Strengthening Local Governance: The Role of the Fifteenth Finance Commission Grants”

12 Nov Strengthening Local Governance: The Role of the Fifteenth Finance Commission Grants”

SYLLABUS MAPPING:

GS-2-polity and governance -Strengthening Local Governance: The Role of the Fifteenth Finance Commission Grants”

FOR PRELIMS:

What is the role of the Fifteenth Finance Commission grants in strengthening local governance in India?

FOR MAINS:

Discuss the role of the Fifteenth Finance Commission in empowering local governance in India. How have its grants contributed to the decentralization of financial resources and strengthening the administrative capabilities of local bodies?

Why in the news?

The Centre announced on Tuesday that it has disbursed the 15th Finance Commission grants for FY25 to rural local bodies in Kerala, amounting to Rs 266.8 crore. Additionally, Rs 27 crore has been allocated to rural local bodies in Meghalaya for FY22 to address location-specific needs.

This release marks the second instalment of untied grants for Kerala. The funds will be distributed across all eligible local bodies in the state, including 14 district panchayats, 152 block panchayats, and 941 gram panchayats, as per the Ministry of Panchayati Raj.

What is a finance commission?

A Finance Commission is a constitutional body in India tasked with recommending the distribution of financial resources between the central government and state governments, as well as among state governments themselves. It ensures equitable allocation of funds for the smooth functioning of government operations and supports fiscal decentralization. The Finance Commission is appointed every five years by the President of India.

Constitutional mandate:

1. Article 280: the Constitution of India mandates the establishment of a Finance Commission. It outlines the Commission’s primary responsibility to recommend the distribution of financial resources between the Union and State governments. The article also empowers the Finance Commission to suggest measures to improve the financial health of the states and address issues related to fiscal imbalances.
2. First Finance Commission: The First Finance Commission was constituted in 1951 under the chairmanship of K. C. Neogy. It aimed to define the financial relations between the Centre and the states after the adoption of the Constitution. The Commission’s recommendations helped establish a framework for revenue sharing and resource allocation between the different levels of government in India.

Recent Finance Commissions
Fourteenth Finance Commission (14th FC):
Chairman: Dr. Y.V. Reddy
Period: 2015-2020
Key Recommendation: The 14th FC increased the share of states in the central tax pool from 32% to 42%, marking the highest-ever allocation for states.

Fifteenth Finance Commission (2020-2025)
Chairman: N.K. Singh
Key Recommendations:
1. 41% share of central taxes for states.
2. Focus on grants to local bodies (rural and urban).
3. Performance-based grants for fiscal management and governance.
4. Increased allocation for disaster relief.
5. Special grants for Jammu and Kashmir post-Article 370 abrogation.
6. Fiscal deficit limit of 3% for states.

Major Recommendations of the 15th Finance Commission
1. Devolution of Taxes: The 15th FC recommended that 41% of the divisible pool of taxes be given to states, with adjustments based on the criteria of population, income, and fiscal discipline.
2. Grants to Local Bodies: It proposed untied grants to empower rural local bodies and urban local bodies, with a focus on addressing location-specific needs for better governance and service delivery.
3. Performance-based Grants: The Commission introduced performance-based grants to incentivize states for better fiscal management, improved governance, and achieving milestones in sectors like health and education.
4. Disaster Management: The 15th FC suggested a higher allocation for disaster relief, with an emphasis on a more transparent and effective system for managing natural disasters, particularly in states prone to such events.
5. Special Grants for Jammu and Kashmir: Given the unique circumstances of Jammu and Kashmir post-abrogation of Article 370, the 15th FC recommended special grants for the region.

Significance of financial commissions in strengthening fiscal federations:

1. Resource Allocation: Recommends a fair distribution of central tax revenues, ensuring states have sufficient funds for development and governance.
2. Equity and Fairness: Uses criteria like population and income disparity to reduce regional imbalances and support weaker states.
3. Empowering Local Bodies: Allocates grants for local governments (panchayats and municipalities), strengthening decentralized governance.
4. Fiscal Discipline: Sets guidelines on fiscal deficits and borrowing, promoting responsible financial management by states.
5. Disaster Management: Ensures financial preparedness for states to handle natural disasters and unforeseen events.
6. Incentivizing Good Governance: Awards performance-based grants to states demonstrating improved fiscal management and governance.
7. Financial Autonomy: Increases states’ financial independence, reducing reliance on central funding.

Reason for the ineffectiveness of the finance commission:

1. Political Interference: Political pressures often influence the Finance Commission’s recommendations, especially when the Centre and states are governed by different parties. This can lead to biased recommendations or delays in the implementation of key suggestions.
2. Limited Implementation Power: While the Finance Commission can recommend resource allocations, it lacks enforcement power. Its recommendations are not binding on the government, and their actual implementation depends on political will and administrative capacity.
3. Inconsistent Fiscal Discipline: Many states struggle to adhere to the fiscal discipline guidelines set by the Commission. Despite recommendations on managing fiscal deficits and public debt, many states continue to overspend or fail to improve revenue generation, leading to fiscal imbalances.
4. Lack of Flexibility: The Finance Commission’s framework is often rigid, based on specific criteria such as population and income disparities, which may not fully capture emerging fiscal challenges or the dynamic needs of states.
5. Unequal Resource Distribution: Despite efforts to reduce disparities, resource allocation between states remains unequal. Poorer states may still receive insufficient funds to bridge the development gap, especially when revenue generation and local capacity are weak.
6. Implementation Gaps at Local Levels: The devolution of funds to local bodies (panchayats, municipalities) often faces challenges such as inefficiency, lack of capacity, and corruption at the grassroots level, undermining the intended benefits of financial devolution.

Suggestion/recommendation to improve the effectiveness of the finance commission:

1. Stable and Predictable Resource Allocation: Establish a more consistent and long-term formula for resource allocation to reduce uncertainty and provide states with a clearer financial roadmap. This can help states plan better and ensure sustainable development.
2. Enhanced Focus on Local Bodies: Increase the share of grants and devolution for local bodies (panchayats and municipalities) to ensure grassroots-level governance is effectively funded. This would help decentralize governance and improve service delivery at the local level.
3. Performance-Based Incentives: Introduce stronger performance-based grants to incentivize states to improve fiscal management, governance, and public service outcomes. This can encourage states to prioritize reforms and optimize public expenditure.
4. Greater Role in Inter-State Disparities: The Finance Commission should place a stronger emphasis on addressing inter-state fiscal disparities by allocating more resources to poorer and underdeveloped states, thereby ensuring a more equitable distribution of wealth and resources.
5. Simplified Tax Devolution Formula: Simplify the tax devolution formula to make it more transparent and based on easily measurable indicators, such as poverty levels, demographic characteristics, and fiscal performance. This will make the process more accountable and understandable.
6. Support for Fiscal Reforms: The Finance Commission should actively promote fiscal reforms at the state level, including encouraging states to adopt GST (Goods and Services Tax) reforms, implement taxation efficiency measures, and improve tax compliance.
7. Increased Financial Autonomy for States: Empower states with greater financial autonomy by reducing their reliance on Centre-controlled grants and encouraging them to generate their own revenue through tax reforms and better management of state resources.

Conclusion:

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Ritik singh

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