Decentralisation and Local Finance Issues-The Work
Decentralisation and Local Finance Issues-The Work
Decentralisation and Local Finance Issues-The Work
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Executive Summary
This study entitled Decentralisation and Local Finance Issues – The Workings of State Finance
Commissions in India, undertaken under the ADB’s Technical Assistance Project Policy Research
Networking to Strengthen Policy Reforms Thematic Cluster: State Government Budget Constraints
and Delivery of Social Services, examines the performance of State Finance Commissions of the
different states and seeks explanations for their differential performance. It also indicates policy
options to improve the functioning of the future State Finance Commissions in addressing local
finance issues and taking forward decentralisation. The highlights of study are given below –
1
Abhijaat, 31, Nirman Park Society, Vishwamitri, Vadodara, Gujarat, 390011, email: ravikant.joshi@gmail.com
2
This report was prepared by consultants for the Asian Development Bank. The views expressed in this report are the views of
the authors and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of
Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and
accepts no responsibility for any consequence of their use.
b. The determination of the taxes, duties, tolls and fees that may be assigned to or
appropriated by the local governments; and
c. The grants-in-aid to local governments from the consolidated fund of the state.
Over and above recommending the principles that should govern state-local fiscal relations,
SFCs are expected to
• Undertake a review of the finances of municipalities;
• Estimate the future financial requirements of municipalities;
• Suggest measures for strengthening the finances of municipalities.
The new fiscal devolution system has simultaneously effected a major change (by inserting
Article 280(3) ©) in the scope of the tasks of the central finance commission. New Article now
requires the central finance commission to suggest measures need to augment the
consolidated fund of a state to supplement the resources of the local governments on the
basis of the recommendations made by the finance commissions of states.
7. In Indian Federal structure SFC created by 73rd and 74th CAA is the only channel to address
issues of state-local fiscal relations. SFCs thus acquire unique place in fiscal decentralisation
and local finance issues and therefore warrant critical examination.
8. This study is devoted to examination of workings of this very State Finance Commission
mechanism and resultant change in state-local fiscal relations in India. In order to assess the
role of SFCs and their contribution, one needs to examine the following issues –
a. The extent to which SFCs followed CAA provisions / mandate.
b. The extent of change in the pre-CAA situation for local bodies.
c. Approaches adopted by SFCs to address issues of state-local fiscal relationship.
d. Issues associated with workings of SFCs.
e. Issues associated with the implementation of SFC recommendations.
3 th
Report of the 12 Finance Commission (2004) page no.147
2
16. Second State Finance Commissions - Out of 25 states4 liable to constitute SFC except six all
states have constituted the SSFCs. Out of constituted Finance Commission’s in three states
have submitted their reports. Thus in nine states either SFC is not constituted or constituted
but have not submitted report. Seven States have since submitted their Action Taken Report
on the SSFCs to the State Legislature. It is interesting to note that Andhra Pradesh, Kerala
and Punjab have appointed the Third State Finance Commission.
17. Thus there is sizeable experience now to undertake review of workings of SFCs in India.
4
Mizoram, Nagaland and Meghalay are not required to constitute SFC as traditional local institution of self government exists in
these Schedule VI States
5
Report of Twelfth Finance Commission Report
3
e. Vertical/Horizontal Distribution among Local Governments: Again, we observe diametrical
opposite perception and recommendations by SFCs. SFCs have tried to form composite
index for distributing resources. The selection of indicators for this purpose is quite
debatable and needs serious consideration.
f. Tied Vs Untied Fund Concept: Except West Bengal and Karnataka SFCs, all the SFCs
under study have recommended fiscal devolutions in the form of Tied Funds.
g. Autonomy, Financial Management and Budgeting Issues: no clear recommendations
appear to have been made as to how and in what manner local government budgeting,
financial management and auditing procedures should be improved, these being
important components in any decentralisation programme.6
h. Confusion while sharing resources between tiers of rural local governments: village
panchayat vs. intermediate panchayats SFCs have taken different views
i. GP received less than 5 % against 25 % allotted in Karnataka
ii. WB allotted highest share to GP – 50 % to 60 %
i. Measuring Current and Future Spending Responsibilities - “the main deficiency of the
reports lies in the fact that their recommendations are not based on a clear statement of
the spending responsibilities of local bodies. Indeed, the absence of attention to the
elementary principle that expenditure assignment must precede any tax or revenue
assignment has turned most of the SFC exercises, a suspect.7
j. Absence of Equalisation Grant Mechanism
k. No attempt to measure non-formulae based devolution and total local expenditure
l. Uniform block grant without linkage to population, size or service responsibility
m. No input on policy of debt financing
n. No attention to performance or efficiency based criteria for fiscal allocation
o. No attention to create fiscal accountability
At policy level, we observe that SFCs have followed different approaches regarding various
aspects mentioned above. While variation in approaches is inevitable taking in to account the
vastly different local situations, its long term implications need to be carefully monitored. The
likely result of variation in approaches will be asymmetrical decentralisation in different states,
which will occur at different paces and through different routes.
