Syllabus: Devolution of powers and finances up to local levels and challenges therein.
Context
- The 16th Finance Commission submitted its report on November 17, raising expectations on resource-sharing formulas and support for local bodies.
Mandates of the 73rd and 74th Amendments
- These amendments empower States to assign revenue powers and expenditure responsibilities to panchayats and municipalities.
- They list 29 subjects for panchayats and 18 matters for municipalities, but these schedules are illustrative, not binding.
- States therefore vary widely in delegating fiscal authority, causing mismatches between responsibilities and resources.
Current Fiscal Challenges of Local Bodies
- Local governments deliver essential services like water supply, sanitation, health, roads and asset maintenance.
- They are authorised to collect taxes such as property tax, advertisement tax and non-taxes like market fees and tolls.
- A significant revenue–expenditure gap exists across States and UTs due to limited revenue handles.
- States often pass on responsibilities without adequate finances or staff, reducing operational efficiency.
Role of State Finance Commissions (SFCs)
- SFCs are constituted every five years to recommend revenue sharing, assignment of taxes, grants and functional devolution.
- Despite over 100 reports, implementation is weak, leaving local bodies dependent on Union transfers.
Union Finance Commissions (UFCs): Track Record
- Six UFC recommendations have been implemented, but earlier bodies made lump-sum grants without assessing actual resource needs.
- The 13th UFC alone linked grants to a percentage of the Union divisible pool, ensuring inflation neutrality and revenue buoyancy.
- Later UFCs reversed this, returning to lump-sum grants and inconsistent performance-linked conditions.
- Successive UFCs imposed different reform conditions, resulting in discontinuity and poor compliance.
Expectations from the 16th FC
- It is expected to assess the real financial needs of 2.7 lakh panchayats and 5,000 municipalities, enabling them to function as institutions of economic development and social justice.
Q- Discuss the major fiscal challenges faced by Panchayats and Municipalities despite the 73rd and 74th Constitutional Amendments. (15 Marks)