The role of the State Finance Commissions between States and local bodies is supposed to mimic the role of Finance Commissions between the Centre and the States. But, in fact, the treatment to SFCs by the States — including in Maharashtra — is farcical.
Cities, as the engines of growth, are critical for the development of India. And given that growth is a pre-requisite for our developmental outcomes, it follows that our cities need to be well managed. This has to be done considering the primary functions of cities viz. liveability and livelihood creation. The first entails that citizens be provided with adequate and quality local public goods and services, and the second entails the power and capacity to create an ambience for attracting investments that would then generate employment, and hence, livelihoods. Legislative rights apart, cities require resources to do all this and herein lies the rub: Indian Local Public Finance is missing!
Normally, the world over, the size of the local governments taken together is to the tune of around six percent of the national GDP. In case of India, it is less than one percent. Apart from the lethargy of the local governments to tax, this is due to two things. The bands and rates of taxes and charges to be levied are fixed by the State governments (not that they are exploited to the hilt) and second that most taxes that would be theoretically assigned as local are usurped by State government. Indeed, post GST, almost all of these anyway are subsumed under it. This includes the bad but buoyant tax like the Octroi which use to provide almost 45 percent of the total tax revenues for the Municipal Corporation of Greater Mumbai. Further, the new-found interest in exploiting the land based fiscal tools are of no direct or full benefit to the local governments because constitutionally, land is a State subject. All this means that even with reforms in tax and non-tax regimes in place, cities are never likely to be surplus entities given our tax design. Higher level governments must therefore devolve funds to the local bodies to fund their mandate.
Constitutionally, post the 74th Constitutional Amendment, the instrument provided for this purpose is that of State Finance Commissions (SFC). These SFCs are mandated to be set up every five years and they are to present an award/recommendations including the formulaic financial devolution to take care of the vertical and horizontal imbalances that arise between the State and Urban Local Bodies (ULBs), amongst others. The role of the SFCs between States and local bodies is supposed to mimic the role of Finance Commissions (FCs) between Centre and the States. But, in fact, the treatment to SFCs by the States, including in Maharashtra, is farcical to say the least. In Maharashtra, the SFCs are set up regularly but even the action taken report is presented to the legislature just as the period of award is coming to an end. In all of the four SFCs set up in Maharashtra thus far, not a single financial recommendation has been accepted. This, incidentally, is true in most states. This is in sharp contrast to the FCs recommendations that are routinely accepted by the Central Government. It is imperative that SFCs should be deemed to have the same status as the FCs and their awards including financial recommendations should be treated with utmost seriousness. This becomes even more important in the post GST regimen, where almost all the revenue handles have been subsumed under GST.
In this context, the FCs have done better than the SFCs. They have been devolving resources down to the local bodies via the State governments. But, unfortunately, the constitution does not permit them to directly ‘talk’ to the local bodies. They must continue to successively devolve more and more resources to the local bodies (in particular to ULBs) formulaically, since that will impart buoyancy to the fund flow. In all of this, pragmatic self-interest must be recognised so that these fund flows should be seen as investments rather than merely as aid.
Another important way in which the ULBs can be empowered could be by allowing them to come together and form virtual entities which can then take exposure to financial markets through loans and debt route. This implies a modification of the Pooled Fund Banks in the USA. The modification is required because the US model leads to cherry picking of the strongest local bodies, whereas our development mandate requires us to be inclusive, taking all the ULBs along. Such a possibility will allow arbitrage and scale-benefit to be reaped. Of course, it will also require some legal hurdles to be removed as well as for the local bodies to embrace best practices/reforms in setting taxes and non-tax charges, so as to render their balance sheets healthy and hence get good ratings.
Yet another effort has to do with capacity building of the ULBs to enter into PPP contracts. This is especially required for the medium and smaller local bodies. The extant organisations like YASHADA or even state Universities could be leveraged for this purpose, but really speaking, a new organisation needs to be set up for overall training and capacity building in this and other regards if the cities have to be truly empowered so that they can deliver matching expectations.
Finally, there is a talk of land-based fiscal tools (LBFTs) as a major instrument for leveraging funds for city-level infrastructure development. Implementation of this requires several pre-requisites (all doable) and importantly, capacity building of local bodies. The really major issue here is that constitutionally, Land is a State subject. So, the resources raised through these measures (at least a large portion of it) have to be ring-fenced by the State for devolving them to the local bodies. Again, the State needs to show a statesmanlike attitude in doing this. We would not be off the mark in legitimately expecting this of, at least, the progressive and aspirational urban States like Maharashtra.
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Mary Martin Director UN Business and Human Security Initiative LSE IDEASRead More +