The message coming out from the case studies about SFCs is that SFCs are constrained by
various factors and, as a result, SFCs have failed to address issues of local finance and to
carry forward decentralisation.
6
Richard Bird. 1998 – Designing State – Local Fiscal Transfers for Uttar Pradesh - mimeo
7
O.P. Mathur - June 2000 – Decentralisation In India: A Report Card – UMP-Asia Occasional Paper No. 47
4
state governments to implement the recommendations of SFCs also needs to be addressed.
The specific policy options in the context of various issues observed earlier are as follows:
21. Recommendations that can be implemented in the short-term - Following are some
recommendations that can be implemented within a time-frame of 1-2 years.
a. Creating a SFC Secretariat/Permanent Administrative Set up for Ensuring Continuity:
while some of the states have implemented this recommendation of setting up a
permanent SFC cell in the state government, many others are yet to implement the
recommendation. It is suggested that all the states constitute permanent administrative
units in state governments to deal with SFC matters, in line with the recommendations of
the 12th Finance Commission
b. Synchronisation of SFCs with the Central Finance Commission and Five Year Plans: It is
necessary to draw up a detailed calendar regarding various events and stages associated
with the SFC and this calendar should be followed meticulously to overcome problems of
non-synchronisation of the award periods of SFCs with those of the CFCs and five year
plans.
c. Enhancing the Impact of SFC Recommendations on the Finances of Local Bodies: Two
things, first acceptance and implementation of SFC recommendations in their entirety and
second, improvement in the fiscal health of the state, which will make enough resources
available so that it can devolve more resources to the local bodies, are essential and
must be ensured.
d. Quantum of Revenue Sharing: The policy decision is to decide the extent to which fiscal
gap is to be financed through revenue sharing. Most of the SFCs at present follow a
system of estimating gross financial requirements of local bodies based on past trends
and deciding on the percentage in the divisible pool. It is necessary that in the future
SFCs should increasingly adopt the normative approach to calculate the fiscal gap while
basing their recommendations on the quantum of revenue sharing. Along with their
recommendations, SFCs should provide fiscal accountability norms for local bodies.
e. Improving composition of SFCs: 12th CFC has made specific recommendation regarding
this issue –“It is necessary that the states constitute SFCs with people of eminence and
competence, instead of viewing formation of SFCs as a mere constitutional formality.
(Para 8.33, 12th CFC) In the matter of composition of SFCs, state may well be advised to
follow central legislations and rules which prescribe the qualifications for the chairpersons
and members and frame similar rules.”
22. Recommendations that can be implemented in the medium-term - Following are some
recommendations that can be implemented within a time-frame of 2-3 years.
a. Revenue / Tax Assignments - There is a clear trend in the recommendations of the SFCs
favouring revenue sharing and grants-in-aid rather than tax assignments. This is a soft
approach and certainly not a healthy trend. Tax assignments should be given adequate
importance in the context of two realities one, deteriorating fiscal health of state finances
and two, tax assignments being a better instrument of decentralisation.
b. Principles of Revenue Sharing - It is necessary that there is broad uniformity about the
principles of revenue sharing adopted by the SFCs. It can be said that in future SFCs
should adopt as a uniform pattern the concept of global sharing to form the divisible pool
on the basis of NLGORR (Karnataka model) coupled with 5 to 10 percent share in central
devolution to the State (Tamil Nadu model).
c. Resources sharing between urban-rural local bodies and between tiers of local bodies -
Various SFCs have different methods for arriving at the share of urban and rural local
bodies’ in the divisible pool. It is difficult to suggest policy options or definite answers
regarding the ideal set of indices. Specific research is required on the merits and demerits
associated with using these and other indicators for inter-se distribution of resources.
