
Rs.24068 crore equivalent to 15% of the assessed requirement. The Government has accepted
this recommendation.

Environment Related Grants

8. The Commission has recommended three grants under this category of Rs. 5000 crore each
aggregating to Rs. 15000 crore. The first grant of each of these Rs. 5000 crore grants is
forest grant, the second is for promotion for renewable energy and the third is for the
water sector. The eligibility of each State for the grant for renewable energy is to be decided,
based on the achievement of each state on this front in the first four years of the award period.
The Government has accepted these recommendations.

Grants for Improving Outcomes

9. The Commission has recommended six grants under this category aggregating to Rs.14446
crore over the award period. An incentive grant for reduction in infant mortality of Rs.5000
crore is to be released to States starting 2012-13 depending on the reduction in Infant
Mortality Rate (IMR) achieved by the States with reference to the baseline level of 2009-10
figures. Grant of Rs. 5000 crore for improved delivery of justice has been recommended for
Lok Adalats and Legal Aid, Alternate Dispute Resolution Centers, Heritage Court Buildings,
State Judicial Academy and training of judicial officers and public prosecutors. The grant for
Unique Identification (UID) programme amounting to Rs. 2989.10 crore is to be released
based on the number of people covered under the UID database. Two grants of Rs. 616 crore
each have been recommended for District Innovation Funds and improving statistical systems
at district and State levels. Finally, a grant of Rs. 225 crore has been recommended for setting
up a database of employees and pensioners. The Government has accepted these
recommendations.

Grants for maintenance of Roads and Bridges

10. The Commission has assessed the requirement of ordinary repairs of roads in a State and has
recommended a grant of Rs. 19930 crore equivalent to 90% of the assessed requirement for

By : Dr. Vibhas Jha

 PMGSY roads and 50% of the assessed requirement for other roads, for four years of the
award period starting 2011-12. The Government has accepted these recommendations.

State Specific grants

11. The Commission has recommended grants aggregating to Rs. 27945 crore for various state
specific needs of the States.The Government has accepted these recommendations.

12. For monitoring and implementation of all the above grants at the State level, the Commission
has recommended setting up a monitoring committee under the chairmanship of the Chief
Secretary of the State. In addition to the grants mentioned above, the Commission has
recommended grants for GST implementation, local bodies and disaster relief which, along
with the other recommendations relating to these areas, are explained below.

Goods and Services Tax

13. The Commission has recommended a model GST structure that includes features such as
single rate, zero rating of exports, inclusion of various indirect taxes at the Central and State
level in GST ambit, major rationalization of the exemption structure, etc. The Commission
has recommended a grant of Rs. 50000 crore for implementation of GST as per the
recommended model. This grant is to be disbursed initially in the form of compensation for
loss due to implementation of GST and residual amount to be distributed amongst States in
the terminal year of the award period as per the devolution formula. It has also recommended
administrative structure for implementation and monitoring of this grant.

Local Bodies
14. The Commission has recommended a basic grant and a performance grant for local bodies.
Both these grants in any year have been quantified based on a percentage of the divisible pool
of the preceding year. For every year of the award period, the Commission has recommended
a basic grant amounting to 1.5% of the size of the divisible pool in the preceding year.
Similarly, for 2011-12 the Commission has recommended a performance grant of 0.5% of the
divisible pool of the preceding year and for subsequent years in the award period, 1% of the
divisible pool of the preceding year.

15. It has also recommended a separate special area basic grant of Rs. 20 per capita, carved out
of the total basic grant, for every year in the award period for Schedule V and Schedule VI
areas and areas excluded from Part IX and IXA of the Constitution. For these areas, it has

By : Dr. Vibhas Jha

 recommended a special area performance grant of Rs. 10 per capita for 2011-12 and Rs. 20
per capita for subsequent years of the award period.

16. The performance grants are to be released if the States meet conditions specified by the
Commission.

17. As per the revenue projections of the Commission, total grant recommended for the local
bodies aggregates to Rs. 87519 crore over the award period. The Commission has also
recommended distribution of the grants between urban and rural areas and the inter-se
distribution between States.The Government has accepted these recommendations.

