• The 13th Finance Commission (FC) was set up in 2007 and its recommendations were for 2010 to 2015.
• The FC is set up under Article 280 of the Constitution.
• The FC give recommendations on vertical devolution (Union to state transfers), horizontal distribution (between states, on the basis of a formula varying from FC to FC) and grant-in-aid (usually written as grants-in-aid).

What are the constitutional provisions for finance commission?

• Finance commissions (FC) are constituted every five years by the President of India under Article 280 of the Indian Constitution.
• FC defines the financial relations between the central government of India and the individual state governments.
• It recommends the distribution of financial resources between central Government and state governments.

Recommendations of FC

• Vertical devolution which means transfer of financial resources from Union to state.
• Horizontal distribution means distribution of financial resources between states, on the basis of a formula which varies from FC to FC.
• Grant-in-aid which is covered under Article 275 is the funds provided by parliament each year to the states in need of assistance and different sums may be fixed for different states.

What is grant-in-aid?

• There is a difference between grant (Article 282) and grant-in-aid. Grant-in-aid is when recipient operates at arm’s length. Thus, grant-in-aid is not subject to as many tight controls as a grant is.

Importance:

• Grants-in-aid are an important component of Finance Commission transfers as they act like a memorandum to states.
• It enables the Commission to make its scheme of transfers more comprehensive and address various issues spelt out in the ToR (Terms of reference).
• ToR is notified by the Finance Ministry and they act as guidelines to the FC.

Arguments by the state:

• States have argued that grants should be restricted to only a small portion of the states’ share in FC transfers.
• Grants are directed to particular sectors with conditionalities that restrict the expenditure options of the states.
• Objections by the states seem to be more towards conditionalities and not towards distortions caused by focusing on specific sectors.

What is the objective of FC behind conditionalities put on grants?

• The objective of FC behind conditionalities put on grants is to address various issues in a state.

Example:

Justice Delivery

• It is in the conditions in the grants made by the 13th FC.
• In our judicial system there are over three crore cases are pending in various courts in the country.
• The Department of Justice has identified a number of initiatives which are part of this action plan and need support including: -
• Increasing the number of court working hours using the existing infrastructure, enhancing support to Lok Adalats, funding to State Legal Services Authorities to enabling them to enhance legal aid, promoting the Alternate Dispute Resolution (ADR) mechanism, etc.
• Finance commissions'' expectation was that providing grants for implantation of the following would address the justice delivery system of the country but states showed reluctance in implementing the recommendations.

Statistical System

• For equitable horizontal distribution, the measurement of cost disabilities is important.
• The cost of services varies across states due to a large number of factors
• To estimate the cost disabilities of states, two types of data are required:
• Quantifiable measure of the level of various services available in different states
• Corresponding unit cost.
• As of now, such data are not available.
• Measurement of inter-regional trade data would be useful to provide insights in an inter-regional framework
• Hence the 13^th FC recommended that the Ministry of Statistics take steps to fill in the statistical gaps.

Recommendations made by financial commission help states in recognition of the areas where they have been lacking and what the state shall do to address such issues. Hence state should try to implement the recommendation of finance commissions. On the other hand, finance commissions should allow states themselves to decide where the funds shall be used and provide them with some autonomy.