The Tenth Finance Commission of India

The Tenth Finance Commission (TFC), constituted under the chairmanship of K.C. Pant in 1992, submitted its report in 1994, covering the period from 1995-2000. Finance Commissions in India are crucial constitutional bodies that recommend principles governing the distribution of tax revenues between the Union government and the states, as well as among the states themselves.

Key Recommendations and Observations

The TFC's report contained a number of significant recommendations designed to improve fiscal federalism and resource allocation. A central theme was the need for greater fiscal discipline and accountability among both the central and state governments.

• Tax Devolution Formula: The Commission retained the previous formula largely, emphasizing population as a major factor in determining state shares of central taxes. However, it gave increased weight to factors like infrastructure development and tax effort to incentivize states to improve their performance in these areas. This was a departure from previous commissions which focused heavily on poverty and backwardness.
• Debt Relief: Recognizing the increasing debt burden of states, the TFC recommended a debt relief package linked to states' efforts to improve their fiscal management and reduce revenue deficits. It advocated for a debt swap scheme to allow states to retire high-cost debt with proceeds from lower-cost borrowings.
• Grants-in-Aid: The Commission recommended substantial grants-in-aid to states under Article 275 of the Constitution, focusing on specific needs such as upgradation of infrastructure, special problems, and natural calamities. A portion of these grants was earmarked for local bodies (Panchayati Raj Institutions and Municipalities) to strengthen decentralization and local governance.
• Centre-State Financial Relations: The TFC stressed the importance of cooperative federalism and advocated for greater consultation between the Centre and states on matters of fiscal policy. It recommended that the Union government should share a percentage of its gross tax revenue with the states, allowing for more predictable and stable resource transfers.
• Disaster Relief: The Commission acknowledged the increasing frequency and intensity of natural disasters in India. It recommended the creation of a National Calamity Contingency Fund (NCCF) to provide immediate assistance to states affected by such events. It also advocated for better disaster preparedness and mitigation measures.
• Local Body Finances: A significant recommendation was the allocation of funds directly to local bodies. This was a landmark step towards empowering local governments and promoting participatory development at the grassroots level. The TFC emphasized the need for states to establish State Finance Commissions to regularly review the financial position of local bodies and recommend measures for their improvement.

Impact and Significance

The Tenth Finance Commission's report had a considerable impact on Centre-State financial relations in India. The recommendations on tax devolution, debt relief, and grants-in-aid influenced the pattern of resource transfers to states and contributed to improved fiscal management. The emphasis on incentivizing states for tax effort and infrastructure development promoted healthy competition and improved governance. Perhaps most significantly, the Commission's strong focus on funding local bodies laid the foundation for strengthening decentralized governance in India. While some states may have found the conditionalities attached to debt relief challenging, the overall thrust of the TFC's recommendations was towards a more equitable and efficient system of fiscal federalism.