Financial Devolution to Urban Local Bodies (ULBs)

Despite the efforts initiated by the 11th Finance Commission, financial devolution to urban areas remains inadequate. Municipalities suffer from poor fiscal health, and rapid urbanization without sufficient fiscal measures hinders development.

Financial Devolution to Urban Local Bodies (ULBs)

• India allocates only 0.5% of its GDP to ULBs, whereas countries like South Africa, Mexico, the Philippines, and Brazil allocate between 1.6% and 5.1%.
• Intergovernmental transfers make up about 40% of ULBs’ revenue in India, but these transfers are often:
  • Unpredictable
  • Not earmarked for vulnerable groups
  • Lacking horizontal equity
• The introduction of GST reduced ULBs’ tax revenue (excluding property tax) from 23% in 2012-13 to around 9% in 2017-18.
• Intergovernmental Transfers (IGTs) from states to ULBs are minimal, with state finance commissions recommending only about 7% of states’ own revenue in 2018-19.
• Over the past three decades, progress in financially empowering ULBs, as envisioned by the 74th constitutional amendment, has been inadequate.
• The 13th Finance Commission observed that parallel agencies undermine the financial and operational capabilities of local governments.

Challenges Posed by Absence of 2021 Census Data

• Accurate population data from the census is vital for determining fund distribution and ensuring equitable resource allocation based on demographic needs.
• Census data informs financial devolution strategies by highlighting urban growth trends and demographic changes.
• Urban transformations reflect the complex interactions of demographic shifts.
• India has about 4000 statutory towns and a similar number of census towns, along with numerous effective urban villages that need accurate enumeration.
• Accurate census data is crucial for understanding significant migration to tier 2 and tier 3 cities, which impacts their service structure and needs.
• The absence of 2021 census data complicates the accurate assessment of urban growth, making it difficult to understand demographic changes necessary for evidence-based fiscal devolution.

Measures To Be Taken

• Local governments need support from Union and State governments through funding, personnel, and technical assistance.
• Increasing IGTs as a percentage of GDP is crucial to enhance the financial stability of ULBs.
• Addressing programs like the MP and MLA Local Area Development Schemes is essential to prevent the distortion of the federal structure by creating parallel agencies.

16th Finance Commission

• The Government of India has established the 16th Finance Commission under Article 280(1) of the Constitution, with Dr. Arvind Panagariya appointed as Chairman.
  • Article 280 mandates the establishment of a Finance Commission every five years to recommend the distribution of tax revenues between the central and state governments.

Terms of Reference for the 16th Finance Commission

• Distributing taxes between the Union and States and allocating state shares.
• Principles governing grants-in-aid from the Consolidated Fund of India to states and grants under Article 275 for specific purposes.
• Measures to boost state consolidated funds to support Panchayats and Municipalities based on state finance commission recommendations.
• Reviewing current financing structures related to disaster management under the Disaster Management Act of 2005 and proposing improvements or changes.