Tenth Finance Commission Recommendations

The Tenth Finance Commission (TFC), constituted in 1992 under the chairmanship of K.C. Pant, submitted its report in 1994. Its core mandate was to make recommendations on the distribution of net proceeds of taxes between the Union and the States, the principles governing grants-in-aid to States, and measures needed to augment the Consolidated Fund of a State to supplement the resources of local bodies. The TFC's recommendations covered the period from 1995-2000.

Key Recommendations

A significant aspect of the TFC's report was its shift towards a more formula-based approach to resource allocation. Unlike previous commissions which relied heavily on gap-filling approaches, the TFC emphasized equity and efficiency. Some of the main recommendations included:

• Tax Sharing: The Commission recommended that 29% of the gross tax revenue of the Union be distributed among the States. This was a substantial increase compared to the 85% share in income tax and 45% share in excise duties previously devolved. The aim was to provide states with greater financial autonomy and flexibility in managing their resources.
• Criteria for Distribution: The distribution among states was determined using a formula that considered various factors. While population continued to be a significant factor, the TFC gave increased weight to indicators of economic backwardness and infrastructure development. The formula included criteria such as:
  • Population (1971): This remained a major factor, reflecting the needs based on population size.
  • Income Distance: This measured the distance of a state's per capita income from the highest per capita income state. Greater distance indicated greater backwardness.
  • Area: Reflecting the cost of providing services in larger states.
  • Infrastructure Index: This aimed to capture the level of infrastructure development in each state.
  • Tax Effort: Recognizing states that made greater efforts to mobilize their own resources.
• Grants-in-Aid: The TFC recommended grants-in-aid under Article 275 of the Constitution to address specific needs of certain states. These grants were intended to cover non-plan revenue deficits and promote specific developmental activities.
• Local Bodies: Recognizing the importance of strengthening local bodies, the TFC recommended earmarking a portion of the total devolution for panchayats and municipalities. This was aimed at empowering local governments and improving service delivery at the grassroots level. The TFC also emphasized the need for states to establish State Finance Commissions to ensure proper resource allocation to local bodies.
• Debt Relief: The Commission addressed the issue of growing indebtedness of states and recommended measures for debt relief and consolidation. This included schemes for rescheduling state debts and encouraging fiscal discipline.

Impact and Significance

The Tenth Finance Commission's recommendations had a significant impact on Centre-State financial relations. The increase in the share of Union taxes devolved to the states provided them with greater fiscal autonomy and resources for development. The emphasis on a formula-based approach promoted transparency and objectivity in resource allocation. The focus on backwardness and infrastructure helped to address regional disparities. The earmarking of funds for local bodies was a crucial step towards strengthening decentralized governance.

While the TFC's recommendations were generally well-received, some states raised concerns about the weight given to certain criteria and the adequacy of grants-in-aid. Nevertheless, the Tenth Finance Commission played a vital role in shaping the financial landscape of India and laying the foundation for future reforms in Centre-State financial relations.