12th Finance Commission Report: Key Aspects
The Twelfth Finance Commission (TFC), constituted in 2002 and chaired by Dr. C. Rangarajan, submitted its report in 2004, covering the period 2005-2010. Its primary mandate was to make recommendations regarding the distribution of tax revenues between the Union and the States, principles governing grants-in-aid to the States, and measures to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities.
Key Recommendations
Tax Devolution: The TFC recommended maintaining the share of states in the net proceeds of central taxes at 30.5%, the same as that recommended by the Eleventh Finance Commission. However, it simplified the formula for inter-state distribution of this share. The criteria and their weights included: population (25%), fiscal capacity distance (50%), area (10%), fiscal discipline (5%), and tax effort (10%). This formula aimed to address both equity (fiscal capacity distance) and efficiency (tax effort).
Grants-in-Aid: The Commission recommended various grants to states, including:
- Non-Plan Revenue Deficit Grants: These grants were aimed at reducing the revenue deficits of states. The commission recommended a phased elimination of revenue deficits by 2008-09.
- Grants for Local Bodies: Substantial grants were allocated to local bodies (Panchayats and Municipalities) to improve their infrastructure and service delivery. These grants were conditional on the states enacting legislation to devolve functions, finances, and functionaries to the local bodies.
- Grants for Calamity Relief: The TFC recommended enhancements to the Calamity Relief Fund and the National Calamity Contingency Fund to address natural disasters.
Debt Relief and Management: Recognizing the high debt burden of many states, the TFC recommended a Debt Consolidation and Waiver Scheme. This scheme aimed to reschedule state debts to the Centre, subject to the states adhering to fiscal consolidation targets. It also recommended a debt waiver linked to the states’ performance in achieving these targets.
Fiscal Responsibility Legislation: The Commission emphasized the importance of fiscal responsibility and encouraged states to enact their own Fiscal Responsibility Legislation to ensure long-term fiscal sustainability.
Other Recommendations: The TFC also addressed sector-specific issues, recommending reforms in areas like power, irrigation, and road infrastructure. It stressed the need for better targeting of subsidies and improved efficiency in public expenditure.
Impact and Significance
The 12th Finance Commission’s recommendations had a significant impact on Centre-State financial relations. The debt consolidation and waiver scheme provided much-needed relief to financially distressed states. The increased grants to local bodies helped strengthen decentralized governance. The focus on fiscal discipline and efficiency in public expenditure contributed to improved fiscal management at both the central and state levels.
The TFC’s report represented a balanced approach, addressing both equity and efficiency concerns. It provided a framework for a more stable and sustainable fiscal environment, contributing to overall economic development.
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