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Recommendations of the 13th Finance Commission of India

The 13th Finance Commission (ThFC), chaired by Dr. Vijay Kelkar, was constituted to make recommendations on the distribution of tax revenues between the Union and the States, the principles governing grants-in-aid to States, and measures needed to improve the finances of the Union and States for the period 2010-2015. The Commission's report, submitted in 2009, proposed significant changes to fiscal federalism in India.

Key Recommendations:

• Fiscal Deficit Reduction: The ThFC strongly advocated for fiscal consolidation. It recommended that both the Union and States should reduce their fiscal deficits. Specifically, it suggested the Union government aim for a fiscal deficit of 3% of GDP by 2013-14. Similar deficit targets were set for the States, encouraging them to manage their finances prudently.
• Debt to GDP Ratio: The Commission proposed targeting a consolidated debt-to-GDP ratio of 68% by 2014-15. It urged both the Union and States to implement strategies to reduce their debt burdens.
• Tax Devolution: A crucial recommendation concerned the share of central taxes to be devolved to the States. The ThFC increased this share from 30.5% to 32%. This higher devolution aimed to provide States with greater financial resources to address their developmental needs.
• Grants-in-Aid: The Commission recommended various types of grants to States, including:
  • Revenue Deficit Grants: To help States bridge the gap between their revenue expenditures and revenue receipts.
  • Special Area Grants: To address specific development challenges in areas like forests, ecology, and internally displaced persons.
  • Local Body Grants: A substantial increase in grants to local bodies (Panchayats and Municipalities) was proposed, earmarked for basic services like water supply, sanitation, and solid waste management. This was intended to empower local governments and improve service delivery at the grassroots level.
  • Calamity Relief: Recommendations were made for strengthening the mechanisms for disaster management and providing adequate funds for relief and rehabilitation.
• Goods and Services Tax (GST): The ThFC strongly supported the introduction of a Goods and Services Tax (GST), highlighting its potential to enhance tax efficiency, broaden the tax base, and improve revenue mobilization. It provided a roadmap for GST implementation and urged the government to expedite its introduction.
• Fiscal Responsibility Legislation: The Commission emphasized the importance of fiscal responsibility legislation at both the Union and State levels to ensure fiscal discipline and sustainability.
• Performance-Based Incentives: The ThFC advocated for linking grants to State performance in key areas like health, education, and environmental protection. This aimed to incentivize States to improve their performance and achieve better development outcomes.
• Pension Reforms: Recognizing the growing burden of pension liabilities, the Commission urged both the Union and States to implement pension reforms to ensure the long-term sustainability of their pension systems.

The ThFC's recommendations aimed to promote fiscal stability, equitable distribution of resources, and improved governance. The enhanced tax devolution, increased grants to local bodies, and emphasis on fiscal discipline have had a significant impact on the fiscal landscape of India.

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