Eleventh Finance Commission of India

The Eleventh Finance Commission (EFC) was constituted under the Chairmanship of A.M. Khusro in July 1998, to make recommendations on the distribution of tax revenues between the Union and the States, and also among the States, for the period 2000-2005. It was tasked with reviewing the existing principles and suggesting suitable changes deemed necessary.

Key Recommendations

The Commission recommended that 28 percent of the net proceeds of all central taxes be devolved to the states. This marked a significant departure from previous commissions that typically focused on divisible pools of specific taxes. The EFC aimed for greater stability and predictability in resource transfers by considering a broader base.

Regarding inter-state distribution, the EFC assigned weights to various factors to determine each state’s share. These factors and their respective weights included:

• Population (1971 Census): 10%
• Income Distance: 62.5%
• Area: 7.5%
• Infrastructure Index: 7.5%
• Tax Effort: 5%
• Fiscal Discipline: 7.5%

The use of the 1971 population census was controversial, as it was argued that it penalized states that had effectively managed population growth. However, the EFC maintained that using more recent data would disproportionately reward states with higher population growth rates, potentially undermining national efforts to control population.

The Commission also introduced the concept of “incentive-based transfers” linked to fiscal discipline. States were encouraged to improve their fiscal management through revenue enhancement and expenditure control. This element aimed to promote fiscal responsibility and sustainability at the state level.

Other Significant Aspects

Beyond tax devolution, the EFC addressed grants-in-aid to the states under Article 275 of the Constitution. It recommended specific grants for various purposes, including:

• Upgradation of standards of administration and specific services
• Special problems of certain states
• Local bodies

The Commission emphasized the importance of strengthening local bodies (Panchayats and Municipalities) by providing them with adequate resources. It recommended grants to be distributed among the states based on factors such as population, area, and index of backwardness.

The EFC also made recommendations concerning debt relief for states. Recognizing the increasing debt burden of several states, the Commission suggested measures for debt consolidation and restructuring, aiming to reduce their debt servicing burden and improve their fiscal health.

Impact and Legacy

The Eleventh Finance Commission’s recommendations had a significant impact on the financial relations between the Union and the States. The increased share of central taxes devolved to the states provided them with greater fiscal autonomy. The focus on fiscal discipline and incentive-based transfers encouraged states to improve their financial management practices. The recommendations regarding grants to local bodies also contributed to strengthening grassroots democracy and promoting local development.