Disaster Relief
18. The Commission has reviewed the existing arrangement of financing relief expenditure in
light of the Disaster Management Act, 2005 and has recommended merger of the National
Calamity Contingency Fund (NCCF) into National Disaster Response Fund (NDRF) and
merger of Calamity Relief Funds (CRF) into State Disaster Response Fund (SDRF) with
effect from 01.04.2010 and transfer of the balances in the existing funds into the new funds.

19. The Commission has assessed the relief expenditure requirements of all States and
recommended that 75% of the SDRF requirement for general category states and 90% for
special category states be met by the Centre through a grant to the States. It has also
recommended a grant of Rs. 525 crore for capacity building. Overall, to meet the Central
share of SDRF and for capacity building, the Commission has recommended a grant of
Rs.26373 crore. It has mandated all states to follow the required accounting practices to
properly account for relief expenditure. The Government has accepted these
recommendations.

Fiscal Roadmap
20. The Commission has assessed the finances of the Union and States and specified a combined
debt target of 68% of Gross Domestic Product (GDP) to be met by 2014-15. It has worked out
a roadmap for Fiscal Deficit (FD) and Revenue Deficit (RD) for the award period. For the
Centre, it has recommended RD to be eliminated and FD to be brought down to 3% of GDP
by 2013-14. For States, the Commission has worked out a fiscal roadmap for each State
depending on its current deficit and debt levels. The States are required to eliminate RD and
achieve FD of 3% of their respective Gross State Domestic Product (GSDP) during the
Commission’s award period in stages, in a manner that all the States would eliminate RD and

By : Dr. Vibhas Jha

 achieve FD of 3% of GSDP latest by 2014-15. The Commission has also recommended that
the borrowing limits of the States should be fixed by the Centre in line with these targets.

The Government has accepted these recommendations in principle. Detailed proposals for
amendment of the FRBM Act, as may be necessary, will be taken up separately.

Debt Relief to States

21. The Commission has recommended two debt relief measures to be extended to all States.
Firstly, it has recommended that the interest rates on loans from National Small Savings Fund
(NSSF) to States contracted till the end of 2006-07 and outstanding as at the end of 2009-10
be reset at an interest rate of 9%. The implication of this relief during the award period is
estimated by the Commission to be Rs. 13517 crore. The financial implication over the entire
period till the maturity of the last loan covered in this relief measure is estimated to be Rs.
28360 crore. The Commission has also recommended that structural reforms should be
brought in the NSSF to make it more market linked.

22. The second debt relief recommended by the Commission is write-off of Central loans to
States that are administered by central ministries other than the Ministry of Finance
outstanding as at the end of 2009-10. The amount of loans outstanding as at the end of
2007-08 was Rs. 4506 crore as noted by the Commission. The Commission has also
recommended that any further loans under Centrally Sponsored Schemes should be
completely avoided.

23. The Commission has also recommended extension of the debt consolidation facility
recommended by the Twelfth Finance Commission to States that have not yet availed this
benefit.

24. All the above mentioned debt relief is available to States only if they amend/legislate FRBM
Acts in accordance with the recommendations of the Commission. The Commission has also
recommended that the States will be eligible for the state specific grants only if they comply
with this condition.

25. In addition to the above, the Commission has made other recommendations that deal with
issues including revenue and expenditure reforms at Central and State levels, accounting and
budgeting reforms, additional disclosures by the Centre, State and local bodies, etc. These
recommendations will be examined in due course.

By : Dr. Vibhas Jha

 Fourteenth Finance Commission ( XIV FC )

The Fourteenth Finance Commission (FC-XIV) was constituted by the President on 2 January 2013 to
make recommendations for the period 2015-20. Dr. Y. V. Reddy was appointed the Chairman of the
Commission.

Terms of Reference (ToR)

In making its recommendations, the Commission shall have regard, among other considerations, to:

(i) the resources of the Central Government, for five years commencing on 1 April 2015, on
the basis of levels of taxation and non-tax revenues likely to be reached during 2014-15;

(ii) the demands on the resources of the Central Government, in particular, on account of the
expenditure on civil administration, defence, internal and border security, debt-servicing and
other committed expenditure and liabilities;

(iii) the resources of the State Governments and the demands on such resources under
different heads, including the impact of debt levels on resource availability in debt stressed
states, for the five years commencing on 1 April 2015, on the basis of levels of taxation and
non-tax revenues likely to be reached during 2014-15;

(iv) the objective of not only balancing the receipts and expenditure on revenue account of all
the States and the Union, but also generating surpluses for capital investment;

