16th Finance Commission

Focus Areas

Description

• 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. 

• 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. 
  • • 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. 

• 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.

Population Classification

Population (2001 Census)

• Tier-1

• 100,000 and above

• Tier-2

• 50,000 to 99,999

• Tier-3

• 20,000 to 49,999

• Tier-4

• 10,000 to 19,999