Model Answer
0 min readIntroduction
The Finance Commission is a constitutional body (Article 280) established every five years to recommend the distribution of tax revenues between the Union and the States, and among the States themselves. The Thirteenth Finance Commission (2005-2010), chaired by Dr. Vijay Kelkar, played a crucial role in strengthening the financial position of local governments – Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs). Recognizing the importance of decentralized governance, the TFC proposed significant measures to augment the resources available to these bodies, aiming to enhance their capacity to deliver essential services and promote inclusive growth. This answer will discuss the major recommendations of the TFC with regard to augmenting the resources of local governments.
Key Recommendations of the Thirteenth Finance Commission for Local Governments
The TFC’s recommendations were comprehensive, addressing various aspects of local government finance. They can be broadly categorized into tax devolution, grants-in-aid, and capacity building measures.
1. Tax Devolution
The TFC significantly increased the share of divisible pool of taxes devolved to local bodies. It recommended that states devolve:
- Panchayats: 2.5% of the State’s own tax revenue.
- Municipalities: 1% of the State’s own tax revenue.
This was a substantial increase compared to previous commissions and aimed to provide local bodies with a more predictable and autonomous source of funding. The commission emphasized that this devolution should be unconditional, allowing local bodies the flexibility to prioritize their spending based on local needs.
2. Grants-in-Aid
The TFC recommended a substantial increase in grants-in-aid to local bodies, categorizing them into two main types:
- Basic Grants: These were unconditional grants intended to support the general revenue needs of local bodies. The TFC recommended a total of ₹83,796 crore as basic grants for the period 2005-2010.
- Specific Purpose Grants: These grants were earmarked for specific projects and programs, such as water supply, sanitation, and solid waste management. The TFC recommended ₹22,296 crore as specific purpose grants.
The commission also introduced a performance-based incentive scheme, linking grants to the achievement of specific performance indicators in areas like financial management and service delivery.
3. Capacity Building Measures
Recognizing that increased financial resources alone were not sufficient, the TFC emphasized the need for capacity building of local bodies. Key recommendations included:
- Training and Skill Development: The TFC recommended the establishment of dedicated training institutes for local government officials and elected representatives.
- Strengthening Financial Management: The commission advocated for the adoption of accrual-based accounting systems and the implementation of internal audit mechanisms.
- E-Governance: The TFC encouraged the use of information and communication technology (ICT) to improve transparency, accountability, and efficiency in local government operations.
- State Finance Commissions (SFCs): The TFC stressed the importance of strengthening SFCs and ensuring that their recommendations were implemented by the State Governments.
4. Addressing Fiscal Imbalances
The TFC acknowledged the significant fiscal imbalances between different states and recommended special grants to states facing severe financial difficulties. This was intended to ensure that all states had the resources necessary to meet their obligations to local bodies.
Impact of Recommendations: While the implementation of the TFC’s recommendations varied across states, it generally led to a significant increase in the financial resources available to local bodies. This enabled them to undertake more infrastructure projects, improve service delivery, and strengthen their financial management capabilities. However, challenges remained in terms of capacity building and ensuring effective utilization of funds.
Conclusion
The Thirteenth Finance Commission’s recommendations were a landmark in the evolution of fiscal federalism in India, particularly concerning local governments. By significantly increasing tax devolution and grants-in-aid, and by emphasizing capacity building, the TFC laid the foundation for stronger and more autonomous local bodies. While challenges in implementation persist, the TFC’s approach of unconditional devolution and performance-based incentives remains relevant for strengthening local governance and promoting inclusive development in India. Further reforms are needed to address issues like own-source revenue generation and inter-governmental coordination.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.