What Can Local Bodies Expect from the 16th Finance Commission? – Chinmaya IAS Academy

Context:

The 16th Finance Commission (FC) submitted its report to the President of India on November 17.
The report is crucial for strengthening fiscal decentralisation, improving resource flows to States and local bodies, and addressing the revenue–expenditure mismatch faced by Panchayats and Municipalities in delivering public services.

Key Highlights:

Role of the 16th Finance Commission

Expected to recommend the vertical transfer of resources from the Union’s divisible tax pool to States for the next five-year period.
Mandated under Article 280(3)(bb) and 280(3)(c) to:
- Recommend measures to supplement State finances for devolution to Panchayats and Municipalities.

Local Bodies and Public Service Delivery

Panchayats and Urban Local Bodies (ULBs) are responsible for:
- Drinking water
- Sanitation
- Public health
- Local infrastructure
Despite expanded responsibilities, local bodies face a persistent fiscal gap due to:
- Limited own-source revenues
- Dependence on higher-level transfers

Constitutional and Institutional Framework

73rd and 74th Constitutional Amendments empower States to:
- Assign revenue powers
- Delegate expenditure responsibilities to local governments
However:
- There is no separate constitutional list of functions or finances for local bodies.
- This leads to wide inter-State variation in fiscal empowerment.

Challenges in Functional and Financial Devolution

State governments often:
- Assign functions without adequate financial resources.
- Transfer responsibilities without corresponding staff or administrative capacity.
This weakens the operational efficiency and developmental role of local bodies.

Experience of Previous Finance Commissions

Earlier Union Finance Commissions (UFCs):
- Relied on lump-sum grants for local bodies.
The 13th UFC recommended a fixed percentage share of the divisible pool.
Subsequent UFCs:
- Reverted to conditional grants tied to reform measures.
- Discontinued reform frameworks initiated by previous Commissions, reducing continuity.

Expectations from the 16th FC

Comprehensive assessment of resource needs of:
- ~2.7 lakh Panchayats
- ~5,000 Municipalities
Enable local governments to function as:
- Institutions of economic development
- Instruments of social justice

Relevant Prelims Points:

16th Finance Commission: Constitutional body under Article 280.
Key Constitutional Provisions:
- Article 280(3)(bb) – Panchayats
- Article 280(3)(c) – Municipalities
State Finance Commissions (SFCs):
- Constituted every five years
- Recommend devolution to local bodies at the State level
Types of Transfers:
- Vertical transfer – Centre to States
- Horizontal distribution – among States
- Grants-in-aid – targeted financial assistance

Relevant Mains Points:

Conceptual Clarity:
- Fiscal Decentralisation: Matching functions with funds and functionaries.
- Effective decentralisation improves service delivery and accountability.
Governance Issues:
- Weak coordination between Finance Commissions and State Finance Commissions.
- Absence of continuity in reform-linked grants.
Economic Implications:
- Underfunded local bodies limit inclusive growth and urban–rural development.
Way Forward:
- Provide predictable and formula-based transfers to local bodies.
- Ensure functional–financial–administrative alignment.
- Strengthen and enforce State Finance Commission recommendations.
- Build local capacity for own-source revenue mobilisation (property tax, user charges).

UPSC Relevance (GS-wise):