The 12th Finance Commission: Bridging Fiscal Gaps
The 12th Finance Commission, constituted under the chairmanship of Dr. C. Rangarajan, played a crucial role in reshaping the financial relations between the Union and State governments in India. Its recommendations, covering the period from 2005 to 2010, aimed to ensure a more equitable and efficient distribution of resources, fostering fiscal discipline and promoting economic growth.
One of the primary responsibilities of the Commission was to determine the principles governing the distribution of tax revenues between the Union and the States. The 12th Finance Commission recommended maintaining the States’ share in the net proceeds of shareable Central taxes at 30.5%. This aimed to provide a stable and predictable revenue stream for the States, enabling them to plan and execute their development programs more effectively.
Beyond the vertical distribution of resources, the Commission also addressed the horizontal distribution, determining how the States’ share should be allocated among themselves. This involved considering various factors such as population, income distance (the gap between a state’s per capita income and the highest per capita income), area, infrastructure development, and fiscal discipline. The Commission placed greater emphasis on fiscal discipline, rewarding States that demonstrated prudent financial management.
A significant aspect of the 12th Finance Commission’s work was its focus on debt relief for States. Many States were burdened with high levels of debt, hindering their ability to invest in infrastructure and social development. The Commission recommended a Debt Consolidation and Waiver Scheme, allowing States to restructure their debt owed to the Central Government at lower interest rates and providing waivers for achieving fiscal targets. This scheme significantly reduced the debt burden of States and freed up resources for developmental expenditures.
Furthermore, the Commission made recommendations regarding grants-in-aid to States. These grants were designed to address specific needs, such as compensating for revenue deficits or supporting local bodies. The Commission recommended substantial grants for local bodies, aiming to strengthen their capacity to deliver essential services and promote decentralized governance. These grants were conditional upon the States transferring funds and functions to the local bodies, encouraging greater accountability and citizen participation.
The 12th Finance Commission also emphasized the importance of fiscal responsibility at both the Union and State levels. It advocated for the enactment of Fiscal Responsibility Legislation, setting targets for reducing fiscal deficits and ensuring sustainable debt levels. This commitment to fiscal prudence helped to improve the overall macroeconomic stability of the country.
In conclusion, the 12th Finance Commission’s recommendations played a pivotal role in strengthening India’s fiscal federalism. By providing a framework for equitable resource distribution, promoting fiscal discipline, and addressing the debt burden of States, the Commission contributed significantly to the country’s economic development during the period of its operation.
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