The Thirteenth Finance Commission Report: An Assessment

The Constitution of India clearly divides powers and responsibilities between two levels

of governments with some amount of flexibility. The Union is assigned buoyant revenue

sources that accrue about two third of total revenue whereas the States are assigned about

two third of total responsibilities. Under this framework, eighteen years ago, the local

governments, both panchayat and municipality, were brought in the book of the statute.

Though vertical imbalances between the revenue powers and functional responsibilities

of different tiers of government are a characteristic feature of all federations, the balance,

in India, is tilted rather heavily in favour of the Union. The favourable position set for the

Union in regard to fiscal resources reflects the strong-centre theme running through the

Constitution, and many feel that this has been an important factor in keeping the country

united.

In India, wide variations can be seen in the capacity and resources across States. Thus,

intergovernmental fiscal transfers are an integral part of the system. Such transfers were

envisaged in the Constitution for vertical and horizontal redistribution of income. The

Constitution has simple provisions. But, in practice the fiscal transfer system in India has

become quite complex and the money flows to sub-national governments and local

governments from multiple channels including the following: