FINANCE COMMISSION

• Established under Article 280 of the Indian Constitution.
• Focus: Devolution of the consolidated fund to support local bodies (panchayats and municipalities).
• Post 73rd and 74th constitutional amendments:
  • Introduction of sub-clauses 280 (3) (bb) and (c).
  • Mandate for FC to recommend measures to augment State consolidated funds for local bodies.

IMPORTANCE OF CITIES

• Cities as “engines of growth” (National Commission on Urbanisation).
• Contribution: 66% of India’s GDP, 90% of total government revenues.
• Required investment: $840 billion for basic urban infrastructure in the next decade (World Bank estimate).
• Current state:
  • Inadequate financial devolution despite efforts by five commissions since the 11th Finance Commission.
  • Poor fiscal health of municipalities.
  • Adverse effects of rapid urbanisation without appropriate fiscal action.

INTERGOVERNMENTAL TRANSFERS (IGTS) TO URBAN LOCAL BODIES (ULBS)

• Current IGTs to ULBs: About 0.5% of GDP.
  • Comparison with other developing nations:
    • South Africa: 2.6%
    • Mexico: 1.6%
    • Philippines: 2.5%
    • Brazil: 5.1%
  • Issues:
    • Predictability
    • Earmarking for vulnerable groups
    • Horizontal equity
  • IGTs constitute about 40% of ULBs’ total revenue.
  • Need for stable support due to ULBs’ financial condition.

TAXATION SYSTEM IMPACT

• Introduction of GST:
  • Reduction in ULBs’ tax revenue (excluding property tax) from 23% (2012-13) to 9% (2017-18).
• State Finance Commissions:
  • Recommended only about 7% of States’ own revenue to ULBs (2018-19).
• Need to increase IGTs as a percentage of GDP.
• Limited progress despite the 74th constitutional amendment’s aim to financially strengthen ULBs.

CHALLENGES AND RECOMMENDATIONS

• Growth of parallel agencies distorting local governments’ roles:
  • Member of Parliament Local Area Development Scheme
  • Member of Legislative Assembly Local Area Development Scheme
• Need for support from Union and State governments: Funds, functionaries, technical aid.

IMPORTANCE OF THE CENSUS

• Reliance on 2011 Census data is inadequate for evidence-based fiscal devolution.
• Significant migration to Tier-2 and Tier-3 cities.
• Approximate figures:
  • 4,000 statutory towns
  • 4,000 Census towns
  • 23,000 effectively urban villages
• Essential data to be captured by the 16th FC.

15TH FINANCE COMMISSION’S GUIDING PRINCIPLES

• Revisit needed for nine guiding principles.
• Areas deserving attention:
  • Enhancement in property tax collection in tandem with State’s GST.
  • Maintenance of accounts.
  • Resource allocation for mitigating pollution.
  • Focus on primary health care, solid waste management, drinking water.
• Importance of addressing urbanisation dynamism.
• Ensuring IGTs to urban areas are at least doubled.
• McKinsey Global Institute warning: Insufficient investment in urban infrastructure could lead to significant issues (e.g., water supply, untreated sewage).