XIII Finance Commission: Recommendations and Impact

The Thirteenth Finance Commission (XIII FC), constituted in 2007 under the chairmanship of Dr. Vijay Kelkar, played a pivotal role in shaping the fiscal landscape of India from 2010 to 2015. Its primary mandate was to make recommendations regarding the distribution of tax revenues between the Union and the States, and among the States themselves. The Commission also examined issues relating to debt sustainability, local body finances, and disaster management.

A cornerstone of the XIII FC's recommendations was a significant increase in the share of central taxes to be devolved to the States. The Commission recommended increasing this share to 32%, a substantial jump from the 30.5% recommended by the Twelfth Finance Commission. This increase was intended to provide States with greater fiscal autonomy and resources to address their developmental needs.

Beyond the overall share, the XIII FC also refined the formula used to determine the inter-state distribution of tax revenues. The formula considered factors such as population, fiscal capacity distance (the gap between a state's per capita income and the highest per capita income), area, fiscal discipline, and tax effort. The Commission placed significant emphasis on fiscal capacity distance, ensuring that states with lower per capita incomes received a larger share of the devolved funds, promoting greater equity among the states.

The Commission recognized the importance of fiscal consolidation and debt sustainability. It emphasized the need for both the Union and the States to adhere to fiscal responsibility targets. To encourage fiscal discipline, the XIII FC linked debt relief and grant-in-aid to the states' adherence to fiscal correction paths. This incentivized states to manage their finances prudently and reduce their debt burden.

Recognizing the crucial role of local bodies (Panchayats and Municipalities) in delivering essential services, the XIII FC recommended grants for these bodies. These grants were intended to improve the infrastructure and service delivery capacity of local bodies, especially in rural areas. The grants were also linked to the transfer of functions, finances, and functionaries to the local bodies, ensuring that they had the necessary resources and authority to perform their roles effectively.

Furthermore, the Commission addressed the issue of disaster management. It recommended the establishment of a National Disaster Response Fund (NDRF) and State Disaster Response Funds (SDRF) to provide financial assistance for disaster relief and rehabilitation efforts. The Commission also emphasized the need for better preparedness and mitigation measures to reduce the impact of disasters.

In conclusion, the Thirteenth Finance Commission's recommendations had a significant impact on the fiscal relations between the Union and the States. The increased devolution of tax revenues, the emphasis on fiscal discipline, the support for local bodies, and the attention to disaster management all contributed to a more balanced and equitable fiscal system in India. While some states expressed concerns about certain aspects of the distribution formula, the overall impact of the XIII FC's recommendations was widely seen as positive, promoting greater fiscal autonomy for the states and supporting their developmental efforts.