Finance Commission breaks status quo of poor municipal fiscal governance

The final report of the 15th Finance Commission for the five year period 2021-22 to 2025-26 was tabled in Parliament on Monday (February 1) along with Union Budget 2021-22.

The Centre also tabled an explanatory memorandum on its responses to the recommendations of the commission. Of special significance is its acceptance of the recommendations of the panel with respect to municipalities. Besides an overall outlay of approximately ₹1,55,000 crore for municipalities, the 15th FC has more importantly broken the status quo of poor fiscal governance in our municipalities in at least three specific ways.

Firstly, it has distinguished between million-plus urban agglomerations (UAs, as per Census 2011) and other cities, thus mainstreaming metropolitan governance arguably for the first time since the 74th constitution amendment in 1992. By making 100 per cent of grants for these UAs outcome-based, it has recognised that these cities should be held accountable for the quality of life outcomes (air quality, water and sanitation) and therefore be incentivised significantly (with an outlay of ₹38,000 crore) for the same. At the same time, given they are economic powerhouses or at least have the potential to be one, the FC has refrained from any untied grants.

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Secondly, the FC has brought in a concept of entry conditions or basic conditions for any municipality to be eligible for grants. It has laid out two such conditions, namely, the online publication of audited and unaudited annual accounts (by May 15 each fiscal), and notifying floor rates for property tax and showing an increase in collections each year in line with the State’s Gross State Domestic Product (GSDP). The first entry condition ensures financial accountability and the second strengthens property tax base of municipalities, thereby their potential to raise its own revenues.  For the first time, such reform measures are not being tied to relatively modest performance grants, but being acknowledged as fundamental building blocks of fiscal governance. The FC has however been reasonable in providing a reasonable preparatory window of two years.

Thirdly, the FC has shown courage in calling out state governments for their neglect of state Finance Commissions and prescribed a deadline of March 2024. Essentially, states would not be eligible for grants if they do not constitute State Finance Commissions, and table action-taken reports on their recommendations in state legislatures by March 2024.  Local governance is a state subject as per the Indian constitution.  Therefore, states need to discharge their fair share of responsibility with respect to providing municipalities with predictable fiscal transfers. State Finance Commissions were envisaged in the 74th CAA as counterparts to the Central Finance Commissions, but state governments did not invest adequately in nurturing them as credible and independent institutions. Therefore, if states respond with maturity and openness to this recommendation, that would be a watershed moment in fiscal decentralisation in India.

The total amount of allocation of ₹155,000 crores and the share of municipalities of 35 per cent are lesser than what the interim report had indicated.  However one cannot blame the FC, given the unprecedented and tough conditions under which it had to submit its final report.  There could also be a criticism that the percentage of untied grants to sub-million municipalities is quite low at 40 per cent, and the FC should not have tied 60 per cent of the grants to water and sanitation. It is true that municipalities were envisaged to be local self-governments under the 74th CAA and therefore need to be given untied grants as a matter of right. The only silver lining may be that most of them would, in any case, need to invest significantly in drinking water supply, rainwater harvesting, water recycling, solid waste management, faecal sludge management and other wastewater treatment given their own current state of infrastructure and service delivery.

One would hope that the broad range of these sectors that give adequate elbow room to municipalities and the Ministry of Housing and Urban Affairs would interpret the same generously. Further, municipalities may be able to use these tied grants synergistically along with grants they may receive under Jal Jeevan Mission and Swachh Bharat Mission 2.0 which have been announced in Union Budget 2021-22.

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The 15th FC has definitively pushed the envelope with respect to financial accountability of municipalities and struck a balance between large cities and relatively smaller ones in terms of design of incentives. Overall this is hugely positive for municipalities, cities and us.

(The author is the CEO, Janaagraha Centre for Citizenship and Democracy)

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not reflect the views of The Federal.)