Paper: GS – II, Subject: Polity, Topic: Local Government, Issue: 16th Finance Commission for Local Bodies.
Context:
India’s panchayats and municipalities remain fiscally weak despite constitutional recognition. The 16th Finance Commission is expected to strengthen their finances, building on the 73rd – 74th Amendments.
Key Takeaways:
| Finance Commission (FC): The Finance Commission (FC) is a constitutional body constituted by the President under Article 280 of the Constitution. It is a Quasi-Judicial body constituted every 5th year or at such earlier time as the President deems necessary. It consists of a chairman and 4 other members to be appointed by the President. They are eligible for re-appointment. State Finance Commission: Constitutional Basis: The SFC was established under the 73rd and 74th Constitutional Amendments in 1992 which aimed to strengthen local self-governance in India by providing constitutional status to panchayati raj institutions and municipalities. |
- The 16th Finance Commission (XVIFC) was set up on 31 December 2023.
- It is tasked with giving recommendations for the award period from 1 April 2026 to 31 March 2031.
- The Commission is currently chaired by Dr Arvind Panagariya.
What can local bodies expect from the 16th Finance Commission?
Clear vertical share of Union taxes for States:
- As mandated by Article 280, the 16th FC must recommend what percentage of the central tax pool goes to the States for the next five years.
- Local bodies indirectly depend on this because State fiscal space determines their transfers.
Formula for horizontal distribution among States: The FC will also decide how this pool will be distributed across States based on factors like population, income distance, area, etc.
Specific measures to improve finances of panchayats and municipalities: Under Article 280(3) (bb) and (c), the FC must recommend ways to augment State resources for supporting rural and urban local bodies.
Expectations include:
- A predictable share of the divisible pool (as done by the 13th FC).
- Grants that reflect real expenditure needs of 2.7 lakh panchayats and 5,000 municipalities.
- Reduced dependence on ad hoc lump-sum grants.
Mandates of the 73rd and 74th Constitutional Amendments:
- Establishment of Local Bodies:Constitutionally recognized Panchayats (rural local bodies) and Municipalities (urban local bodies) as institutions of self-governance.
- Devolution of Powers: State governments are empowered to devolve powers, authority, and responsibilities to these local bodies, enabling them to function as self-governing units.
- Functional Responsibilities: Assigning responsibilities for planning and implementation of schemes for economic development and social justice.
- The 11th and 12th Schedules of the Constitution provide illustrative lists of functions for Panchayats (29 subjects) and Municipalities (18 subjects), respectively.
- Financial Powers: Empowering local bodies to levy, collect, and appropriate taxes, duties, tolls, and fees. State governments are responsible for assigning revenue handles to various levels of Panchayats and Municipalities.
Failure of Finance Commissions on Performance-Linked Grants:
By addressing these issues, the 16th Finance Commission can play a crucial role in empowering local bodies and enabling them to effectively contribute to India’s economic development and social progress.
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