Report Of The Thirteenth Finance Commission
Report of the thirteenth Finance Commission (2010-15) As far as post-devolution Non-Plan Revenue Deficit (NPRD) grants are concerned, they have ranged from a maximum of 100 per cent of total grants, as recommended by the Fourth Finance Commission and to a minimum of 33.1 per cent of total grants, as recommended by the Fifth Commission. NPRD grants comprised 39.86 per cent of the total Twelfth Finance Commission gránts. The Thirteenth Finance Commission has recommended the lowest ever NPRD grants equal to 16.26 per cent of total grants. According to the Commission, “This has been possible due to the sustained efforts of States to adhere to the fiscal reform path laid down by their respective. Fiscal Responsibility and Budget Management (FRBM) legislation”. To help the States in fulfilling their obligations as enshrined in the Constitution-right of all children, in the age group 6 to 14 10 free and compulsory schooling-the Commission has provided grants worth Rs. 24,068 crore to them Two new ‘considerations’ in the terms of reference of the Commission are the need to improve the quality of public expenditure to obtain better outputs and outcomes and the need to mana ecology, environment and climate change consistent with sustainable development. The Commission has recommended grants worth Rs. 14,446 crore for the former and Rs. 15,000 crore for the latter (Rs. 5,000 crores each for (i) protection of forests, fü) renewable energy and füü) water sector management).
Other Sources Of Transfer
In addition to the transfer of resources from the Centre to the States according to the recommendations of the Finance Commission, there are two other sources of transfer – i) assistance for Plan purposes from the Planning Commission, and i) discretionary grants from the Centre to the States. These sources of transfer have contributed substantially more resources than statutory transfers (which are transfers through the Finance Commission) and reflect the considerable power that the Central government énjoys in influencing the decision-making process at the State level. For most of the period of planning, statutory transfers have remained less than one-third of total transfers, the remaining two-thirds having been contributed by the Planning Commission as assistance for Plan purposes or by the Central Government under the head ‘discretionary grants’. Though the Planning Commission had no statutory basis (as against the Finance Commission which is an ad hoc quinquennial body statutorily set up to recommend devolution of resources from the Centre to the States), it tended to take up the functions of the Finance Commission and for a considerable period of planning, has remained the more important source of transfer. Since it was not guided by any objective criteria, the whole scheme introduced an arbitrariness in the determination of resource transfers.
The Gadgil formula
It was only from 1969-79 onwards that objective criteria were adopted for Plan assistance among the States. The formula evolved for the purpose was known as the Gadgil formula which gave 60 per cent weightage to population, 10 per cent to per capita income if below the national average, 10 per cent to tax effort in relation to per capita income, 10 per cent to continuing major and medium irrigation projects, and 10 per cent to special problems of individual states (like those relating to metropolitan areas, floods, chronically drought-affected areas and tribal areas). Under the Gadgil formula, it was stated that 30 per cent of total Plan assistance would be given in the form of grants and 70 per cent in the form of loans. This provision did not apply to Jammu and Kashmir, Assam and North-Eastern States in whose case 10 per cent was to be given in the form of loans and the rest 90 per cent in the form of grants. This formula was used for the distribution of Central Plan assistance during the Fourth and Fifth Plans. Since the criterion in respect of on-going programmes was weighted in favour of rich States, the Gadgil formula was modified at the beginning of the Sixth Plan (August 1980 to be precise) and the weightage for on-going schemes was added with per capita income, making its weight 20 per cent. This modified formula became the basis of allocation of Central Plan assistance to States in Sixth and Seventh Plans and Annual Plan 1990-91.
The Mukheriee formula
Most of the State governments expressed reservations on the modified Gadgil formula and keeping in view their concerns, a Committee was constituted under the chairmanship of Pranab Mukherjee, the Deputy Chairman of the Planning Commission, to evolve a suitable formula for distribution of Central assistance. The suggestions of the Mukherjee Committee were discussed by National Development Council on 23-24 December 1991 wherein a consensus emerged and a revised formula was adopted for allocation of Central Plan assistance to the States for the Eighth Plan. The Mukherjee formula took into account the following criteria for the non-special category States:
i) population on the basis of 1971 census (60 per cent);
ii) per capita income 120 per cent on the basis of deviation method covering States with per capita SDP below the national average and 5 per cent on the basis of distance method covering all States);
iii) – performance assessed on the basis of tax effort, fiscal management and progress in respect of national objectives (7.5 per cent) and iv) special problems (7.5 per cent).