Report of the TWELFTH FINANCE COMMISSION (2005-10) November, 2004 Report of the TWELFTH FINANCE COMMISSION (2005-10) November, 2004 Chapter 1 Introduction Appointment of the Twelfth Finance part-time member with effect from 1st July Commission 2004. The relevant notifications are at 1.1 The appointment of a finance annexures 1.1, 1.2 and 1.3. commission by the President is provided for 1.2 The Commission was originally asked under article 280 of the Constitution of to make its report available by the 31st July India. The first such commission was 2004 covering a period of five years constituted on November 19, 1951. The commencing on the 1st April 2005. eleven finance commissions, which have Subsequently, due to disruption of normal preceded the present one, have, through activities on account of preponement of their recommendations, given a definitive parliamentary election, the President, shape to fiscal federalism in our country. through his order dated 1st July 2004, The present finance commission, which is extended the tenure of the Commission up the twelfth, was appointed by the President to 31st December 2004, but required the of India on 1st November, 2002 under the report to be made available by chairmanship of Dr. C. Rangarajan, the then 30th November 2004 (notification at Governor of Andhra Pradesh. The President annexure 1.4). also appointed two full-time members, namely, Shri T. R. Prasad, IAS (retd.), Terms of Reference (TOR) former Cabinet Secretary, Government of 1.3 The President vide the notification India and Prof. D. K. Srivastava of National dated 1st November, 2002 (annexure 1.1) Institute of Public Finance & Policy mandated the Commission to do the (NIPFP) and one part-time member, namely, following: Shri Som Pal, Member, Planning Commission. Dr. G.C. Srivastava, IAS was “4. The Commission shall make appointed as the Secretary to the recommendations as to the following Commission. Later on, he was appointed as matters:- Member Secretary, against the vacancy of (i) the distribution between the the fourth Member with effect from July 1, Union and the States of the net 2003. Consequent upon the resignation of proceeds of taxes which are to Shri Som Pal from the Commission, be, or may be, divided between Dr. Shankar N. Acharya was appointed as a them under Chapter I Part XII 2 Twelfth Finance Commission of the Constitution and the on the basis of levels of taxation allocation between the States of and non-tax revenues likely to the respective shares of such be reached at the end of 2003- proceeds; 04; (ii) the principles which should (ii) the demands on the resources of govern the grants-in-aid of the the Central Government, in revenues of the States out of the particular, on account of Consolidated Fund of India and expenditure on civil the sums to be paid to the States administration, defence, which are in need of assistance internal and border security, by way of grants-in-aid of their debt-servicing and other revenues under article 275 of committed expenditure and the Constitution for purposes liabilities; other than those specified in the (iii) the resources of the State provisions to clause (1) of that Governments, for the five years article; and commencing on 1st April 2005, (iii) the measures needed to on the basis of levels of taxation augment the Consolidated Fund and non-tax revenues likely to of a State to supplement the be reached at the end of 2003- resources of the Panchayats and 04; Municipalities in the State on (iv) the objective of not only the basis of the balancing the receipts and recommendations made by the expenditure on revenue account Finance Commission of the of all the States and the Centre, State. but also generating surpluses 5. The Commission shall review the for capital investment and state of the finances of the Union and reducing fiscal deficit; the States and suggest a plan by (v) taxation efforts of the Central which the governments, collectively Government and each State and severally, may bring about a Government as against targets, restructuring of the public finances if any, and the potential for restoring budgetary balance, additional resource achieving macro-economic stability mobilization in order to and debt reduction along with improve the tax-Gross equitable growth. Domestic Product (GDP) and 6. In making its recommendations, the tax-Gross State Domestic Commission shall have regard, Product (GSDP) ratio, as the among other considerations, to: - case may be; (i) the resources, of the Central (vi) the expenditure on the non- Government for five years salary component of commencing on 1st April 2005, maintenance and upkeep of Chapter 1: Introduction 3 capital assets and the non- stability and debt sustainability. Such wage related maintenance measures recommended will give expenditure on plan schemes to weightage to the performance of the be completed by the 31st March States in the fields of human 2005 and the norms on the basis development