(v) the taxation efforts of the Central Government and each State Government and the
potential for additional resource mobilization to improve the tax-Gross Domestic Product

By : Dr. Vibhas Jha

 ratio in the case of the Union and tax-Gross State Domestic Product ratio in the case of the
States;

(vi) the level of subsidies that are required, having regard to the need for sustainable and
inclusive growth, and equitable sharing of subsidies between the Central Government and
State Governments;

(vii) the expenditure on the non-salary component of maintenance and upkeep of capital
assets and the non-wage related maintenance expenditure on plan schemes to be completed by
31 March, 2015 and the norms on the basis of which specific amounts are recommended for
the maintenance of the capital assets and the manner of monitoring such expenditure;

(viii) the need for insulating the pricing of public utility services like drinking water,
irrigation, power and public transport from policy fluctuations through statutory provisions;

(ix) the need for making the public sector enterprises competitive and market oriented; listing
and disinvestment; and the relinquishing of non-priority enterprises;

(x) the need to balance management of ecology, environment and climate change consistent
with sustainable economic development; and

(xi) the impact of the proposed Goods and Services Tax on the finances of Centre and
States and the mechanism for compensation in case of any revenue loss.

The following additional item was added to the ToR of the Commission vide President’s Order
published under S.O. No. 1424(E) dated 2 June 2014 :

“The Commission shall also take into account the resources available to the successor or reorganized
States on reorganization of the State of Andhra Pradesh in accordance with the Andhra Pradesh
Reorganisation Act, 2014 (6 of 2014) and the Ministry of Home Affairs notification number S.O. 655
(E) dated 4 March, 2014 and make recommendations, for successor or reorganized States, on the
matters under reference in this notification”.

By : Dr. Vibhas Jha

Salient Features of XIV FC Recommendations

VERTICAL DEVOLUTION
1. The vertical devolution of taxes was increased from 32 per cent to 42 per cent. According to
the Commission, the increased devolution of the divisible pool of taxes represented a
‘compositional shift in transfers’ from grants to tax devolution.

HORIZONTAL DEVOLUTION
2. The formula for horizontal devolution is given below

GRANTS
3. In assessing the States’ needs, the Commission did not go by the Plan and nonPlan
distinctions, but considered the entire revenue expenditure. The Commission recommended
Rs. 194,820 crore as revenue deficit grants.

4. It recommended distribution of grants to States for local bodies using 2011 population data
with weight of 90 per cent and area with weight of 10 per cent. The total grant recommended
was Rs. 287,436 crore for the award period. Out of this, the grant to panchayats was Rs.
200,292 crore and the rest to municipalities. The grants were divided into a basic component
and a performance component. The ratio of basic to performance grant was set at 90:10 for
panchayats and 80:20 for municipalities.

5. A sum of Rs 55097 crores was recommended as disaster relief grants.

By : Dr. Vibhas Jha

Dissent Note
6. There is a dissent note by Prof Abhijit Sen (Part time member) suggesting tax devolution of
38 percent of the divisible pool in the first year of the award period and maintained at that
level unless there is agreement in the new institutional mechanism to revert to 42 percent
share. Consequently, Prof Sen recommended a change in Post Devolution Revenue deficit
grants. The Government has accepted the majority decision regarding Tax devolution to
States.

Revenue Deficit Grant

7. The Commission has assessed the revenues and expenditure of the States for the period
2015-20 and has projected the deficit for each State after taking into account the amount of
share in Central taxes that State. The Commission has recommended a grant of Rs.1,94,821
crore to meet this deficit of eleven States.
The Government has accepted the above recommendations “in Principle”. The Grants In-aid
to be subject to the Revenue raising and fiscal consolidation measures undertaken by the
States. Appropriate institutional arrangements shall be put in place to assess and advise
Government for making post devolution Revenue deficit Grants-in-aid.

Local Bodies
8. The Commission has recommended that local bodies should be required to spend, the grants
only on the basic services within the functions assigned to them under relevant legislations. It
has been recommended that distribution of grants to States for local bodies using 2011
population data with weight of 90% and area with weight of 10%. The grants to States will be
divided into two parts, a grant to duly constituted Gram Panchayats and a grant to duly
constituted municipalities on the basis of urban and rural population. The Commission has
worked out a total grant of Rs.2,87,436 crore for the period 2015-2020.

