The Eleventh Finance Commission (EFC) of India, constituted under the chairmanship of A.M. Khusro, submitted its report for the period 2000-2005. Its primary mandate was to recommend principles governing the distribution of tax revenues between the Union and the States, and the allocation of resources among the States themselves. The commission grappled with the challenge of balancing fiscal equity and efficiency, aiming to encourage better fiscal management at the state level while addressing regional disparities.
A key recommendation of the EFC was maintaining the existing share of net proceeds of shareable central taxes allocated to the states at 29.5%. This was a departure from some earlier commissions that had increased the states’ share. However, the EFC argued for consolidation and stability in the fiscal framework. While the aggregate share remained constant, the commission significantly altered the formula for inter-state distribution. It emphasized a more holistic approach incorporating factors beyond population and poverty.
The EFC assigned weights to various criteria for inter-state tax devolution as follows: Population (10%), Income Distance (62.5%), Area (7.5%), Infrastructure (7.5%), Tax Effort (5%), Fiscal Discipline (5%), and Special Problems (2.5%). ‘Income Distance’ remained the most crucial factor, reflecting the gap between a state’s per capita income and the highest per capita income among all states. This aimed to provide greater resources to less developed states. ‘Infrastructure’ was a new criterion introduced to incentivize investment in essential services. ‘Tax Effort’ rewarded states that demonstrated greater efficiency in collecting their own taxes, encouraging fiscal responsibility.
The EFC also addressed the issue of grants-in-aid to the states. It recommended both revenue deficit grants and grants for specific purposes. Revenue deficit grants were aimed at bridging the gap between a state’s assessed revenue and expenditure, ensuring that even the fiscally weaker states could meet their essential obligations. Specific purpose grants were earmarked for crucial sectors like education, health, and infrastructure development, aligning with national priorities and promoting focused investment.
Furthermore, the EFC underscored the need for fiscal consolidation at both the central and state levels. It emphasized the importance of reducing revenue deficits and controlling debt levels. The commission recommended measures for improving tax administration, enhancing expenditure management, and promoting public sector reforms. It urged states to move towards sustainable fiscal practices and reduce their reliance on central assistance.
The Eleventh Finance Commission’s report had a significant impact on the fiscal relations between the Centre and the States. While the commission aimed for a balanced approach, some states expressed concerns about the altered inter-state distribution formula. Nevertheless, the EFC’s recommendations provided a framework for fiscal management and resource allocation for the ensuing five years, emphasizing the need for fiscal prudence, equity, and efficiency in the Indian federal system. Its focus on infrastructure and tax effort signaled a shift towards incentivizing development and responsible fiscal behavior amongst the states.
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