Overview of the 16th Finance Commission's Recommendations
The 16th Finance Commission (FC) of India has recently submitted its report to the President, focusing on the allocation of resources from the Central revenue pool to States and the improvement of finances for panchayats and municipalities, as mandated by Article 280 of the Constitution.
Role of Local Governments
- Local governments are responsible for essential public services, including drinking water, sanitation, public health, rural roads, and maintenance of community assets.
- They collect certain taxes such as property tax and advertisement tax, and non-taxes like market fees and tolls.
- There is a significant gap between revenues and expenditure responsibilities across States and Union Territories (UTs).
Constitutional Amendments and Fiscal Powers
- The 73rd and 74th constitutional amendments enable State governments to assign fiscal powers and responsibilities to local governments.
- There is a wide variation in the fiscal powers of panchayats and municipalities across States.
- No separate list of functional responsibilities or revenue handles is designated for them.
Challenges Faced by Local Governments
- Local governments often implement vertical schemes designed by Union and State governments without adequate revenue handles or officials.
- State Finance Commissions (SFC) provide recommendations, but many reports remain unimplemented, forcing reliance on fiscal transfers from the Union government.
Union Finance Commission Recommendations
- Six Union Finance Commissions have made recommendations, but often through ad hoc lump sum grants rather than quantifying the resource requirements of local governments.
- The 13th UFC recommended grants as a percentage share in the union tax divisible pool, emphasizing inflation neutrality and resource buoyancy.
- The 14th and 15th UFCs reverted to lump sum grants and varied conditional grants to reform local administration.
Expectations from the 16th Finance Commission
- Assessment of resource requirements for 2.7 lakh panchayats and about 5,000 municipalities to enable them to function effectively in economic development and social justice.
