The Fifteenth Finance Commission of India could fundamentally transform the financial governance of India’s municipalities, if its interim report is anything to go by. Finance Commissions generally submit their reports for a five-year duration.
Now, the final report for FY 2021-22 to FY 2025-26 is expected to be tabled along with the forthcoming Budget 2021-22. The Interim report for 2020-21 talks about raising the standards of financial governance of India’s municipalities in four specific ways.
The Finance Commission is an independent constitutional body set up for a period of five years. It assesses the fiscal position and needs of each state, and recommends the formula for sharing the divisible pool of (central) tax revenues between the Centre, states, and local self-government bodies (for example municipalities for cities and gram sabhas for villages).
The 15th FC’s interim report for 2020-21 has recommended a higher share of the total divisible tax pool for local bodies, from 3.54% in 2019-20 to 4.31% in 2020-21, and for cities specifically it has recommended that the share for urban versus rural should gradually increase to 40% (from 30%) over the medium term, recognising key urbanisation trends and challenges.
For 2020-21, the overall grant allocation for local bodies was Rs 90,000 crore, of which the FC recommended cities get 32.5%, which total Rs 29,250 crore.
With India urbanising so rapidly, and urban (city) population expected to grow from about 400 million currently to over 600 million by 2030 and over 800 million by 2050, there are urgent demands for developing and upgrading urban infrastructure services such as roads, sewerage, street lights, waste management & treatment facilities and water bodies, among others.
The overall investment required for the same for 2011-2031 is estimated at Rs 39.2 lakh crore. However, ULBs that bear a large percentage of this expenditure obligation currently do not generate sufficient own revenues—such as property tax and user charges—to finance this expenditure, even after considering fiscal transfers and various forms of assistance from central and state governments.
Greater fund allocations from the 15th FC, therefore, become very important as they will have significant fiscal impact on city finances, especially for India’s smaller cities, where a substantial portion of ULBs’ receipts (in some cases as high as 90%) still comes from grants.
Besides increased fund allocation to cities (ULBs), the 15th FC is also paving the way for bold, data-driven governance reforms for India’s municipalities, foremost of which are the two entry conditions for every municipality to be able to access the 15th FC grants.
Taken together, these two basic yet crucial reform conditions could lay a strong foundation for both own revenue enhancement of municipalities as well as their financial accountability.
They will also likely drive more informed policy-making and improved relationship (for municipalities) with key external stakeholders including multilateral financial institutions, credit rating agencies and large infrastructure investors (especially for future fund raising including municipal bond issuances).
The 15th Finance Commission has approached the Ministry of Finance on the performance model for municipal corporations for setting up a sound financial footing in covering their operational expenses at an affordable level. The commission in its interim report has suggested the following changes to bring reforms to the financial governance of India’s municipalities.
