The Twelfth Finance Commission (TFC) under the chairmanship of Dr. C. Rangrajan was appointed on November 1, 2002, to make recommendations regarding the distribution between the Union and the States of net proceeds of shareable taxes, the principles which should govern the grants-in-aid of the revenues of States from the Consolidated Fund of India, and the measures needed to augment the Consolidated Fund of a State to supplement the resources of local bodies in the State on the basis of the recommendations made by the Finance Commission of the State.
The terms of reference mandated the Commission to review the state of the finances of the Union and the States, and suggest a Plan by which the governments, collectively and severally, restore budgetary balance, achieve macroeconomic stability and debt reduction along with equitable growth.
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Furthermore, the Commission was also asked to suggest corrective measures for debt sustainability and to review the Fiscal Reform Facility introduced by the Central Government.
The Commission submitted its report on November 30, 2004 covering the period 2005-10. On February 2, 2005 Union Government accepted all recommendations of the 12th Finance Commission.
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The Commission recommended debt relief to States linked to fiscal reforms, doing away with the present system of Central assistance to State plans in the form of grants and loans, and transfer of external assistance to States on the same terms and conditions as attached to such assistance by external funding agencies.
The TFC raised the share of States in shareable Central taxes from 29.5 per cent to 30.5 per cent. Total transfers to States recommended by the TFC amount to Rs. 7, 55,752 crore over the five year period 2005-2010. Of this, transfers by way of share in Central taxes and grants-in-aid amount to Rs. 6,13,112 crore and Rs. 1,42,640 crore, respectively.
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The total transfers recommended by the TFC are higher by 73.8 per cent over those recommended by the Eleventh Finance Commission (EFC). Within the total transfers, while the share in Central taxes is higher by 62.9 per cent, grants-in-aid recommended by the TFC are higher by 143.5 per cent over those recommended by the EFC.
Share of Various States in Transferable Tax Revenue of the Centre:
(Recommendations of 12th Finance Commission)
States:
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Andhra Pradesh Arunachal Pradesh Assam Bihar
Chhattisgarh Goa Gujarat Haryana
Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala
Madhya Pradesh Maharashtra
Recommendations of the Twelfth Finance Commission Restructuring Public Finances:
(i) Centre and States to improve the combined tax-GDP ratio to 17.6 per cent by 2009-10.
(ii) Combined debt-GDP ratio, with external debt measured at historical exchange rates, to be brought down to 75 per cent by 2009-10.
(iii) Fiscal deficit to GDP targets for the Centre and States to be fixed at 3 per cent.
(iv) Revenue deficit of the Centre and States to be brought down to zero by 2008-09.
(v) Interest payments relative to revenue receipts to be brought down to 28 per cent and 15 per cent in the case of the Centre and States, respectively.
(vi) States to follow a recruitment policy in a manner so that the total salary bill, relative to revenue expenditure, net of interest payments, does not exceed 35 per cent.
(vii) Each State to enact a fiscal responsibility legislation providing for elimination of revenue deficit by 2008-09, and reducing fiscal deficit to 3 per cent of State Domestic Product.
(viii) The system of on-lending to be brought to an end over time. The long-term goal should be to bring down debt-GDP ratio to 28 per cent, each for the Centre and the States.