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Indian Economic Policy

Notes (v) Assess the debt position of the States at the end of March 2004 and suggest necessary corrective
measures consistent with macro-economic stability and debt main-tainability;
(vi) Review the present arrangements as regards financing of Disaster Management; and
(vii) To recommend whether the non-tax income of profit petroleum to the Centre, arising out of
contractual provisions, should be shared with the States from where the mineral oils are
produced, and if so, to what extent.
The Award of the Twelfth Finance Commission

While giving its award on the various terms of reference, the 12 FC had carefully considered the
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views of the Central and State Governments on the various items of terms of reference...The
Commission’s basic objective was
(a) to sustain the growth momentum,
(b) to bring about fiscal consolidation, and
(c) to recommend a scheme of transfers that could serve the twin objectives of equity and efficiency.
The transfers from the Centre to the States - in the form of tax devolutions and grants - are meant to
correct, both the vertical and the horizontal imbalances.
The 12 FC considered the recommendations of previous commissions on this point and also the
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memoranda submitted by various States regarding :
(a) The continuation of the use of population as a factor;
(b) The use of income distance criteria;
(c) Continuation of area as a factor; and
(d) Retaining the tax effort and index of fiscal discipline criteria.
There is no objective factor in any of the above criteria. Till now, every FC has attempted to work out
different criteria and different weightages for each criterion to arrive at a reasonable degree of
equalization. In practice, this is impossible to arrive at and every FC award has been criticized by
those States who felt that they should have got a bigger share in the shareable. Central revenue pool.
Let us take only one criterion, viz., the population factor, which is a basic indicator of need for public
goods and services, and as a criterion, it ensures equal per capita transfers among all States. This was
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recognized by all FCs, even though, different FCs have given different weights. The 12 FC stated in
this connection, “Looking at the recent periods, during the Seventh and Eighth Finance Commissions,
the weight attached to population, varied between 22.5 percent to 25 percent. This weight was reduced
to 20 percent by the Ninth Commission and further to 10 percent by the Eleventh Commission. We
feel that a strong case exists for increasing the weight and have fixed it at 25 percent.” Incidentally, in
their memoranda submitted to the 12 FC, different States had demanded the weightage for population
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to be fixed between 10 percent to 50 percent.
Local Bodies - Panchayats and Municipalities
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For the first time, it was the 11 FC which was required to suggest “the measures needed to augment
the Consolidated Fund of a State to supplement the financial resources of Panchayats and
Municipalities. The 11 FC recommended a number of measures which could be taken by State
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Governments and local bodies for augmenting the consolidated fund of the States to supplement the
resources of local bodies. These measures included assignment of land tax, profession tax, surcharges
cesses on State taxes for improving the basic civic services and taking up schemes of social and
economic development. At the same time, the 11 FC also noted the additional burden the States had
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to bear while implementing the recommendations of State Finance Commissions (SFCs). Accordingly,
the 11 FC awarded ad hoc annual grant of ` 1,000 crores for Panchayats and ` 400 crores for
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municipalities - a total of ` 7,000 crores for the period 2000-05.
The 12 FC kept the above points and, ascertained the views of State Governments, of the Ministry of
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Rural Development, and of the Ministry of Urban Development and Poverty Alleviation, of the

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