13TH FINANCE COMMISSION

13th FC was constituted by the President under Article 280 of the Indian Constitution on 13th November 2007 under Dr. Vijay Kelker to give recommendations on specified aspects of Centre State fiscal relations during 2010-15. The Commission submitted its report to the President on 30th December 2009 covering all aspects of its mandate

Composition-

Dr. Vijay Kelkar was appointed the Chairman of the Commission. Dr. Indira Rajaraman, Professor, National Institute of Public Finance & Policy (NIPFP), Dr. Abusaleh Shariff, Chief Economist, National Council of Applied Economic Research (NCAER), and Professor Atul Sarma, Former Vice-Chancellor, Rajiv Gandhi University (formerly Arunachal University) were appointed full time Members (1+3=4). Shri B.K. Chaturvedi, Member, Planning Commission was appointed as a part-time Member. Shri Sumit Bose was appointed as Secretary to the Commission

Point to be noted-

■President appointed Dr. Sanjiv Misra, Former Secretary (Expenditure), Ministry of Finance as member of the Commission in place of Dr. Abusaleh Shariff, who was unable to join

Terms of Reference-

■The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds

■The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States which are in need of assistance by way of grants-in-aid of their revenues under article 275 of the Constitution

■The 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 Commission shall review the state of the finances of the Union and the States, keeping in view, in particular, the operation of the States' Debt Consolidation and Relief Facility 2005-2010 introduced by the Central Government on the basis of the recommendations of the 12th Finance Commission, and suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth

■The Commission may review the present arrangements as regards financing of Disaster Management with reference to the National Calamity Contingency Fund and the Calamity Relief Fund and the funds envisaged in the Disaster Management Act, 2005

■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

Point to be noted-

■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

About FC-

What is the role of the commission-?

The Constitution provides that certain tax revenues of the Union government should be shared between the Centre and the states. President constitutes the finance commission under Article 280 of the Constitution to recommend what percentage of such revenues should go to the states and also how the funds are shared among the states

Why the resources are shared between the Centre and states-?

This is necessary due to the fact that the bulk of taxation powers are with the Centre, but expenditure is in the domain of states. In fact, most federal systems need a mechanism to address the issue of vertical distribution of resources. Canada has a federal system very similar to that of India. There, too, a mechanism is in place to address the issue of vertical imbalance and horizontal equity-how the resources are shared amongst states themselves. Australia is another such federal setup

What are the other key responsibilities-?

Finance commission is also required to lay down the principles governing the grants-in-aid to states out of the consolidated fund of India. It should also suggest measures to augment the resources of states to supplement the resources of panchayats and municipalities. At times the government can also ask the finance commission to make suggestions on specific issues. The Thirteenth Finance Commission was asked to make recommendations on accounting of off budget subsidies and GST

Are the recommendations of finance commission binding-?

The recommendations of the finance commission are not binding on the government. But, the recommendations have the force of precedent and governments generally go by the suggestions. The recommendations relating to distribution of Union taxes and duties and grants-in-aid can be implemented by a presidential order only (Not by executive order)

When was the 1st FC appointed in India-? What is the timeline for recommendations-?

The 1st Finance Commission was constituted on 22nd November 1951 under the chairmanship of K.C. Neogi. 13th Finance commissions have been appointed so far at five-year intervals. Recommendations are valid for a period of five years. The recommendations of the current finance commission will be for the five year period beginning April 1, 2010

What is Fiscal consolidation-?

A conscious policy effort is needed by the government to live within its means and thereby bring down the fiscal deficit and public debt. It includes, among other things, efforts to raise revenues and bring down wasteful expenditure such as subsidies. As a larger mandate, it also involves the participation by state governments in the process. But the whole initiative is planned as a long-term exercise by the government through a road map for fiscal reform rather than through a single Budget announcement. This is particularly true for a country like India where the government's expenditure is way beyond its revenues, forcing it to borrow (increasing Fiscal deficit)

Why do rating agencies often express their concern about it-?

Just as a borrower's creditworthiness depends on her indebtedness, a country's rating is often linked to its fiscal deficit. Fiscal consolidation efforts are looked at positively by sovereign-rating agencies. This is because it gives them an indication of a country's financial strength and hence, its ability and capacity to service the debt it rises. Many a time, even though an economy has grown well or its other indicators, such as external sector strength, are buoyant, it does not get a good rating only on the ground of poor efforts at fiscal consolidation

How is India placed on Fiscal consolidation ranking-?

For many years, India ranked low on fiscal consolidation. However, from 2003 onwards, the government made conscious efforts to bring down its fiscal deficit and public debt after it passed the Fiscal Responsibility and Budget Management (FRBM) Act. This enabled the government to pursue fiscal reforms aimed at committing to a pre-decided level of deficit. Though its efforts went off well in the initial years, government finances slipped in the last two years as it was forced to provide fiscal sops initially to tackle high inflation and then to contain the impact of the global financial crisis of 2008-09 that hit the real economy hard along with recommendations of 6th pay Commission. As a result, through its fiscal stimulus package, it had to announce several fiscal concessions and also increase expenditure on account of some sops. This ended in a further worsening of the country's finances

What is India going to do about it-?

