Agenda for the 16th Finance Commission

July 3, 2024

According to Article 280 of the Indian Constitution, the 16th Finance Commission (FC) of India has started its work. This is to make sure that the combined fund is shared fairly among all levels of government, including local bodies. New changes, mostly the 73rd and 74th, have raised the standing of local governments within the federal system and told the Commission to look into ways to give panchayats and municipalities more money.

Significance of Cities in the Indian Economy

India’s cities are important economic hubs; they bring in about 66% of the country’s GDP and 90% of its government income. This important addition shows that cities are important places for national growth. Despite this, cities face big problems, such as not getting enough money from higher levels of government, which makes it harder for them to build new infrastructure and grow existing ones.

Challenges in Fiscal Devolution to Urban Local Bodies (ULBs)

It is about 0.5% of GDP that the state and national governments give to Urban Local Bodies (ULBs). This is a lot less than what other developing countries get. This is called intergovernmental transfers (IGTs). This lack of help has made municipalities’ finances worse, which has a negative impact on the productivity and living standards of cities. Moreover, the introduction of the Goods and Service Tax (GST) has greatly decreased the sources of income for ULBs, leaving them more reliant on the unpredictable IGTs.

Parallel Agencies and Fiscal Distortion

Local governments have lost more and more control over their jobs and finances, even though changes to the constitution were meant to give them more power. These overlapping duties make it harder for local governments to do their jobs well and keep their finances in order. Also, programs like the Member of Parliament Local Area Development Scheme make things even more complicated when it comes to money by changing the way planned fiscal devolutions and jobs work.

The Imperative of Updated Census Data

Putting in place evidence-based economic policies and devolutions is harder to do when the 2021 Census is delayed. Using 2011 statistics as a starting point doesn’t fully show the big changes in population and urbanization, especially the growth of existing cities and the appearance of many new ones. The 16th Finance Commission needs accurate, up-to-date data to make smart choices about how to spend money.

Recommendations for the 16th Finance Commission

To improve the financial health and facilities of cities, the 16th Finance Commission needs to work on several important issues. These include pushing for a big rise in the share of GDP that goes to IGTs for ULBs, changing property tax rules to match what the state GST says should be done, and making sure there is enough money for basic services like water, sewers, and trash collection. India’s cities will need to deal with these problems if they want to keep growing as economic engines.

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