By : Dr. Vibhas Jha

 8.1. For Gram Panchayats, the Commission has recommended a basic grant of
Rs.1,80,262.96crore and performance grant of Rs. 20,029.22 crore for all the states.
8.2 For Municipalities, the Commission has recommended a basic grant of Rs. 69,715.03crore
and performance grant of Rs. 17,428.76 crores for all the states.

Disaster Relief
9. The Commission has reviewed the existing arrangement of financing relief expenditure in
light of the Disaster Management Act, 2005 and likely implementation of Goods and Services
Tax (GST) and has recommended an amount of Rs. 61,219 crore as aggregate corpus of State
Disaster Relief Fund (SDRF) for all States for the award period and that States contribute
10% (Rs.6,122 crore) to SDRF during the award period with the remaining 90% (Rs.55,097
crore) coming from the Union Government. The Commission has recommended that up to 10
percent of the funds available under the SDRF can be used by a State for occurrences which
State considers to be ‘disasters’ within its local context and which are not in the notified list
of disasters of the Ministry of Home Affairs.

The Government has accepted the above recommendation with the modification that the
percentage share of the States will continue to be as before, and that the flows will also be of
the same order (linked to the extent of cess), as in the existing system; and that, once GST is
in place the recommendation of FFC on disaster relief would be fully implemented.

Other Recommendations
10. In addition to the above, the Commission has made recommendations that deal with issues
including Goods and Services Tax, Fiscal Environment and Fiscal Consolidation Roadmap,
Pricing of Public Utilities, Public Sector enterprises and Public Expenditure management.
These recommendations will be examined in due course in consultation with various
stakeholders.

By : Dr. Vibhas Jha

 Fifteenth Finance Commission ( XV FC )

The Fifteenth Finance Commission (XVFC) was constituted on 27 November 2017 against the
backdrop of the abolition of the Planning Commission (as also of the distinction between Plan and
non-Plan expenditure) and the introduction of the goods and services tax (GST), which has
fundamentally redefined federal fiscal relations.

The Finance Commission is a constitutional body formed by the President of India to give suggestions
on center-state financial relations. The 15th Finance Commission (Chair: Mr. N. K. Singh) was
required to submit two reports. The first report, consisting of recommendations for the financial year
2020-21, was tabled in Parliament in February 2020. The final report with recommendations for the
2021-26 period was tabled in Parliament on February 1, 2021.

Shri N.K. Singh, former Member of Parliament and former Secretary to the Government of India was
appointed as the Chairman of the Commission. Shri Shaktikanta Das, former Secretary to the
Government of India and Prof. Anoop Singh, Adjunct Professor, Georgetown University was
appointed full time Member. Dr. Ashok Lahiri, Chairman (nonexecutive, part time) Bandhan Bank
and Dr. Ramesh Chand, Member, NITI Aayog was appointed as a part-time Member. Shri Arvind
Mehta was appointed as Secretary to the Commission. Shri Ajay Narayan Jha, former Finance
Secretary, Government of India, was later appointed as Member with effect from 1 March 2019 in
place of Shri Shaktikanta Das. Over the course of the Commission's tenure, this and other changes in
membership were subsequently notified by President's Order

Terms of Reference (ToR)

The Fifteenth Finance Commission (XVFC)’s ToR was unique and wide ranging in many ways. The
Commission was asked to recommend performance incentives for States in many areas like the power
sector, adoption of DBT, solid waste management etc. Another unique ToR was to recommend
funding mechanisms for defence and internal security.

The Terms of Reference (ToR) of the current Commission have some distinctive features, including
recommending monitorable performance criteria for important national flagship programmes and
examining the possibility of setting up a permanent non lapsable funding for India’s defence needs.
The reorganization of the State of Jammu and Kashmir into two Union Territories – one of Jammu and
Kashmir and one of Ladakh – presents a new dynamic. On the whole the Finance Commission faces

By : Dr. Vibhas Jha

new challenges in the process of the evolution of our federal polity. As an important Constitutional
entity, the Commission is committed to balancing competing claims and priorities among all three
tiers of government in a credible manner.