d. System of performance based incentive grants
e. Equalisation concept to correct distortions in horizontal resource sharing
5
state finance commissions consider capping the extent of non-formula based grants to
local bodies
c. Fiscal responsibility norms and index of self reliance for local bodies
d. Hard budgetary constraints on local bodies
e. Improving own fiscal health by state governments
f. Separate inter-governmental transfer system for urban and rural local governments
Centralised
Data base
Permanent Statutory
Administrative Mechanism
Set up for SFC to monitor
Implementation
Making SFC of SFCs
Mechanism
Focal Point of
Fiscal
Decentralisation
Synchronisation
Creating convention of SFCs with CFC
Of accepting SFC and five year plans
Recommendations,
Public opinion Professional,
building independent
approach by
SFCs
Summing Up
24. State Finance Commission, a new mechanism to structure the fiscal devolution framework
and state-local fiscal relations has by and large turned out to be inadequate and ineffective
due to various reasons including policy, implementation and general administrative issues.
Though we find flashes of creativity and policy innovations, most of the SFC reports have
turned out to be unsatisfactory and have failed to live up to their constitutional role.
25. At the same time it can also be said that the reports of the Second SFCs show that the new
system of fiscal arrangement envisaged by Constitutional Amendments more than a decade
ago is coming of age in spite of a host of infancy blues and if the third generation SFCs of the
other states which are being set up or would be set up in the near future improve upon the
pragmatism and professionalism shown by the SSFCs while effectively dealing with policy
weaknesses reviewed in this paper.
26. The 11th and 12th Central Finance Commissions have elaborately noted the weaknesses in
the working of SFCs and their reports. Though SFC reports were short on policy aspects the
real reason for the failure of the SFC mechanism in terms of bringing about a paradigm shift
in the state-local fiscal relationship was a weakness in implementation. States were never
ready for such a mechanism (it was thrust upon them through constitutional amendments) to
determine the sharing of resources with local governments. As a result, states have shown
gross apathy in setting up SFCs, accepting their reports and in implementing their
recommendations. It is now high time for all states to come together, with the central
government in the lead, to pay attention to the institution of SFC and to evolve a national
consensus regarding the role, working, composition of the SFC and regarding the moral
commitment of state governments to implement the recommendations of SFCs. If these
measures are not taken urgently, there is a danger of jeopardizing the entire fiscal devolution
mechanism.
6
Framework for making State Finance Commission Mechanism Meaningful and Effective in addressing
Decentralization and Local Finance Issues
Policy Aspects (To be observed by the State Finance Commissions while structuring devolution
mechanism)
• Separate Inter-governmental transfer system for Urban and Rural Local Governments
o Urban and Rural Local Governments have different resource bases, expenditure
responsibilities and governing capabilities and therefore need separate inter-
governmental transfer systems.
• Revenue vs. Tax Assignments
o Due importance, if not more, should be given to instrument of Tax Assignments by
SFC while drafting fiscal devolution system
o But success of Tax Assignments as an instrument of decentralization depends on
maturity of local government institutions.
o Appropriate capacity and opinion building strategy should be formulated by SFC and
State commensurate to tax assignments initiatives
• Principles of Resource Sharing between State and Local Governments
o There is need to evolve uniformity in principles of Resource sharing between State
and Local Governments.
o Variation in approaches will lead to asymmetrical decentralisation in different states
which will occur at different paces and via different routes
o Concept of global sharing should form foundation for resources sharing between
State and Local Governments
o Sharing of State Resource with Local Governments on the basis of ‘Non Loan Gross
Own Revenue Receipts’ will provide broad and buoyant base.
o States should also share certain percentages of Central devolution with local
governments to make resource sharing comprehensive.
• Principles for Determining Quantum of Resource Sharing
o Quantum should be determined by normative approach as follows –
Identification of the core/ essential services,
Establishing standards/ norms for the provision of services,
7
Calculating gaps between actual service provision and needs (service gap)
and then
Estimating the costs to fill service gap to find out fiscal gap.
o Deciding extent to which fiscal gap to be financed through revenue sharing.
o Linking it with local resource mobilisation and fiscal accountability norms to be
attained by local governments
• Principles for Resource Sharing between Rural and Urban Local Governments or amongst
the different tiers of Local Governments –
o Composite index/formula made of different types of indicators (demographic,
economic, social etc) should be adopted in place of single criteria like population or
area
o It is difficult to suggest ideal set of indices, as their selection will depend on specific
context and situation prevailing in the State.
