13th Finance Commission Recommendations Summary

The 13th Finance Commission (ThFC), constituted under the chairmanship of Dr. Vijay Kelkar, submitted its report in 2009, covering the period from 2010-11 to 2014-15. Its primary task was to make recommendations on the distribution of tax revenues between the Union and the States, the principles governing grants-in-aid to the States, and measures to improve the financial position of both the Union and the States.

Key Recommendations:

Fiscal Devolution:

The ThFC recommended increasing the share of States in the divisible pool of central taxes to 32%, a one percentage point increase from the 12th Finance Commission’s recommendation. This aimed to provide States with greater resources for their developmental needs.

Grants-in-Aid:

The commission proposed various types of grants to the States, including:

Revenue Deficit Grants: Provided to States projected to have a revenue deficit after the devolution of taxes. The objective was to eliminate revenue deficits by 2014-15.
Special Area Grants: Designed to address specific needs of States with difficult terrains, low population density, and other challenges.
Local Body Grants: Recommended grants for both rural and urban local bodies, emphasizing the importance of strengthening local governance and service delivery. A significant portion of these grants was earmarked for sanitation, reflecting the Commission’s focus on improving public health.
Disaster Management Grants: Allocated for disaster preparedness and mitigation, recognizing the increasing vulnerability of certain states to natural calamities.

Fiscal Consolidation:

The ThFC strongly emphasized fiscal prudence and consolidation, urging both the Union and the States to reduce their debt burdens. It recommended a phased reduction in the combined debt-to-GDP ratio of the Centre and States. It also suggested adoption of a credible fiscal consolidation path, advocating for measures to improve tax revenue mobilization and control expenditure.

Goods and Services Tax (GST):

While GST was still under discussion during the ThFC’s tenure, the Commission recognized its potential to significantly improve tax administration and boost economic growth. It recommended that the Union and States should work together to implement GST as soon as possible.

Performance-Based Incentives:

The ThFC introduced performance-based incentives for States in areas such as:

Fiscal Management: Encouraging States to improve their fiscal performance.
Environmental Protection: Promoting environmental conservation.
Power Sector Reforms: Incentivizing reforms in the power sector to improve efficiency and reduce losses.
Improving Statistical Systems: Strengthening the statistical capacity of states for better planning and policy making.

Debt Relief:

The commission recommended a debt waiver scheme tied to fiscal consolidation efforts. This was meant to encourage states to adhere to responsible fiscal behavior.

Overall Impact:

The 13th Finance Commission’s recommendations aimed at a more equitable distribution of resources between the Union and the States, promoting fiscal responsibility, and incentivizing good governance. The increased devolution of taxes, along with grants tailored to specific needs, provided States with greater autonomy and resources to address their developmental challenges. The emphasis on fiscal consolidation and performance-based incentives encouraged both the Union and the States to adopt sound fiscal practices.