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Reasons why the 14th Finance Commission Removed Grants-

in-Aid Benefit to States

(Page 159 of its original 497-page Report)

“Our approach to sector-specific grants is based on our analysis of

these grants recommended by the previous Finance Commissions.
We observe a certain discontinuity in the sectors recommended for
grants by the past Finance Commissions. For example, the FC-XI
(11th Finance Commission) recommended upgradation grants for
general administration, but the FC-XII discontinued it. Similarly, a
maintenance grant for public buildings was recommended by the
FC-XII but not by the FC-XIII. The FC-XIII discontinued grants-
in-aid for protection of heritage sites that both the FC-XI and the
FC-XII had recommended. Overall, we notice more of change than
continuity in the sectorspecific grants. Though the grants have
covered a large number of sectors, only a few like health and
education have been considered on a regular basis.” (Section 11.29
0f Report)

“It is important to analyse the significance of Finance

Commissions' sector-specific grants in terms of their relative
magnitude. We note that these constituted a small percentage of
total grants going to the States in a particular sector. For example,
the health sector grant recommended by the FC-XIII is estimated
to be only 1.57 per cent of the total likely revenue expenditure of
all States for the award period (2010-2015). Similarly, the
corresponding figure for the elementary education sector is 1.95
per cent of the total likely revenue expenditure of all States. The
problem of the small size of the grants is further compounded by
the poor utilisation of these on account of conditionalities. The
limited tenure of the Commission also adds to the constraints in
designing the grants. Finally, the flow of such grants through
multiple channels tends to result in duplication and overlap. In this
regard, we have also noted the view of the Ministry of Finance that
a large number of Union Government schemes already existed in

the sectors where previous Finance Commissions had

recommended grants-in-aid.” (Section 11.30)

“Five key considerations have influenced our approach towards

state-specific grants. First, the state-specific grants recommended
by previous Finance Commissions constitute a small fraction of the
proposals submitted by the States. Second, the state-specific grants
were not allocated on the basis of any formula or any uniform
principle. Third, state-specific schemes are best identified,
prioritised and financed at the level of the State Government.
Fourth, State Governments repeatedly raised the issue of the need
for flexibility in the use of state-specific grants during our
discussions with them. This need for flexibility arises as there is a
minimum time lag of two years between the time state-specific
schemes are originally proposed to the Finance Commission and
when the implementation process actually begins. Due to changed
circumstances, there is often a need to revisit the originally
recommended schemes. This flexibility is not possible in grants
recommended by Finance Commissions. After considerable
deliberations, we have come to the conclusion that grants for both
sector-specific and state-specific schemes by the Finance
Commission are not necessary.” (Section 11.31)

“We see merit in the views of the Ministry of Finance on the

overlap of Finance Commission grants and non-Finance
Commission grants. Apart from the issue of duplication of funding,
the support from multiple channels makes it difficult to take a
comprehensive view on funding and renders monitoring of outputs
and outcomes a difficult exercise.” (Section 11.32)