Wednesday, December 29, 2010

The Report of the Thirteenth Finance Commission Conundrum in Conditionalities

NIPFP Working Paper 76

M Govinda Rao
December 2010


The 13th Finance Commission has forayed into a number of areas partly warranted by its terms of reference and partly due to the approach it adopted. The Commission, besides tax devolution, has recommended as many as 12 different types of grants with a plethora of conditionalities. A critical appraisal of the recommendations shows that the transfer system recommended by the Commissions suffers from the same limitations of inequity and perverse incentives as in the past.

The inability to offset the fiscal disabilities of the states leads to giving several grants. Even here, the approach is ad hoc. In particular, the grants recommended for individual states for their special needs is a classic example of ad hoc approach which is arbitrary and judgemental. The recommendations relating to the GST are the ones which have been resented most by the states and actually, this has taken the reform agenda backwards. The “all or nothing” types of conditions do not leave much room for a “grand bargain”.

A major concern is with a plethora of conditionalities imposed by the Commission. Besides the conditions on GST compensations discussed above, there are several conditions stipulated for achieving fiscal consolidation and incentivising local bodies. There are questions on design, implementation, and monitoring of these conditions. These questions leave one suspect that the Commission lost an opportunity to reform the transfer system yet again.