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Indian Economic Policy

Notes which is measured by the revenue base available to each state - varies. Third, cost of providing
similar levels of public goods and services may also vary from state to state due to historical
circumstances, adverse physical geography, sparse terrain, or geopolitical constraints to development.
To some extent, the definition of some states as ‘special category states’ addresses this issue. But
greater attention is needed to be paid to such factors. Fourth, commission highlighted the endeavor
of previous finance commissions in rewarding the efficiency in public management, fiscal effort and
outcomes. The commission notes that the adoption of fiscal responsibility legislation after the report
of Twelfth Finance Commission has improved the fiscal health of many states. The Thirteenth Finance
Commission favored to build upon this effort and incentivising improved efficiency in public
expenditure management and revenue effort.
In horizontal devolution of resource transfers the commission clearly stated that it is concerned with
equalisation, not equity, (italics added) it says at it is both feasible and possible to address efficiency and
fiscal equalisation, using both instruments available to the commission, viz. grants and devolution. The
Commission recommended that due weight be given to considerations of efficiency and performance
in its overall design. In other words it implies that the states which do not respond to incentives as
designed by the commission stand to lose and those who do respond stand to gain in terms of their
share in total revenue. Giving effects to its thinking on horizontal devolution, the Thirteenth Finance
Commission adopted the following criteria and weights for inter se determination of shares of states.
Local Bodies - Panchayats and Muncipalities

Thirteenth Finance Commission provided ` 87,519 crores as grants for local bodies. It is significant that
out of total transfers from center to states share of local bodies made a jump from 3.3 per cent by Twelfth
Finance Commission to 5.1 percent by Thirteenth Finance Commission (Table 3). In absolute terms this
increase seems to be much greater as total grants for local bodies have increased from ` 25,000 crores to `
87,519 crores. This shows the importance given by the Thirteenth Finance Commission to local bodies.
Another major recommendation of the commission was with regard to sharing of income from royalties
received by the state government with those local bodies in whose jurisdiction such income arises.
Commission also recommended for sharing of revenues of local development authorities with local bodies.
Goods and Service Tax
Thirteenth Finance Commission had to deal with a special issue and that was Goods and Service Tax
(GST), which was scheduled to be implemented by October 1, 2010 (earlier it was scheduled for April
2010). The Finance Commission was entrusted with the task of facilitating transition from prevailing
system of indirect taxation to a new tax named GST. Thirteenth Finance Commission recommended
that both the Centre and the states should conclude a ‘Grand Bargain’ to implement the Model GST.
The Grand Bargain comprises six elements :
(i) The design of the Model GST
(ii) The operational modalities.
(iii) The proposed agreement between the Centre and states, with contingencies for changes.
(iv) The disincentives for non-compliance are described.
(v) The implementation schedule is described.
(vi) The procedure for claiming compensation.
To facilitate and incentivise the implementation of this Grand Bargain, the commission recommended
a grant of ` 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 1 January 2015. However there is a rider clause in the
recommedations of the Commission - “In the unlikely event that a consensus with regard to
implementing all the elements of the Grand Bargain cannot be achieved and the GST mechanism
finally adopted is different from the Model GST suggested by us, this Commission recommends that
this amount of ` 50,000 crore shall not be disbursed.”

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