New Delhi: The recommendations of the 13th Finance Commission redefine the existing structure of fiscal federalism in the country, setting the stage for a different political dynamism by vesting greater powers with the third tier of government: the local bodies, both urban and rural.
The commission has recommended that local self-government bodies be given a direct share in Union tax revenues, bypassing the state governments, and that the cut for urban local bodies be raised in tune with their population growth vis-à-vis rural bodies.
Greater independence: The recommendations will reduce the control that state governments exercise over local government bodies. Pradeep Gaur/Mint
The recommendations, tabled in Parliament on Thursday, will empower local bodies by turning the grants they receive into an entitlement, reduce the control that the state governments exercise over them and have the potential to benefit the political party in power at the national level, an expert said.
In its action-taken report, the Congress-led United Progressive Alliance government said it has accepted most of the recommendations of the commission.
The panel pointed out that inclusive growth requires a “fiscally strong Centre, states as well as third tier (local bodies)”. It suggested raising the states’ share in Union tax revenues from 30.5% to 32%.
It also called for a 2.5% share of the divisible pool for local bodies in the form of grants, as the Constitution does not allow the sharing of tax revenues with them. While 1.5% will be constant, 1% will be on the basis of performance.
This will weaken the states’ control over local government, said Vinoj Abraham, who teaches at the Thiruvananthapuram-based Centre for Development Studies.
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“It is like bypassing the state, and the Centre will be directly dealing with the local self-governments (LSGs). The LSGs will get their grants on the basis of their performance and their share from the tax revenues and states will not have much powers on them,” he said.
The commission’s recommendations also seek to balance the share of urban bodies in total revenue. While revenue is currently divided between rural and urban bodies in the ratio 4:1, the commission has suggested raising the latter’s share to match their share of the population according to the 2001 census.
This move will also likely give an upper hand to the political party ruling the Centre. Increasing urbanization, emigration from rural areas and the latest delimitation of parliamentary and assembly constituencies have raised the political clout of urban voters. The number of urban Lok Sabha constituencies, for instance, rose from 70 to more than 100 after the completion of the delimitation exercise last year.
With the Delimitation Commission of India, which redrew the country’s electoral map, suggesting that the exercise be undertaken every decade, urban voters may eventually overtake rural voters in electoral significance.
Competition among states due to performance-linked incentives introduced in the report will force state governments to utilize Central funds more effectively. It will also change the arbitrary nature of resource sharing between the Centre and the states, often subject to political equations between the parties in power at the two levels.
The report also lays emphasis on state-specific grants on the basis of fiscal needs, fiscal capacity and the relative cost of providing similar levels of public goods and services.
The commission called for “closely targeted” subsidies, pointing out that Central subsidies on food, fertilizers, petroleum and so on have a regessive impact as the money is not targeted at those who really need it.
It says: “...regressive untargeted subsidies that reduce fiscal space for key growth-promoting public investments and delivery of public goods to enhance inclusiveness are today a fiscal obstacle...”
The recommendation for special grants for border states and those with considerable tribal population or lower per capita income also has the potential to stand the ruling coalition at the Centre in good stead.