For representative purposes. | Photo credit: Getty Images
The story so far: The 16th Finance Commission (FC) has started its work, established under Article 280 of the Constitution of India, mainly focusing on the devolution of consolidated funds. Since the 73rd and 74th constitutional amendments, local bodies have gained significant recognition in the federal system. This amendment introduces sub-clauses 280(3)(bb) and (c), which mandates the FC to recommend measures to increase the State’s pooled funds to support panchayats and municipalities.
What about the city?
The National Commission on Urbanization in the mid-80s described cities as “engines of growth.” Although this view is rather narrow, the reality is that cities contribute about 66% of India’s GDP and about 90% of total government revenue. Cities, thus, are important spatial zones for the overall development of the country. However, our economies of scale are not sufficient to meet our growing needs. The World Bank estimates that $840 billion is needed for basic urban infrastructure over the next decade.
Despite the efforts of five commissions since the 11th Finance Commission, financial devolution to the city remains inadequate. The fiscal health of municipalities is poor, affecting the productivity and quality of urban life. Rapid urbanization without appropriate fiscal action has adverse effects on development. Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs) in India are about 0.5% of GDP, lower than the 2-5% typical of other developing countries. For example, South Africa allocates 2.6%, Mexico 1.6%, the Philippines 2.5%, and Brazil 5.1% of GDP to their cities. Although IGTs make up about 40% of the total revenue of ULBs, problems remain about their predictability, earmarking for vulnerable groups, and horizontal efforts. IGTs are important for ULBs, given the financial state and the need for stable support until their own profits increase.
What about the taxation system?
The introduction of Goods and Services Tax (GST) has reduced the tax revenue of ULBs (excluding property tax) from around 23% in 2012-13 to around 9% in 2017-18. IGTs from the State to ULBs are very low, with the State Finance Commission recommending only about 7% of the state’s own revenue in 2018-19. Increase the amount of IGTs as a percentage of GDP is necessary. Despite the objective of the 74th constitutional amendment to strengthen ULBs financially, progress over three decades has been slow.
The 13th Finance Commission noted that “parallel agencies and bodies undermine local governments financially and operationally.” Local governments need support from the Union and State governments through funds, officials, and technical assistance. However, the growth of parallel institutions has distorted the role of local government. Programs like the Members of Parliament Local Area Development Scheme and the Members of Parliament Local Area Development Scheme exacerbate this problem, undermining the federal structure.
How important is the Census?
In the absence of the 2021 Census, reliance on 2011 data is insufficient for evidence-based fiscal devolution. India has about 4,000 statutory towns and an equal number of Census towns, with about 23,000 villages, all of which are effectively towns. These figures should be captured by the 16th FC, including significant migration to Tier-2 and 3 cities.
Thus, the nine guiding principles of FC 15 require re-examination. Not all but the reference to increase the property tax collection in tandem for the State GST; account maintenance; allocation of resources to reduce pollution; focus on primary health care, solid waste management, drinking water, etc., should be taken into account. The 16th FC should consider the dynamism of India’s urbanization and ensure IGTs for urban areas are at least doubled. A McKinsey Global Institute report warned that if India continues to invest in urban infrastructure at the current rate, urban infrastructure will fall short, leading to water supply and untreated sewage problems.
The author is former Deputy Mayor, Shimla, and Member, Kerala Urban Commission.