o Still there are indices which must form part of any such composite formulae for
sharing of resources amongst different types of Local Governments –
Population
Area
Per Capita Income or People living below poverty line
People living in Slums
Literacy Rate
• Principles for Incentive Grants
o Incentive grants should be sizeable, motivating and performance linked
o Performance Covenants to be identified after careful assessment of weaknesses of
Local Governments in question
• Principles for Equalisation Grants
o Local Governments differ in their economic base and in terms of constraints. Certain
Local Governments suffer from weak economic base or other constraints.
o Above framework, though comprehensive, can not take care of such local
governments.
o Appropriate framework of equalisation grants to uplift such weaker local governments
8
Decentralisation and Local Finance Issues –
The Workings of State Finance Commissions in India
Preamble
….just as it is wrong to withdraw from the individual and to commit to the community at
large what private enterprise can accomplish, so it is like-wise unjust and a grave
disturbance of right order to turn over to a greater society of higher rank functions and
services which can be performed by lesser bodies on a lower plane. This is a
fundamental principle of social philosophy, unshaken and unchangeable.8
Introduction
Decentralization in recent decades has become truly world wide movement. Rabinovitch (1999) noted
that more than 60 countries have adopted decentralisation initiatives and are in process of
strengthening it. Of the 75 developing countries with populations greater than 5 million, all but 12
claimed to have embarked on some form of transfer of fiscal authority from central and provincial to
local governments. This transfer of power has been occurring even in inherently centralized
countries. The World Development Report on ‘Entering the 21st Century’ notes that localization – the
desire for self-determination and the devolution of power is the main force “shaping the world in which
development will be defined and implemented” in the first decade of this century.9 For similar
initiatives in developing countries, see Annexure I
Across the world, decentralisation is pursued for different reasons and in order to attain different
objectives. According to Robert Ebel, the western world sees decentralisation as a means to provide
public services in a more cost-effective way. Developing countries are pursing decentralisation
reforms to counter economic inefficiencies, macroeconomic instability and ineffective governance.
Post communist transition countries are embracing decentralisation as natural step in the shift to
market economies and democracy. African states view decentralisation as a path to bridge the social
divide and bring about economic justice and equity.
Thus, the nature of these decentralisation policies varies tremendously – from incremental changes in
protocols of intergovernmental relations on the one hand to major constitutional amendments or even
new constitutional forms on the other. Three large countries –Brazil (1988), India (1992) and South
Africa (1996) gave new constitutional powers to local governments during 1990s.
In India, an important constitutional amendment (73rd and 74th ) in 1992 (see Annexures II & III)
provided and illustrative list of functions that are henceforth considered appropriate for local
government; among these functions are planning for economic and social development, urban
poverty alleviation, and even urban forestry. The amendment also limited the degree to which state
governments are able to suspend democratic local government, and finally and most importantly
provided for a revision of state-local fiscal relations at regular interval through mechanism of State
Finance Commission. This paper is devoted to examination of workings of this very State Finance
Commission mechanism and resultant change in state-local fiscal relations in India.
rd th
The Constitutional 73 and 74 Amendment Act, 1992, essentially contains provisions to address
three issues –
i. The constitution, composition and the structure of the panchayats and municipalities;
ii. Institutional arrangements for planning of economic and social development, and
iii. The functional and fiscal powers of the panchayats and municipalities.
8
Pius XI. Quadragesimo Anno 1931. pp203
9
William Dillinger 1994. Decentralization and its Implications for Urban Service Delivery. The World Bank, Washington, D. C.
9
Constitution and composition of the Panchayats and Municipalities
Similarly, there are three types of municipalities namely Nagar Panchayats, Municipal Councils and
Municipal Corporations, which are classified depending on factors such as population, functions,
economic base and like.
The Constitution now also contains a specific provision for the representation of women and other
disadvantaged groups in order to impart greater participation of those sections of local communities,
which have been outside the mainstream of development.
Thus, the Constitutional Amendments have put an end to the state government’s discretion in
constituting or not constituting local bodies or in deciding their structure or composition. However,
deviations from the provisions of the Eleventh Schedule of the Constitution have been noticed.
