The 73rd Constitutional Amendments created a third tier of government and mandated the Union Finance Commission (UFC), under Article 280(3) (bb) & (c), to recommend measures for augmenting the financial resources of panchayats and municipalities.
Role of Finance Commission in Strengthening Local Bodies:
- Ensuring Vertical Devolution:
- UFCs recommend untied and sector-specific grants from the consolidated fund of India to local bodies.
- 13th FC set a landmark by recommending 2.5% of the divisible pool for local bodies, ensuring buoyancy.
- 15th FC recommended ₹4.36 lakh crore (2021–26) for local bodies which is the highest ever.
- Promoting Local Revenue Mobilisation: FCs recommended Property tax reforms, Improved accounting and auditing and Digitisation of municipal finances. For e.g., 15th FC mandated property tax floor rates as a condition to receive grants.
- Institutional Strengthening: FCs push for standardisation of budget formats, accounts, and audits. For e.g., 14th FC encouraged adoption of double-entry accounting and online reporting.
- Incentivising Good Governance: 13th FC introduced performance grants linked to auditing, local plans, and property tax while 15th FC introduced performance-linked grants for air quality improvement in million-plus cities
- Pushing States to Strengthen SFCs: FCs emphasise regular constitution, timely reports, and implementation of State Finance Commissions (SFCs) For example, 13th FC made timely SFC reports mandatory to access performance grants.
Challenges in Achieving Effective Fiscal Devolution:
- Weak State Finance Commissions (SFCs): Many SFCs are delayed, under-staffed and ignored by State legislatures. As per RBI (2021) report, only 14 States have submitted SFC reports on time.
- Overreliance on FC Transfers: Local own-source revenues remain low at 1% of GDP, vs OECD avg of 6%. Many local bodies rely 70–90% on higher-level grants.
- Inconsistency in FC Recommendations: FCs introduced new performance criteria every cycle. For e.g., 13th FC introduced auditing, property tax while the 15th FC incorporated sanitation, and air quality.
- State Government Resistance: States fear revenue loss and administrative complications; hence they resist full implementation of SFC recommendations.
- Capacity Deficits: Lack of trained personnel in Accounts & audit, Project preparation and Municipal finance. As stated by CAG, 70% local bodies do not have updated audited accounts.
Way Forward:
- Strengthen SFCs with statutory timelines and independent secretariats.
- Ring-fence local revenue sources such as property tax, user charges.
- Predictable multi-year grants for better planning.
- Capacity-building missions for municipal finance & digital governance.
Conclusion:
For local governments to become effective institutions of economic development and social justice, India needs a stable, predictable, and coordinated fiscal architecture, anchored jointly by Finance Commissions, state governments, and empowered local institutions.
‘+1’ Value Addition:
- India has 2.7 lakh Panchayats and 5,000+ municipalities, world’s largest local governance system.
- 15th FC allocated ₹8,000 crore for improving air quality in 42 cities.
- As per World Bank, Indian cities need $840 billion investment in urban infrastructure over next 15 years.
- Indore’s property tax reforms increased revenue by 45% in 4 years.
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