The Hindu (Delhi)

What is on the agenda for the 16th Finance Commission?

How do other countries devolve funds to their local government­s? Why is the Census signicant?

The story so far:

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 signifficant 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.

What about cities?

The National Commission on Urbanisati­on in the mid-80s described cities as “engines of growth.” Although this view is somewhat narrow, the reality is that 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 insuffcient to meet rising needs. The World Bank estimates that $840 billion is needed for basic urban infrastruc­ture in the next decade.

Despite the effiorts of ffive commission­s since the 11th Finance Commission, ffinancial devolution to cities remain inadequate. The ffiscal health of municipali­ties is poor, affiecting both city productivi­ty and quality of life. Rapid urbanisati­on without appropriat­e ffiscal action has adverse effiects 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. For instance, South Africa allocates 2.6%, Mexico 1.6%, the Philippine­s 2.5%, and Brazil 5.1% of their GDPs to their cities. Although IGTs make up about 40% of ULBs’ total revenue, issues persist regarding their predictabi­lity, earmarking for vulnerable groups, and horizontal equity. IGTs are crucial for ULBs, given their ffinancial state and the need for stable support until their own revenues improve.

What about the 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 ffinancially strengthen ULBs, progress over three decades has fallen short.

The 13th Finance Commission observed that “parallel agencies and bodies are emasculati­ng local government­s both ffinancially and operationa­lly.” Local government­s require support from Union and State government­s through funds, functionar­ies, and technical aid. However, the growth of parallel agencies has distorted local government­s’ roles. 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.

How important is the Census?

In the absence of the 2021 Census, reliance on 2011 data is inadequate for evidence-based ffiscal devolution. India has approximat­ely 4,000 statutory towns and an equal number of Census towns, with an estimated 23,000 villages, all of which are effiectively urban. These ffigures must be captured by the 16th FC, including the signifficant migration to Tier-2 and 3 cities.

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 urbanisati­on dynamism and ensure IGTs to urban areas are at least doubled. A McKinsey Global Institute report warns that if India continues investing in urban infrastruc­ture at current rates, urban infrastruc­ture will fall short, leading to water supply issues and untreated sewage.

Author is former Deputy Mayor, Shimla, and Member, Kerala Urban Commission.