What can local bodies expect from the 16th FC?

Source: The post “What can local bodies expect from the 16th FC?” has been created, based on “What can local bodies expect from the 16th FC?” published in “The Hindu” on 19 November 2025. What can local bodies expect from the 16th FC?.

UPSC Syllabus: GS Paper 2- Governance

Context: The 16th Finance Commission (FC) submitted its report on November 17. Under Article 280 of the Constitution, the FC is mandated to recommend vertical sharing of Central revenues with States and measures to augment the finances of panchayats and municipalities. Given the limited progress in fiscal decentralisation, local bodies expect the 16th FC to bring stability, clarity, and greater financial empowerment.

What Local Bodies Expect from the 16th FC

1. Greater vertical devolution: Local bodies expect the FC to allocate a higher percentage share of the Union divisible pool, ensuring predictable and adequate resources. They also anticipate a formula-based approach rather than the earlier ad hoc lump-sum grants.
2. Strengthening of own-source revenues: Local governments expect clearer guidelines on expanding property tax, advertisement tax, and user charges. They expect the FC to push States to devolve revenue powers aligned with functional responsibilities.
3. Clearer functional devolution: Panchayats and municipalities expect the FC to encourage States to map functions in line with the 11th and 12th Schedules. They expect stronger alignment between assigned functions and corresponding funds.
4. Revival of performance-based grants: Local bodies expect the FC to introduce realistic and implementable performance criteria. They expect incentives for improving auditing, transparency, service delivery, and administrative reforms.
5. Better integration of State Finance Commissions: Local governments expect the FC to ensure that recommendations of SFCs are considered and implemented consistently. They anticipate a framework that encourages States to devolve funds and functions as per constitutional intent.
6. Reduction of ad hocism: Local bodies expect the FC to move away from abrupt shifts in grant design seen in previous FCs. They expect consistent principles to guide tied, untied, and conditional grants.

Challenges Faced So Far

1. Inadequate functional devolution: States often retain control over key subjects listed in the 11th and 12th Schedules. Local bodies thus lack clarity over their actual service delivery responsibilities.
2. Weak local revenue capacity: Many local governments lack the authority or capacity to effectively administer property tax or user charges. Local revenues remain insufficient to meet operational costs.
3. Poor implementation of State Finance Commissions: Though over 100 SFC reports have been submitted, very few have been accepted or implemented by States. The absence of SFC-based devolution weakens the overall fiscal framework.
4. Discontinuity in Union FC recommendations: Successive FCs have changed formulas, grant types, and conditions frequently. Local bodies struggle to plan long-term due to such inconsistencies.
5. Unrealistic performance conditions: Several FCs recommended conditions that were difficult for most local governments to meet.As a result, performance-linked grants were often discontinued.
6. Inability to estimate actual resource needs: Earlier FCs could not accurately assess expenditure needs of 2.7 lakh panchayats and 5,000 municipalities. This has resulted in inadequate and uneven grant allocations.

Way Forward

1. Adopt a stable, transparent formula for grants: The 16th FC should standardise tied, untied, and performance grants to reduce policy uncertainty. A predictable multi-year framework will improve planning at the grassroots.
2. Strengthen SFCs and enforce their implementation: The FC should mandate timelines and minimum standards for SFC constitution and functioning. A monitoring mechanism can ensure States implement their SFC recommendations.
3. Promote realistic and outcome-based performance grants: Conditions should focus on achievable reforms such as timely audits, data reporting, and improved service indicators. Incentives should reward efficiency rather than penalise weak capacity.
4. Link funds to actual functions devolved: Grants must be aligned with functions that States assign to local governments. This alignment will strengthen accountability and improve service delivery.
5. Enhance local revenue mobilization: Capacity building, digitisation of property tax records, and rational user charges should be promoted. States should be nudged to devolve appropriate taxation powers.
6. Create a comprehensive database of local finances: A national-level dataset on local government finances can help assess expenditure needs accurately. This will support evidence-based grant allocation by the FC.

Conclusion: Local bodies expect the 16th Finance Commission to provide a coherent, sustained, and equitable framework for fiscal decentralisation. Strengthening functional clarity, ensuring predictable grants, improving revenue capacity, and reinforcing SFCs can finally realise the vision of the 73rd and 74th Amendments by empowering grassroots governance in India.

Question: Discuss key expectations of local bodies from the 16th Finance Commission and the challenges in strengthening local government finances.