15th Finance commission: Reforming financial governance of India’s municipalities

Source: Indian Express

Gs2: Issues and Challenges Pertaining to the Federal Structure, Devolution of Powers and Finances up to Local Levels and Challenges Therein.

Synopsis:  The reforms suggested by the 15^th Finance commissions (interim report) can improve the financial governance of India’s municipalities.

Background:

• The 15^th Finance Commission submitted an interim report for FY 2020-21.
• Now, the final report for FY 2021-22 to FY 2025-26 is expected to be tabled along with the forthcoming Budget 2021-22.
• The Interim report for 2020-21 talks about raising the standards of financial governance of India’s municipalities in four specific ways.
• Implementation of the suggested 4 changes can be a watershed moment in the financial governance reforms of India’s municipalities.

What are the four changes suggested by the 15^th Finance commission?

The 15^th Finance commission in its interim report has suggested the following changes to bring reforms to the financial governance of India’s municipalities.

1. First, increasing the overall financial disbursement for municipalities (including panchayats) from the existing 30 per cent to 40 percent, in phases. This will result in increased financial resource for the municipalities over the five years.
2. Second,  it has set two very important conditions for all municipalities, for receiving grants. First, Publication of audited annual accounts. Second, notification of floor rates for property tax. It will result in financial accountability and increased revenue of Municipalities.
   • • Moreover, an Additional borrowing limit has been set for states (Rs 50,000 crore). It is linked to reforms in property taxes and user charges for water and sanitation.
3. Third, 100 percent outcome-based funding to 50 million-plus urban agglomerations (excluding Union Territories). Conditions emphasize specifically air quality, water supply, and sanitation.
   • • Note: India has 4,500 municipalities out of which approx. 250 municipalities are urban agglomerations with 53 million-plus population. It contains 44 per cent of the total urban population.
     • Whereas, the remaining 4,250-plus municipalities comprise 56 per cent of the total urban population.
4. Fourth, it has recommended a common digital platform for municipal accounts. This will give a consolidated view of municipal finances and sectoral outlays at the state level.

What are the suggestions?

Constitutional bodies like the finance commission can only prepare the grounds of reforms. The ultimate responsibility for municipal finance reforms remains with the state governments.  Thus, State governments need to enact municipal legislation towards following 5 Objectives:

1. Fiscal decentralisation by strengthening state finance commissions.
2. Revenue optimisation to enhance their own revenues.
3. Fiscal responsibility and budget management to accelerate municipal borrowings.
4. Strengthening institutional capacities by an adequately skilled workforce.
5. Facilitate transparency and citizen participation for democratic accountability.

• Also, State governments need to shift from the present discretionary grants practice to predictable fiscal transfers to municipalities.