The state governments, out of the powers and responsibilities enumerated in the seventh schedule,
have assigned certain functions and duties to the panchayats and municipalities which historically
have consisted of public health, sanitation and communications, i.e., roads, bridges etc. not specified
in list, I, subject to the provisions of Entry 56 of list I, markets and fairs, libraries, museums and other
similar institutions, and burial and cremation grounds. The main services with which the local bodies
(panchayats and municipalities) are associated and which are generally, though not uniformly,
performed by them, are water supply, sewerage and drainage, conservancy and sanitation, street
lighting, and local roads. In addition, the panchayats and municipalities are vested with a large
number of regulatory functions.
The Constitution 73rd and 74th Amendment Acts, 1992, while laying down the procedures for the
constitution of panchayats and municipalities and providing safeguards against their arbitrary
suspension or dissolution, has not changed the structure of fiscal federalism in the county. The
legislature of a state continues to enjoy absolute powers to endow the municipalities with such
authority, as it considers necessary to enable them to function as institutions of self-government’. This
arrangement implies concurrency of functions between state’s panchayats and the state’s
municipalities. It implies that the municipalities do not possess what referred to as general
competency powers are permitting them to take actions not explicitly prohibited or assigned
elsewhere; they possess the legally delegated powers and functions, under the doctrine of ultra vires
(Dillon’s Rule) that limit local choice and diversity. They are to take nothing from the general
sovereignty except what is expressly granted.10 The functional domain of municipalities has also
witnessed periodic shifts and changes, because of the withdrawal of functions from municipalities or
10
The rule known as the Dillon’s rule was not accepted by all the judges. However, the Supreme Court of the US upheld it and
opined that the relationship between state and local government was not contractual in nature (thereby implying equality) but
was one of a superior (the creator) and the inferior (the created). For further discussion, see Advisory Commission on
Intergovernmental Relations. State and Local Roles in the Federal System. Washington D.C. 1982.
10
entrusting them with such responsibilities as poverty alleviation. These features have a direct impact
on the volume and structure of municipal finances.
The state governments determine the fiscal options of municipal governments. The state laws specify
the taxes that the municipalities can levy and collect. Like in the case of functional responsibilities, the
state governments, out of the tax powers listed in the seventh schedule, devolve certain tax powers to
municipalities, which typically have included taxes on lands and buildings, taxes on the entry of goods
into a local area for consumption, use or sale therein; taxes on animals and boats; tolls; taxes on
professions, trades, callings, and employments; and taxes on entertainment. Significant inter-state
variations are witnessed here. Taxes on the entry of goods, which are among the most buoyant and
elastic of the local taxes, are currently levied in Gujarat, Maharashtra, Manipur, Orissa, and Punjab.
The inclusion or exclusion of this tax has an overwhelmingly large impact on the revenue base of
municipalities. Similarly, there are inter-state differences in respect of taxes on entertainment, and
taxes on professions, trades, callings, and employment. These tax objects are less mobile, not easily
exportable, and thus fit into the model that says that the choice of tax instruments should conform to
the rule that each jurisdiction pays for its own benefits.
In its totality, municipalities in India would seem to fall into three groups, with each group presenting a
different order of financial requirements-
iv. Those which have a comparatively large functional and an equally large fiscal domain.
Gujarat and Maharashtra are examples of this typology;
v. Those, which have a larger fiscal domain but a narrow functional jurisdiction. Rajasthan and
Manipur are typical examples of this group; and
vi. Those that have a comparatively larger functional jurisdiction, but a narrower fiscal base.
The state-municipal fiscal relations are complex, with state laws limiting the autonomy of municipal
government in laying down local tax policies, including policies relating to the choice of tax rates or
determining who to include or exclude from payment of taxes. States stipulate the purposes for which
funds may be spent, fix salaries, and impose limits on the amount of debt, the purpose for which debt
may be incurred, procedures for repayment and the like. Absence of autonomy in matters relating to
tax rate fixation, or a low discretion coefficient as it is often referred to, is one of the most serious
handicaps of municipal governments in managing their finances and spending responsibilities. In
many ways, it has meant increasing dependence of municipalities on the state governments.11
The Constitution (seventy third and seventy fourth) Amendment Act, 199212 and Article 280 (3) (c)
have altered the erstwhile fiscal devolution system and framework between the states and
municipalities. Under the new fiscal devolution system/framework every state government is required
to constitute, once in five years, a finance commission and entrust it with the task of reviewing the
financial position of local governments and making recommendations as to the principles that should
govern –
• The distribution between the state and the local governments of the net proceeds of the
taxes, duties, tolls and fees leviable by the state;
• The determination of the taxes, duties, tolls and fees that may be assigned to or appropriated
by the local governments; and
• The grants-in-aid to local governments from the consolidated fund of the state.
