No Union Finance Commission has pointed out that local governments are increasingly becoming cutting edge agents of delivery of the Union and State government schemes
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DEEPAK KR
Finance Commission-16 is the sixth Finance Commission since the tectonic 73rd and 74th Constitutional Amendments (CAs) to usher in a third tier to India’s dual federation making it multi-tier with a multi-tier public finance. The broad intent of the CAs was to make Indian democracy deep, participatory and inclusive. Article 280 on Finance Commission was also amended to add 280(bb) and (c), which mandate the FCs to recommend measures needed to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities in a State ‘on the basis of the recommendations made by the Finance Commission of the state’.
It is instructive to note that the Panchayati Raj Institutions (PRIs) which number nearly 2.7 lakh comprising 3.2 million representatives do not get a fair deal in the analytical part, policy recommendations and in the allocation of the grant-in-aid. Clubbing Rural Local Bodies (RLBs) with Urban Local Bodies (ULBs) as local bodies (the Constitution knows only panchayats and municipalities understood as institutions of self-government), the actual rural-urban split of the award of ₹7.91 lakh crore for the period 2026-31 works out to 55:45.
Compared to FC-15’s rural-urban ratio of 66:34 of local grants there is an 11 percentage points reduction for PRIs. Both the rural and urban grants are divided into basic and performance components in 80:20 ratio. If we deduct the state matching component of ₹43,524 crore from the performance component of RLBs and ₹29,016 crore from that of the ULB performance component the size of the total union local grant comes down to ₹7.18 lakh crore. The conditionality of a 50 per cent matching contribution by the States is unwelcome particularly because the grant is called an ‘award’.
The incentivisation of speedy urbanisation is done by a one-time ‘urbanisation premium grant’ “for the merger of peri-urban villages into an adjoining larger ULB with an existing population of not less than one lakh” subject to the formulation of a Transition Policy (on the Odisha model) as a pre-condition for claiming this grant.
At least four questions call for some answers:
One, why are the vital infrastructural project costs left to be contingent on a 40 per cent matching contribution by the States?
Two, why was the option of in-situ urbanisation idea and improving the local areas not even discussed while arriving at the decision? The Commission surely is aware of the vast pool of the unemployed swelling the informal sector with 46 per cent workforce in the agricultural sector. The growing commuting is not likely to slacken.
Three, why has the Commission completely kept out the environmental problem of India whose capital along with 83 other cities are crossing all international pollution norms. Is it not important to address at least tangentially the problem of slums and poverty?.
Four, why is it that the Commission did not consider Articles 243ZD, and 243ZE (particularly the District Planning Committee and Metro Political Planning Committees) for the urbanisation economic growth strategy of the Commission?
Still an enigma
In spite of seven studies sponsored by the Commission including a “comprehensive Review” of panchayat finances, the analysis of local finance is tepid. It does not speak highly of the various Union FCs and State FCs of the past that a clear picture of the local governments in the fiscal federal map of India is still an enigma. True, FC-16 gives State-wise figures of OSR (Own Source of Revenue) of RLBs and ULBs for five years from 2019-20 up to 2023-24. The total sum for local governments (bodies) for 2023-24 adds to ₹1.18 lakh crore with the contribution of PRIs an abysmally low 14.7 per cent.
The per capita OSR of RLBs for 2019-10 works out to ₹146.6 and that of ULBs ₹1,404, with ULB 9.5 times higher. The corresponding numbers for 2023-24 indicate a 10.8 times rural-urban gap. The reasons for the poor performance of RLBs ought to have attracted more in-depth examination.
The assertion of “heavy dependence of local bodies on Union and State governments for revenues” (para 10.63) does not fully agree with the statement given in the para (10.62) immediately preceding, which says OSR contributes 51 per cent of total municipal revenues for all categories of ULBs in India, and the contribution ranges between 61 per cent of total revenues of ULBs with a population larger than 40 lakh and 32 per cent for those with a population of less than 5 lakh. Undoubtedly, several municipal corporations and municipalities are capable of funding their expenditure responsibilities. The Economic Survey 2017-18 points out that India’s urban local governments are closer to international norms and “have emerged more fiscally empowered than RLGs so far in India”. To be sure, the finance of panchayats needs separate analysis and scrutiny. The Constitution opted for the 73rd Amendments, exclusively for the Panchayats to address their problems separately.
The Economic Survey 2017-18 had pointed out that 90 per cent of the tax potential of the PRIs remains untapped. This is not something to be lightly glossed over. Is low level equilibrium a matter of choice or is it a trap? Moreover, clubbing together tax and non-tax revenues by the Commission is not proper because user charges are collected on a quid pro-quo basis. It is certainly important to know what taxes are collected and in what proportion of OSR is contributed by non-tax revenues.
Imposing too much tying and conditions in the dispensation of local grants can make inroads into local government autonomy, although some are inevitable given the sluggish progress local governments have been making. The continuation of the eligibility conditions related to accounting and audit introduced by FC-15, although still a work in progress, is unavoidable.
No Union Finance Commission has pointed out that local governments are increasingly becoming cutting edge agents of delivery of the Union and State government schemes. It is high time to amend the Seventh Schedule to introduce a Local List, and bring more rationalisation in the assignment of revenue and expenditure responsibilities of the various tiers of the Indian fiscal federal system.
The writer is Honorary Fellow, Centre for Development Studies, Thiruvananthapuram
Published on February 18, 2026