The Commission may consider proposing measurable performance-based incentives for States, at the
appropriate level of government, in following areas:

(i) Efforts made by the States in expansion and deepening of tax net under GST;
(ii) Efforts and Progress made in moving towards replacement rate of population growth ;
(iii) Achievements in implementation of flagship schemes of Government of India, disaster
resilient
infrastructure, sustainable development goals, and quality of expenditure;
(iv) Progress made in increasing capital expenditure, eliminating losses of power sector, and
improving the quality of such expenditure in generating future income streams;
(v) Progress made in increasing tax/non-tax revenues, promoting savings by adoption of
Direct Benefit Transfers and Public Finance Management System, promoting digital economy
and removing layers between the government and the beneficiaries;
(vi) Progress made in promoting ease of doing business by effecting related policy and
regulatory changes and promoting labour intensive growth;
(vii) Provision of grants in aid to local bodies for basic services, including quality human
resources, and implementation of performance grant system in improving delivery of services;
(viii) Control or lack of it in incurring expenditure on populist measures; and
(ix) Progress made in sanitation, solid waste management and bringing in behavioral change
to end open defecation.

Key recommendations in the XVFC Reports include:

a. Vertical Devolutions:

The share of states in the center’s taxes is recommended to be decreased from 42% during the
2015-20 period to 41% for 2020-21. The 1% decrease is to provide for the newly formed union
territories of Jammu and Kashmir, and Ladakh from the resources of the central government.

Total XVFC transfers (devolution + grants) constitutes about 34 per cent of estimated Gross Revenue
Receipts of the Union leaving adequate fiscal space for the Union to meet its resource requirements
and spending obligations on national development priorities.

By : Dr. Vibhas Jha

 b. Horizontal devolution:

This criteria is used by the Commission to determine each state’s share in central taxes, and the weight
assigned to each criterion. The criteria for distribution of central taxes among states for the 2021-26
period is the same as that for 2020-21. However, the reference period for computing income distance
and tax efforts are different (2015-18 for 2020-21 and 2016-19 for 2021-26), hence, the individual
share of states may still change.

Based on principles of need, equity and performance, the overall devolution formula is as follows.

On horizontal devolution, while XVFC agreed that the Census 2011 population data better represents
the present need of States, to be fair to, as well as reward, the States which have done better on the
demographic front, XVFC has assigned a 12.5 per cent weight to the demographic performance
criterion. XVFC has re-introduced tax effort criteria to reward fiscal performance.

➢ Income distance: Income distance is the distance of a state’s income from the state with the
highest income. Income of a state has been computed as average per capita GSDP during the
three-year period between 2016-17 and 2018-19. A state with lower per capita income will
have a higher share to maintain equity among states.
➢ Demographic performance: The Terms of Reference of the Commission required it to use
the population data of 2011 while making recommendations. Accordingly, the Commission
used 2011 population data for its recommendations. The demographic performance criterion

By : Dr. Vibhas Jha

 has been used to reward efforts made by states in controlling their population. States with a
lower fertility ratio will be scored higher on this criterion.
➢ Forest and ecology: This criterion has been arrived at by calculating the share of the dense
forest of each state in the total dense forest of all the states.
➢ Tax and fiscal efforts: This criterion has been used to reward states with higher tax collection
efficiency. It is measured as the ratio of the average per capita own tax revenue and the
average per capita state GDP during the three years between 2016-17 and 2018-19.

c. Revenue deficit grants:

Based on uniform norms of assessing revenues and expenditure of the States and the Union, XVFC
has recommended total revenue deficit grants (RDG) of Rs 2,94,514 crore over the award period for
seventeen States.

d. Local Governments:

The total size of the grant to local governments should be Rs. 4,36,361 crore for the period
2021-26.Of these total grants, Rs. 8,000 crore is performance-based grants for incubation of new cities
and Rs. 450 crore is for shared municipal services. A sum of Rs. 2,36,805 crore is earmarked for rural
local bodies, Rs.1,21,055 crore for urban local bodies and Rs. 70,051 crore for health grants through
local governments.

Urban local bodies have been categorized into two groups, based on population, and different norms
have been used for flow of grants to each, based on their specific needs and aspirations. Basic grants
are proposed only for cities/towns having a population of less than a million. For Million-Plus cities,
100 per cent of the grants are performance-linked through the Million-Plus Cities Challenge Fund
(MCF).

e. Health:

XVFC has recommended that health spending by States should be increased to more than 8 per cent
of their budget by 2022. The total grants-in-aid support to the health sector over the award period
works out to Rs. 1,06,606 crore, which is 10.3 per cent of the total grants-in-aid recommended by
XVFC. The grants for the health sector will be unconditional.