The constitutional amendments have placed crucial responsibilities on the new institution of the
finance commission of states. Over and above recommending the principles that should govern state-
local fiscal relations, SFCs are expected to
The new fiscal devolution system has simultaneously effected a major change in the scope of the
tasks of the central finance commission which until the insertion of Article 280(3) © (See Annexure VI)
11
State limits on local revenue raising authority are neither new nor only a feature of India’s federal structure. In the USA,
property tax rate limits began in the last century, originating in Rhode Island in 1870.
12
Please see Annexure 1 and 2.
11
was confined to the distribution of divisible taxes between the Union and the States and of grants-in-
aid to states under Article 275 of the Constitution. The new fiscal devolution system/framework now
requires the central finance commission to suggest measures need to augment the consolidated fund
of a state to supplement the resources of the local governments on the basis of the recommendations
made by the finance commissions of states.
Before looking at the macro picture of local finance in India, an attempt is made to present
dependency of local governments on higher governments emerging from the SFC reports taken for
case study.
The share of grants/devolutions in the total revenue of city corporations on an average was 39.11
percent in the year 2000-01, that is, municipal corporations were dependent on state devolution to the
extent of 60.0 per cent; but there were wide variations in dependency among various municipal
corporations. Mangalore Municipal Corporation generated almost 89 % of its total revenue from
internal sources that is it was dependent to the extent of 11 per cent on grants and devolutions from
the state government, while Belgaum Municipal Corporation generated only 30.54 per cent of its
revenue internally and Gulbarga Municipal Corporation generated 38 per cent of its revenue
internally. Bangalore Municipal Corporation, the biggest in Karnataka, generated 66 per cent of its
total revenue by internal sources and thus depended on state devolutions to the extent of 34 per cent.
(Para 4.11and 4.12 of SSFC Karnataka)
There are 41 municipalities in Karnataka. In case of municipalities, grants and devolutions constituted
63.10 per cent of revenue in 2000-01. Thus, municipalities generated only 36.90 per cent of total
revenue from internal sources. Yelhanka municipality reported the highest dependency (93.58 %) on
revenue coming from grants and devolutions and next in order was Byataranapura municipality with
82.88 per cent dependency on grant-in-aid from the state government. At the other extreme was the
Channapatna municipality, which generated 92.66 per cent revenue internally, and grants constituted
only 7.34 per cent of its total revenue. (Para 4.31 of SSFC-Karnataka)
There are 82 Town Municipal Councils in Karnataka. The dependence of the town municipal councils
on grants / devolutions in 2000-01 was on an average 47.43 per cent. Chitaguppa TMC was
dependent on grants and devolutions to the extent of 91.18 per cent. At the other extreme was
Gundlpet TMC, which generated 97.27 per cent of its revenue from internal or own sources and thus
was dependent on grants and devolution by just 2.73 per cent. (Para 4.49 of SSFC Karnataka)
There are 93 Town Panchayats or Municipal Councils in Karnataka. In case of town panchayats,
grants and devolutions constituted 49.37 per cent of their total revenue in 2000-01. The highest
12
dependent town panchayat was Gudibande, which depended on grants to the tune of 92.61 per cent
while least dependent town panchayat was Bankapura, which generated 93.88 per cent of its revenue
from own sources. (Para 4.61 of SSFC-Karnataka)
During the second SFC’s (SSFC’s) award period (2002-2007), the situation is not expected to change
much. As estimated by SSFC the own revenue of all local bodies put together will fall short by 60 per
cent in comparison to their revenue requirements. Thus it appears that SSFC projections indicate
increased dependency but it is not so. This increase in dependency projections is on account of
calculating revenue and expenditure needs the SSFC has included additional O & M, debt servicing
and non-debt servicing liabilities which were not accounted for and paid by local bodies earlier. The
brake up of the revenue requirements of various categories shows that district panchayats will
continue to depend 100 per cent on state government funds while village panchayats will be able to
improve marginally by reducing their dependence to 76 per cent from 80 per cent. There will not be
much change in the dependency of town panchayats but the dependency of municipalities and
municipal corporations is expected to increase substantially in the projected period. Table A above
and Annexure VII provides detailed data about the finances of local bodies in Tamil Nadu and their
dependence on state government funds.
