Recommendation of 15th Finance Commission and challenges faced by Local Bodies

GS 3 Indian Economy Issues relating to planning, mobilization, of resources, growth, development and employment.

Introduction

           The Finance Commissions (IAST: Vitta Āyoga) are commissions periodically constituted by the President of India under Article 280 of the Indian Constitution to define the financial relations between the central government of India and the individual state governments.

Current Relevance:

             Recently, 15th Finance Commission report has provided many recommendations for improving the functioning of Local Bodies. The challenges faced by local bodies in India are manyfolds and there is no one-stop solution to them.

Approach of previous Finance Commissions with respect to Local Bodies:

           So far Four Finance Commissions (11th FC to 14th FC) have given their recommendations for local bodies. They provided for,

  1. The increase in quantum of Funds:
    • In recent years, the grants recommended by successive Finance Commissions in absolute terms have increased.
    • For example, the combined grants for rural and urban local bodies recommended by the 14th FC were :
      • three times the amount recommended by the 13th FC.
  2. Different Commissions followed distinct criteria while recommending resources for local governments.
    • The only common criteria considered by all of them were population and geographical area.

Recommendations of Fifteenth Finance Commission:

  1. The 15th FC suggested strict adherence to its recommendation for the constitution of State Finance Commissions(SFCs).
    • It recommends All States must constitute SFCs and also act upon their recommendations.
    • States also need to place the action taken report before the State legislature on or before March 2024.
    • No grants should be released to the States that have not constituted SFC.
    • MoPR(Ministry of Panchayati Raj) will certify the compliance of the State in this respect before the release of their share of grants.
  2. With respect to the Grants to Local Governments, the commission earmarked 60 per cent of funds for national priorities.
    • These priorities include drinking water supply, rainwater harvesting and sanitation etc.
    • Favours a fixed amount rather than a proportion of the divisible pool of taxes.
      • This is to ensure greater predictability of the quantum and timing of fund flow
    • Provides entry-level conditions to local bodies to avail grants.
      • These conditions will include online availability of both.
        • Provisional accounts of the previous year
        • Audited accounts of the year before that.
  3. The report calls for the Integration of the Financial Management Systems for transparency in the audit and functioning of local bodies.
  4. The report recognises Urbanisation as the Engine of Growth. It mentions few important recommendations like:
    • Establishment of Million-Plus Cities Challenge Fund for cities having million-plus population.
      • The devolution of the fund will be linked to the performance of these cities in improving their air quality and meeting the service level benchmarks for urban drinking water supply, sanitation, solid waste management, etc.
    • It also mentions that informal burning, as well as spontaneous combustion at landfills in Urban areas, should be monitored carefully.
    • The report calls for basic grants for urban local bodies in the non-Million-Plus cities category.
    • Also asks for allocating grants on the basis of population for the Cantonment Boards falling within the State’s territory.
  5. Involving Panchayati Raj Institutions as supervising agencies in primary health care institutions.
    • The Commission believes, it would strengthen the overall primary health care system.
  6. The commission provided for a Performance-based challenge fund of Rs. 8,000 crore to States for incubation of new cities.
  7. The commission recommends an amendment to the Constitution to revise the professions tax.

Challenges

  • Challenges with respect to functions:
    • There is an Excessive control of State government in the functions of PRIs.
    • For example,
      • state government approval is needed in project finalization
      • Local bodies Budget
      • Loan requirement, etc.
    • States, instead of guiding PRIs, are restricting the functions of local bodies.
    • Local bodies lack adequate data on essential services and cannot involve in Urban and Rural planning.
    • Though data on Census is available, it consists of data of previous years and not the current data.
    • For example, they do not have data on
      • local traffic
      • urban sewage
      • migration of people etc.
  • Challenges with respect to funding:
    • First, Article 243-I of the Constitution requires SFCs(State Finance Commission) to be appointed at the ‘expiration of every fifth year’.
    • Several States have still not moved beyond the second or third SFC.
    • Even if formed they face challenges like
      • inadequate resources
      • poor administrative support
      • delayed placement of action taken reports(ATR), etc.
    • The tax base of Urban and Rural local bodies is very narrow.
    • For example, Urban Local bodies cannot levy a profession tax of more than 2500.
      • They also have a problem in levying entertainment taxes and property taxes.
    • The Majority of the local bodies do not have access to the Capital market to raise required funds except few Urban local Bodies such as Pune, Chennai, etc
  • Challenges with respect to the Functionaries:
    • Role of women elected members:
      • There are many instances where, in the name of elected women representative their husband operates and takes the decision on her behalf.
      • This undermines the agenda to empower women by providing 33% reservation to them.
Suggestions:
  • Suggestions with respect to functions:
    • The Second ARC has recommended a special problem-solving body to resolve the issue of disqualification of elected members.
      • It also suggested an unbiased approval of Local body budgets, projects, etc.
      • State governments need to implement this.
    • State Governments should provide local bodies with the power to recruit personnel to fulfil their functions properly.
      • Apart from that the State governments also have to allow the local bodies to collect the local data for future use and preliminary planning.
  • Suggestions with respect to funding:
    • States should implement 15th FC  recommendation to appoint SFCs or else grants released to the respective State can be halted.
    • The power to levy taxes on the Union and State Government properties can be provided to local governments.
    • Apart from that, they should be empowered to levy taxes on
      • wealthy people in their locality
      • impose water cess
      • irrigation cess etc.
    • For example, a case study in Karnataka has proved that the levy of water cess is a feasible alternative for local bodies.
    • Separate grants may be allocated to local bodies for creating public health infrastructure and primary health care clinics.
  • Suggestions with respect to the functionaries:
    • To improve the performance of functionaries, the timely election is the need of the hour.
      • Apart from that, the State can encourage Public-Private Partnerships.
      • It will improve the skills of elected local representatives with market expertise and modern methods.
    • The state government can form strict guidelines for the active involvement of elected women representatives in all spheres of the functioning of local bodies.

Conclusion:

             Apart from implementing the recommendations of the 15th FC, the voluntary contribution of States is also the need of the hour.
             The States have to understand that empowerment of local bodies is needed to find solutions to the number of issues faced by them like enhancing tax base, providing adequate primary health and education services, etc.

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