By : Dr. Vibhas Jha

 f. Performance incentives and grants:

Sector-specific grants: Sector-specific grants of Rs 1.3 lakh crore will be given to states for eight
sectors: (i) health, (ii) school education, (iii) higher education, (iv) implementation of agricultural
reforms, (v) maintenance of PMGSY roads, (vi) judiciary, (vii) statistics, and (viii) aspirational
districts and blocks. A portion of these grants will be performance-linked.

State-specific grants: The Commission recommended state-specific grants of Rs 49,599 crore. These
will be given in the areas of: (i) social needs, (ii) administrative governance and infrastructure, (iii)
water and sanitation, (iv) preservation of culture and historical monuments, (v) high-cost physical
infrastructure, and (vi) tourism. The Commission recommended a high-level committee at state-level
to review and monitor utilization of state-specific and sector-specific grants.

Grants to local bodies: The total grants to local bodies will be Rs 4.36 lakh crore (a portion of grants
to be performance-linked) including: (i) Rs 2.4 lakh crore for rural local bodies, (ii) Rs 1.2 lakh crore
for urban local bodies, and (iii) Rs 70,051 crore for health grants through local governments. The
grants to local bodies will be made available to all three tiers of Panchayat- village, block, and district.
The health grants will be provided for: (i) conversion of rural sub-centres and primary healthcare
centers (PHCs) to health and wellness centers (HWCs), (ii) support for diagnostic infrastructure for

By : Dr. Vibhas Jha

primary healthcare activities, and (iii) support for urban HWCs, sub-centres, PHCs, and public health
units at the block level.

Grants to local bodies (other than health grants) will be distributed among states based on population
and area, with 90% and 10% weightage, respectively. The Commission has prescribed certain
conditions for availing these grants (except health grants). The entry-level criteria include: (i)
publishing provisional and audited accounts in the public domain and (ii) fixation of minimum floor
rates for property taxes by states and improvement in the collection of property taxes (an additional
requirement after 2021-22 for urban bodies). No grants will be released to local bodies of a state after
March 2024 if the state does not constitute the State Finance Commission and act upon its
recommendations by then.

Disaster risk management: The Commission recommended retaining the existing cost-sharing
patterns between the center and states for disaster management funds. The cost-sharing pattern
between center and states is: (i) 90:10 for north-eastern and Himalayan states, and (ii) 75:25 for all
other states. State disaster management funds will have a corpus of Rs 1.6 lakh crore (center’s share
is Rs 1.2 lakh crore).

g. Defence and Internal Security

Keeping in view the extant strategic requirements for national defence in the global context, XVFC
has, in its approach, re-calibrated the relative shares of Union and States in gross revenue receipts.
This will enable the Union to set aside resources for the special funding mechanism that XVFC has
proposed. The Union Government may constitute in the Public Account of India, a dedicated
non-lapsable fund, Modernisation Fund for Defence and Internal Security (MFDIS). The total
indicative size of the proposed MFDIS over the period 2021-26 is Rs. 2,38,354 crore.

h. Disaster Risk Management:

Mitigation Funds should be set up at both the national and State levels, in line with the provisions of
the Disaster Management Act. The Mitigation Fund should be used for those local level and
community-based interventions which reduce risks and promote environment-friendly settlements and
livelihood practices.

For SDRMF, XVFC has recommended the total corpus of Rs.1,60,153 crore for States for disaster
management for the duration of 2021-26, of which the Union’s share is Rs. 1,22,601 crore and States’
share is Rs. 37,552 crore.

By : Dr. Vibhas Jha

XVFC has recommended six earmarked allocations for a total amount of Rs. 11,950 crore for certain
priority areas, namely, two under the NDRF (Expansion and Modernisation of Fire Services and
Resettlement of Displaced People affected by Erosion) and four under the NDMF (Catalytic
Assistance to Twelve Most Drought-prone States, Managing Seismic and Landslide Risks in Ten Hill
States, Reducing the Risk of Urban Flooding in Seven Most Populous Cities and Mitigation Measures
to Prevent Erosion).

