What is on the agenda for the 16th Finance Commission?
- The 16th Finance Commission (FC) has begun its work, established under Article 280 of the Indian Constitution, primarily focusing on the devolution of the consolidated fund.
- Since the 73rd and 74th constitutional amendments, local bodies have gained significant recognition within the federal system.
- These amendments introduced sub-clauses 280 (3) (bb) and (c), which mandate the FC to recommend measures to augment State consolidated funds for supporting panchayats and municipalities.
Contribution of Cities
- The National Commission on Urbanisation in the mid-80s described cities as “engines of growth.”
- Cities contribute around 66% of India’s GDP and about 90% of total government revenues.
- Cities, thus, are an important spatial zone for the overall development of the country.
- However, our economic scale is insufficient to meet rising needs. The World Bank estimates that $840 billion is needed for basic urban infrastructure in the next decade.
An overview of cities fiscal health
- Despite the efforts of five commissions since the 11th Finance Commission, financial devolution to cities remain inadequate.
- The fiscal health of municipalities is poor, affecting both city productivity and quality of life.
- Rapid urbanisation without appropriate fiscal action has adverse effects on development.
- Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs) in India are about 0.5% of GDP, much lower than the 2-5% typical of other developing nations.
- Although IGTs make up about 40% of ULBs’ total revenue, issues persist regarding their predictability, earmarking for vulnerable groups, and horizontal equity.
Taxation System
- The introduction of the Goods and Service Tax (GST) has reduced ULBs’ tax revenue (excluding property tax) from about 23% in 2012-13 to around 9% in 2017-18.
- IGTs from States to ULBs are very low, with State Finance Commissions recommending only about 7% of States’ own revenue in 2018-19.
- Increasing the quantum of IGTs as a percentage of GDP is necessary.
- Despite the 74th constitutional amendment’s aim to financially strengthen ULBs, progress over three decades has fallen short.
- The 13th Finance Commission observed that “parallel agencies and bodies are emasculating local governments both financially and operationally.”
- Programs like the Member of Parliament Local Area Development Scheme and the Member of Legislative Assembly Local Area Development Scheme exacerbate this issue, distorting the federal structure.
Way forward
- In the absence of the 2021 Census, reliance on 2011 data is inadequate for evidence-based fiscal devolution.
- Thus, the 15th FC’s nine guiding principles require a revisit. Not all of them but reference to enhancement in property tax collection in tandem to the State’s GST; maintenance of accounts; resource allocation for mitigating pollution; focus on primary health care, solid waste management, drinking water, etc., deserve attention.
- The 16th FC must consider India’s urbanization dynamism and ensure IGTs to urban areas are at least doubled.