and investment of which specific amounts are climate. recommended for the 10. The Commission may review the maintenance of the capital present arrangements as regards assets and the manner of financing of Disaster Management monitoring such expenditure; with reference to the National (vii) the need for ensuring the Calamity Contingency Fund and the commercial viability of Calamity Relief Fund and make irrigation projects, power appropriate recommendations projects, departmental thereon. undertakings, public sector 11. The Commission shall indicate the enterprises etc. in the States basis on which it has arrived at its through various means findings and make available the including adjustment of user State-wise estimates of receipts and charges and relinquishing of expenditure.” non-priority enterprises through privatisation or disinvestment. 1.4 In addition to the above, through a subsequent notification dated 31st October, 7. In making its recommendations on 2003 (vide annexure 1.5), the Commission various matters, the Commission will was asked to make recommendations on the take the base of population figures following matters: as of 1971, in all such cases where population is a factor for “(i) whether non-tax income of profit determination of devolution of taxes petroleum to the Union, arising out and duties and grants-in-aid. of contractual provisions, should be shared with the States from where 8. The Commission shall review the the mineral oils are produced; and Fiscal Reform Facility introduced by the Central Government on the basis (ii) if so, to what extent.” of the recommendations of the Eleventh Finance Commission, and Administrative Arrangements suggest measures for effective 1.5 The process of setting up of the achievement of its objectives. administration of the Commission started 9. The Commission may, after making with the appointment of Dr. V.K. Agnihotri an assessment of the debt position as Officer on Special Duty in the of the States as on the 31st March Department of Economic Affairs on 2004, suggest such corrective 30.06.2002. It took considerable time before measures, as are deemed necessary, the full complement of officers and staff consistent with macro-economic could be put in place. The lists of sanctioned 4 Twelfth Finance Commission posts and functionaries are at annexures 1.6 website is maintained and updated in-house and 1.7. It also took a long time for the office with the technical assistance of the National accommodation at Jawahar Vyapar Bhavan Informatics Centre. to be made ready for use. 1.8 On this occasion, the Commission Golden Jubilee of Finance Commissions brought out a commemorative volume titled, of India ‘Fifty Years of Fiscal Federalism: Finance Commissions of India’, which was released 1.6 The constitution of the Twelfth by the Chairman. The commemorative Finance Commission coincided with the volume has turned out to be a useful completion of fifty years of the creation of compendium of excerpts relating to the this institution. In order to have an overview composition, terms of reference, approach, of the efforts made by the earlier recommendations and action taken reports commissions in ensuring stability and in respect of all the eleven finance usefulness of the system of fiscal federalism commissions. The collection, in one volume, in the country, a golden jubilee function was of an otherwise scattered material has served organized. It was inaugurated by the as an authentic document, providing a President of India, Dr. A.P.J. Abdul Kalam comprehensive account of how the issues at Vigyan Bhawan in the forenoon of April relating to fiscal federalism were handled 9, 2003. The inaugural function was from time to time. presided over by the then Union Minister of Finance, Shri Jaswant Singh. The 1.9 In order to draw lessons from the occasion was also graced by Shri K.C. Pant, experience of the previous commissions, a the then Deputy Chairman of Planning brain storming session was organized on Commission as chief guest. Chief ministers 10th April 2003 wherein the chairman and and finance ministers of states, secretaries members of previous finance commissions and other officers of the Union and state were invited to share their experiences and governments and eminent economists were perception with respect to the intricacies of also present. resource transfers from the Union to the states (list of participants at annexure 1.8). 1.7 The inaugural function was followed by a conference of the finance ministers of Major Activities the states and the launching of the official 1.10 Notwithstanding lack of adequately website www.fincomindia.nic.in of the furnished accommodation and dearth of Twelfth Finance Commission by suitable personnel, the Commission started Dr. C. Rangarajan. The website is its work immediately after it was formally interactive, dynamic, user friendly and rich constituted and the Chairman and the in terms of data related to federal finance.