The 16th Finance Commission (FC) has begun its work which was constituted on December 31st 2023.
McKinsey Global Institute Report, Need for Increased Investment in Urban Infrastructure
- Report by McKinsey Global Institute: It warns that if India continues investing in urban infrastructure at current rates, urban infrastructure will fall short, leading to water supply issues and untreated sewage.
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Agenda For The 16th Finance Commission
Since the 73rd and 74th constitutional amendments, local bodies have gained significant recognition within the federal system. These amendments introduced sub-clauses 280(3)(bb) and (c), which mandate the FC to recommend measures to augment State consolidated funds for supporting panchayats and municipalities.
Focus Areas
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Description
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| Finance Devolution For Cities |
- Contribution of Indian Cities: Cities contribute around 66% of India’s GDP and about 90% of total government revenues and thus, are an important spatial zone for the overall development of India.
- Concerns:
- Inadequate Infrastructure: India’s economic scale is insufficient to meet rising needs. The World Bank estimates that $840 billion is needed for basic urban infrastructure in the next decade.
- Inadequate Devolution: Despite the efforts of five commissions since the 11th Finance Commission, financial devolution to cities remains inadequate.
- Impact on Development: Rapid urbanisation without appropriate fiscal action has adverse effects on development.
- The fiscal health of municipalities is poor, affecting both city productivity and quality of life.
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| About the Taxation System |
- Impact of Goods and Service Tax (GST): It has reduced ULBs’ tax revenue (excluding property tax) from about 23% in 2012-13 to around 9% in 2017-18.
- Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs): In India, they are about 0.5% of GDP, much lower than the 2-5% typical of other developing nations.
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- Example: South Africa allocates 2.6%, Mexico 1.6%, the Philippines 2.5%, and Brazil 5.1% of their GDPs to their cities.
- IGTs from States to ULBs are very low, with State Finance Commissions recommending only about 7% of States’ own revenue in 2018-19.
- Concerns:
- Persistency of Issues: Although IGTs make up about 40% of ULBs’ total revenue, issues persist regarding their predictability, earmarking for vulnerable groups, and horizontal equity.
- Parallel Agencies: The 13th Finance Commission observed that “parallel agencies and bodies are emasculating local governments both financially and operationally.”
- Example: Programs like the Member of Parliament Local Area Development Scheme and the Member of Legislative Assembly Local Area Development Scheme exacerbate this issue, distorting the federal structure.
- Need For: IGTs are crucial for ULBs, given their financial state and the need for stable support until their own revenues improve. Increasing the quantum of IGTs as a percentage of GDP is necessary.
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| Census and Data |
- Concern:
- Reliance on Older Data: In the absence of the 2021 Census, reliance on 2011 data is inadequate for evidence-based fiscal devolution.
- Need For: India’s town figures must be captured by the 16th FC, including the significant migration to Tier-2 and 3 cities.
- India has approximately 4,000 statutory towns and an equal number of Census towns, with an estimated 23,000 villages, all of which are effectively urban.
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Population-based classification of Cities
Population Classification
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Population (2001 Census)
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Conclusion
The 16th Finance Commission must consider India’s urbanisation dynamism and ensure IGTs to urban areas are at least doubled.
- Few guiding principles of the 15th FC’s– reference to enhancement in property tax collection in tandem to the State’s GST; maintenance of accounts; resource allocation for mitigating pollution; focus on primary health care, solid waste management, drinking water, etc., deserve attention.
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