There has been serious debate in the country regarding the role of the Finance Commission vis-a-vis the Planning Commission. Finance Commission is a Constitutional body whereas the Planning Commission is a non-statutory institution.

Over a period of time, the working of both the institutions led to friction among them due to lack of clear-cut guidelines demarcating their areas of work. Scrutiny of plan expenditure and transfer of capital to the states have been left to the Planning Commission.

This has led to a number of practical problems. The relative roles of the Planning Commission and Finance Commission have come to be demarcated in the terms of reference of the Finance Commission.

The Finance Commission assesses the non-plan requirements of the State Governments and recommends a share in the net yield from the Central and Grants-in-aid. The divisible sum of Central taxes is distributed inter se among the states based on independent criteria.


This lead to a situation where many states experience non-plan revenue surplus after receiving the devolution and that surplus is supposed to be used by them for plan purpose. But that is not the job of the Finance Commission. It is left to the planning Commission to take it into account while assessing the states resources for state plans.

The Planning Commission finds it very difficult to fill the shortfall in the states financial resources for plan purpose because of the limited budgetary support provided by the Central Government for the total public sector plan. Consequently, the plan expenditure becomes a casualty.

The various Finance Commissions have generally adhered to the criteria, for grants-in-aid to the States, that this popularly come to be known as the Gadgil formula (after the name of former Deputy Chairman of the Planning Commission), that takes into account in variable proportions the population of the State, developmental performance, budgetary deficit etc.

The Ninth Finance Commission in its first Report for 1989-90 recommended a modified Gadgil formula whereby income tax and union excise duties may be distributed among States in accordance with this ratio: (1) 20% on the basis of population; (2) 50% on the basis of distance of the per-capita income of a State from the highest per-capita-income State multiplied by its population; (3) 12.5% on the basis of a State’s per capita income multiplied by its population; and (4) 12.5% on the proportion of poor people in the State to the total poor population nationally.


However, in the formula for Central assistance to the State recommended by the Planning Commission and approved by the NDC in December 1991 population continues to be given more weight age, alongside, of course, some other criteria: population (60%), per capita (25%) and performance (7.5%). Moreover, of the 25% weight age given to per capita income was made to conform to the ‘deviation method’ such that higher the allocation of Central assistance, lower the per capita income of a State than the national average.

In the meeting of the Inter-State Council which was held in Delhi in July 1997, it was decided that 29% share in Central taxes be given to the States as suggested by the Tenth Finance Commission. As per the Commission’s recommendation, this arrangement should be suitably provided for in the Constitution and reviewed once in fifteen years. The Commission also recommended that the Centre should continue to have the power to levy surcharges for the purposes of the Union and these should be excluded from the sharing arrangements with the States.

Performance Evaluation of 11th Finance Commission

(1) Status-quo-ism: Marginal increase in total central tax revenue to States from 29 to 29.5 percent.


(2) fixed a ceiling of 37.5 per cent of the transfer of Centre’s gross revenue receipts to the states.

(3) The criteria have favoured the northern states in comparison to the Southern States.

(4) It has penalised better performers and has rewarded, “laggards”.

(5) “Gap-filling” approach still continues.


(6) Revenue-raising weight age has been accorded low priority.

(7) The recommendation, that the local bodies be given power to collect and regain agriculture will definitely be a difficult task. ,