● Fiscal roadmap

Fiscal deficit and debt levels: The Commission suggested that the center bring down the fiscal
deficit to 4% of GDP by 2025-26. For states, it recommended the fiscal deficit limit (as % of GSDP)
of: (i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26. If a state is unable to fully
utilize the sanctioned borrowing limit as specified above during the first four years (2021-25), it can
avail the unutilised borrowing amount (calculated in rupees) in subsequent years (within the 2021-26
period).

Extra annual borrowing worth 0.5% of GSDP will be allowed to states during first four years
(2021-25) upon undertaking power sector reforms including: (i) reduction in operational losses, (ii)
reduction in revenue gap, (iii) reduction in payment of cash subsidy by adopting direct benefit
transfer, and (iv) reduction in tariff subsidy as a percentage of revenue.

The Commission observed that the recommended path for fiscal deficit for the center and states
will result in a reduction of total liabilities of: (i) the center from 62.9% of GDP in 2020-21 to
56.6% in 2025-26, and (ii) the states on aggregate from 33.1% of GDP in 2020-21 to 32.5% by
2025-26. It recommended forming a high-powered inter-governmental group to: (i) review the Fiscal
Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM framework for
center as well as states, and oversee its implementation.

Revenue mobilization: Income and asset-based taxation should be strengthened. To reduce

excessive dependence on income tax on salaried incomes, the coverage of provisions related to tax
deduction and collection at source (TDS/TCS) should be expanded. Stamp duty and registration fees
at the state level have large untapped potential. Computerized property records should be integrated
with the registration of transactions, and the market value of properties should be captured. State
governments should streamline the methodology of property valuation.

GST: The inverted duty structure between intermediate inputs and final outputs present in GST needs
to be resolved. Revenue neutrality of the GST rate should be restored which has been compromised

By : Dr. Vibhas Jha

by multiple rate structures and several downward adjustments. Rate structure should be rationalized
by merging the rates of 12% and 18%. States need to step up field efforts for expanding the GST base
and for ensuring compliance.

Financial management practices: A comprehensive framework for public financial management

should be developed. An independent Fiscal Council should be established with powers to assess
records from the center as well as states. The Council will only have an advisory role. A time-bound
plan for phased adoption of standard-based accounting and financial reporting for both center and
states should be prepared while eventual adoption of accrual-based accounting is being considered.
The center as well as states should not resort to off-budget financing or any other non-transparent
means of financing for any expenditure. A standardized framework for reporting of contingent
liabilities should be devised. Both the center and states should strive to improve the accuracy and
consistency of macroeconomic and fiscal forecasting.

Fiscal consolidation under 15th Finance commission

a. Provided range for fiscal deficit and debt path of both the Union and States.
b. Additional borrowing room to States based on performance in power sector reforms.
c. A threshold amount of annual appropriation should be fixed below which the funding for a
CSS may be stopped. Below the stipulated threshold, the administration department should
justify the need for the continuation of the scheme. As the life cycle of ongoing schemes has
been made co-terminus with the cycle of Finance Commissions, the third-party evaluation of
all CSSs should be completed within a stipulated time frame.The flow of monitoring
information should be regular and should include credible information on output and outcome
indicators.
d. In view of the uncertainty that prevails at the stage that XVFC have done its analysis, as well
as the contemporary realities and challenges, we recognise that the FRBM Act needs a major
restructuring and recommend that the time-table for defining and achieving debt sustainability
may be examined by a High-powered Inter-governmental Group. This High-powered
Group can craft the new FRBM framework and oversee its implementation. It is important
that the Union and State Governments amend their FRBM Acts, based on the
recommendations of the Group, so as to ensure that their legislations are consistent with the
fiscal sustainability framework put in place. This High-powered Inter-Governmental Group
could also be tasked to oversee the implementation of the 15th Finance Commission’s diverse
recommendations.

By : Dr. Vibhas Jha

 e. State Governments may explore formation of independent public debt management cells
which will chart their borrowing programme efficiently.

States should amend their fiscal responsibility legislation to ensure consistency with the centre’s
legislation, in particular, with the definition of debt. States should have more avenues for
short-term borrowings other than the ways and means advances, and overdraft facility from the
Reserve Bank of India. States may form an independent debt management cell to manage their
borrowing programmes efficiently.

NOTES:

By : Dr. Vibhas Jha