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Indian Economic Policy

Notes Terms of Reference

The Terms of Reference (ToR) of the Commission included the following :
The Commission shall make recommendations as to the following matters, namely :-
(i) 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;
(ii) 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 for purposes
other than those specified in the provisos to clause (1) of that article; and
(iii) 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.
Subsequently, the commission was given additional terms of reference including the mandate to
review the roadmap for fiscal adjustments and suggest a suitably revised one with a view to
maintaining the gains of fiscal consolidation through 2010 to 2015 particularly considering the need
to bring the liabilities of the Central Government on account of oil, food and fertilizer bonds into the
fiscal accounting, and the impact of various other obligations of the Central Government on the
deficit targets. The TFC has since submitted its Report.
The Approach of the Thirteenth Finance Commission

Following the mandate under the Presidential Order indicating the terms of reference, the Thirteenth
Finance Commission submitted its report on December 30, 2009. The overall approach of the
commission was as follows :
(a) To foster “inclusive and green growth promoting fiscal federalism”
(b) Focus on fiscal consolidation process in a medium-term debt reduction framework. The
commission observed that as against the level of 75 per cent targeted by the Twelfth Finance
Commission, the combined debt-GDP ratio was 82 per cent in the terminal year (2009-10). It
purposed reducing the combined debt-GDP ratio to 68 per cent by 2014-15 with the Centre’s
debt-GDP ratio declining to 45 per cent.
(c) The commission recommended fiscal consolidation through the elimination of revenue deficit
as the long-term target for both the Centre and States. Following a design similar to that adopted
by the recent Finance Commissions, the FC-XIII indicated a normative discipline for both Centre
and State; with equal treatment which entailed no automatic priority for any level of Government
and a focus on equalization (and not equity). The latter signaled the intent of the FC-XIII to
ensure that States and local bodies have the fiscal potential to provide comparable levels of
public service at reasonably comparable levels of taxation. This principle does not guarantee
uniformity in public services across the country; but it addresses the fiscal requirements of each
jurisdiction to enable such uniformity.
Vertical Devolution : Issues and Approach

The Thirteenth Finance Commission Justified the existing constitutional arrangement of division of
taxes between Central and the States, that many direct taxes like Income Tax are levied and collected
by the Centre, but the proceeds are shared with the states. Similar tax treatment, irrespective of
geographical or political consideration is the key to efficient function of the market. The vertical and
horizontal devolution should be based on the principal of equality of access to public services,
irrespective of jurisdiction.
Asymmetric Fiscal Arrangement at Present

TFC elaborated on the asymmetric fiscal arrangement which the constitution specifies the taxing
powers of the Centre and states with respect to different sources of tax revenue. It can be argued that

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