Although the government does not borrow overseas, it cannot ignore the fisc as it is now a part of the global economy. The cost of borrowing for private corporate which raise money overseas, depends a lot on its home country's sovereign ratings. It is expected that finance minister Pranab Mukherjee will roll out a road map for fiscal consolidation during the Union Budget 2010-11 which includes unwinding of the fiscal stimulus

Summery of Recommendations by 13th FC-

■Initiatives should be taken to reduce the number of Centrally Sponsored Schemes (CSS) and to restore the predominance of formula-based plan transfers

■Both the Centre and the states should conclude a 'Grand Bargain' to implement the Model GST. To incentivize implementation of the Grand Bargain, this Commission recommends sanction of a grant of Rs. 50,000 crore. The grant would be used to meet the compensation claims of State Governments for revenue losses on account of implementation of GST between 2010-11 and 2014-15, consistent with the Grand Bargain. Unspent balances in this pool would be distributed amongst all the states, as per the devolution formula, on 1st January 2015

■The Empowered Committee of State Finance Ministers (EC) should be transformed into a statutory council

■The policy regarding use of proceeds from disinvestment needs to be liberalized to also include capital expenditure on critical infrastructure and the environment

■The practice of diverting plan assistance to meet non-plan needs of special category states should be discontinued

■All states need to draw up a roadmap for closure of non-working PSUs by March 2011. Divestment and privatization of PSUs should be considered and actively pursued

■The share of states in net proceeds of shareable central taxes shall be 32 per cent in each of the financial years from 2010-11 to 2014-15

■The Central Government should review the levy of cesses and surcharges with a view to reducing their share in its gross tax revenue

■The revenue deficit of the Centre needs to be progressively reduced and eliminated, followed by emergence of a revenue surplus by 2014-15

■A target of 68 per cent of GDP for the combined debt of the Centre and states should be achieved by 2014-15

■The Medium Term Fiscal Plan (MTFP) should be reformed and made a statement of commitment rather than a statement of intent. Tighter integration is required between the multi-year framework provided by MTFP and the annual budget exercise

■Transfer of disinvestment receipts to the public account to be discontinued and all disinvestment receipts should be maintained in the consolidated fund

■The FRBM Act needs to specify the nature of shocks that would require a relaxation of FRBM targets. Given the exceptional circumstances of 2008-09 and 2009-10, the fiscal consolidation process of the states was disrupted. It is expected that states would be able to get back to their fiscal correction path by 2011-12, allowing for a year of adjustment in 2010-11

■Manipur, Nagaland, Sikkim and Uttarakhand to reduce their fiscal deficit to 3 per cent of GSDP by 2013-14

■Jammu & Kashmir and Mizoram should limit their fiscal deficit to 3 per cent of GSDP by 2014-15

■National Small Savings Scheme to be reformed into a market-aligned scheme. State Governments are also required to undertake relevant reforms at their level

■For states that have not availed the benefit of consolidation under the Debt Consolidation and Relief Facility (DCRF), the facility, limited to consolidation and interest rate reduction, should be extended, subject to enactment of the FRBM Act

■Article 280 (3) (bb) & (c) of the Constitution should be amended such that the words 'on the basis of the recommendations of the Finance Commission of the State's are changed to 'after taking into consideration the recommendations of the Finance Commission of the State's

■Article 243(I) of the Constitution should be amended to include the phrase 'or earlier' after the words 'every fifth year'

■State Governments should appropriately strengthen their local fund audit departments through capacity building as well as personnel augmentation

■To buttress the accounting system, the finance accounts should include a separate statement indicating head-wise details of actual expenditures under the same heads as used in the budget for both Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs). Commission recommend that these changes be brought into effect from 31 March 2012

■State Governments should ensure that the recommendations of State Finance Commissions (SFCs) are implemented without delay and that the Action Taken Report (ATR) is promptly placed before the Legislature

■The development plans for civilian areas within the cantonment areas (excluding areas under the active control of the forces) should be brought before the district planning committees

■State Governments should lay down guidelines for the constitution of Nagar panchayats

■The National Calamity Contingency Fund (NCCF) should be merged into the National Disaster Response Fund (NDRF) and the Calamity Relief Fund (CRF) into the State Disaster Response Funds (SDRFs) of the respective states. Contribution to the SDRFs should be shared between the Centre and states in the ratio of 75:25 for general category states and 90:10 for special category states

■Assistance of Rs. 250 crore to be given to the National Disaster Response Force to maintain an inventory of items required for immediate relief