Strengthening Decentralisation - Augmenting The Consolidated Fund of The States By The Thirteenth Finance Commission: A Normative Approach
- Abhay Pethe, B.M. Mishra, Rakhe P.B.
- Dec 2019
- Department of Economic Analysis and Policy, Reserve Bank of India (RBI)
- India
One of the terms of reference of the Thirteenth Finance Commission (ThFC) calls upon the Finance Commission to look at ‘Measures needed to augment the consolidated fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State’. In view of this, the present study examines issues related to fiscal federalism at the third tier in general and grants to local bodies in particular. It is well documented in the literature that the state of finances of local bodies, both urban and rural, displays a dismal picture in India. In contrast, the finances of the Central and State Governments are on a healthier track with the implementation of the rule-based fiscal policy framework. The study opines that there is a need to fine tune the micro design of grants for local bodies (both urban and local) and their devolution across the States.
The process of devolving funds to the local bodies based on the recommendations of the State Finance Commissions (SFCs) is not working efficiently in India. The issues in this area range from timing of setting up of SFCs to attitude of the State Governments to the recommendations of the SFCs. In this context, the study urges the ThFC to provide a uniform template for the SFCs along with a time line to make progress in the area. This would help the successive Finance Commissions to use the SFC reports as inputs for their recommendations.
The study presents a normative framework to estimate the requirements of operation and maintenance (O&M) expenditure at the local body level based on three important public services i.e. water, education and roads. The study estimates a quantum jump in the local body grants from Rs.25,000 crore given by the Twelfth Finance Commission to Rs.94,451 crore during the award period of the ThFC. This would mean roughly 0.3 per cent of GDP per year. The study provides devolution formulae for distributing this amount among the States. The aspects considered while designing the formula are: share in O&M expenditure, fiscal capacity of the State Governments, population pressure on assets and inverse of asset density.
