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Source-This post on 16th Finance Commission has been created based on the article “What is on the agenda for the 16th Finance Commission?” published in “The Hindu” on 2 July 2024.
UPSC Syllabus-GS Paper-2- Appointment to various Constitutional Posts, Powers, Functions and Responsibilities of various Constitutional Bodies.
Context– The article emphasizes the need for increased financial support to urban local bodies, considering their significant contribution to the national economy.
The Finance Commission is established under Article 280 of the Indian Constitution. Since the 73rd and 74th constitutional amendments, local bodies have become more important in the federal system. These amendments added sub-clauses 280 (3) (bb) and (c) that require the Finance Commission to suggest ways to increase state funds to support panchayats and municipalities.
What is the Importance of Cities for India?
1) Cities contribute around 66% of India’s GDP and about 90% of total government revenue.
2) Cities have been described as “engines of growth” by the National Commission on Urbanization.
What are the challenges faced by Urban Local Bodies (ULBs) in India regarding financial devolution?
1) Financial Devolution to Cities: Efforts by five commissions since the 11th Finance Commission have not adequately improved financial devolution to cities. The poor fiscal health of municipalities affects both city productivity and quality of life.
2) Intergovernmental transfers (IGTs) -Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs) in India are about 0.5% of GDP, significantly lower than those in other developing nations like South Africa (2.6%), Mexico (1.6%) etc. These transfers constitute approximately 40% of ULBs’ overall revenue.
3) State Finance Commissions: State Finance Commissions have recommended only approximately 7% of States’ own revenue in 2018-19.
4) Parallel Agencies: – The 13th Finance Commission noted that parallel agencies undermine local governments financially and operationally. Programs such as MPLADS and MLALADS disrupt the federal structure.
5) Census Data: Without the 2021 Census, using 2011 data is insufficient for informed fiscal planning.
6) Lack of Adequate Investment- A McKinsey Global Institute report warns that if India continues investing in urban infrastructure at current levels, there will be shortages in urban infrastructure, resulting in issues with water supply and untreated sewage.
The World Bank estimates that $840 billion is needed for basic urban infrastructure in the next decade.
Read more- Panchayat Raj Institution(PRI) in India
What recommendation can be made by the 16th Finance Commission to overcome the financial challenges of cities?
1) Revisit the 15th FC’s guiding principles such as-
A) Enhancement of property tax collection in relation to state GST
B) Maintenance of accounts
C) Resource allocation for pollution mitigation
D) Focus on primary health care, solid waste management, and drinking water
2) Consider India’s urbanization dynamics-The 16th Finance Commission needs to recognize India’s dynamic urbanization and ensure that intergovernmental transfers (IGTs) to urban areas are doubled at the minimum.
Question for practice
What are the difficulties that Urban Local Bodies (ULBs) in India encounter concerning financial devolution? What suggestions could the 16th Finance Commission propose to address the financial challenges faced by cities?