SSFC stated as follows : ‘During our visit to the districts, we observed that essential maintenance
work has been neglected in almost all the ULBs, and no ULB was capable of taking any new
development activities on their own’. (Para 3.23 Karnataka SSFC)
13
Table B
Finances of Municipalities of West Bengal
Rs. In Lacs
Year Tax Revenue Non-tax Total Own Own Grants Total
revenue Income income as Received
% of total
income
1993-94 2568.75 1121.16 3689.91 27.44 9753.13 13443.04
1994-95 2800.95 1159.61 3960.56 24.02 12523.24 16483.80
1995-96 3004.93 1828.06 4832.99 26.33 13313.59 18146.58
1996-97 5555.71 3215.97 8771.68 33.55 17368.19 26139.87
1997-98 6823.28 3433.67 10256.95 33.68 18490.09 28747.04
Source – Second State Finance Commission of West Bengal
Regarding Panchayats (rural local bodies), SSFC has noted that, ‘Data regarding resources of the
different tiers of the Panchayats were not available at the State level. In view of this, we circulated a
questionnaire to all the Panchayats. Responses to this questionnaire were not uniform.’ From the
limited data received and presented by SSFC it appears that Panchayats (rural local bodies) are
dependent on state transfers and grants-in-aid almost by 80 per cent.
In the case of Mandal Parishads (Taluka Panchayat/Intermediary level) and Zilla Parishads income
from own sources accounted for a meagre 0.68 per cent of total receipts and the remaining 99.32 %
of income was derived from assigned revenues and grants.(Para 5.19.1Karnataka SSFC)
In the case of municipal bodies income from own sources accounted for 34.81 per cent of their total
income in 2000-01, thus municipal bodies depended on government grants and devolutions to the
tune of 65 per cent. (Para 5.26.3 Karnataka SSFC)
In the case of municipal corporations income from own sources accounted for a much higher %age.
On an average it accounted for 49.61 per cent of total income thus municipal corporations were
dependent on state transfers and grants-in-aids to the tune of 50 per cent.
The picture emerging about the dependency of local governments on state government to the extent
of grants from the SFC reports under study and other additional information narrated above can be
summarised as follows –
14
Table C
Dependency of Local Governments on State Devolutions/Grants-in-Aid - Summarised
(In percentage)
Types of National
13
Local Body Karnataka T.N. A.P Gujarat West Bengal Level
14 15
Studies
G. P. 22.4 80 85 96.09 80 93.66
Taluka
Panchayat 100 100 99 98.14 100 97.28
Zilla (District)
Panchayat 100 100 99 97.55 100 98.94
16
Town Panchayat 50 N.A. N.A. 26.77 94.86 47.57
17
Municipalities 63 38 65 44.76 71.00 59.76 47.43
18
Muni Corporations 60 39 50 24.72 66.58 74.34
---------------------------------------------------------------------------------------------------------------------------------------
Source – SSFC Reports of respective states, Eleventh Finance Commission Report (1996) and NIRD Study (2000)
In 1991-92, revenue raised by the municipalities formed 4.6 per cent of the revenue raised by the
central government and 8.05 per cent of the revenues raised by the state governments.
In 2001/02, the size of the municipal sector measured in terms of revenues that the municipalities
generate by way of levy of taxes, duties, fees and fines was estimated at Rs.12,748 crore. These
revenues formed 3.07 per cent of publicly-raised resources, the shares of the central government and
all state governments combined being 57.5 per cent and 39.5 per cent respectively. As a per cent of
the combined gross domestic product (GSDP), own revenues of municipalities represented 0.63 per
cent. Among the states, it varied between the highest levels of 2.16 % of GSDP in Maharashtra to
0.07 % of GSDP in Bihar.
Over the five-year period, the size of the municipal sector has registered a marginal expansion, both
in terms of its share in the total publicly-raised revenues and combined GSDP. Municipal share in the
total revenues of the three tiers of government has risen from 2.84 per cent in 1997/98 to 3.07 per
cent in 2001/02, while relative to GSDP; its share has increased from 0.61 to 0.63 per cent during the
same period. Municipal own revenues (nominal terms) have risen at an annual average growth rate
13
Dependency data for Gujarat was not available from FSFC report hence this data is as per EFC and NIRD mentioned in
footnote 7 & 8 below
14
The data regarding dependence of three tiers of rural local governments in percentage share is as per study done by
National Institute of Rural Development – Hyderabad of 20 states for the period 1999-93 to 1997-98 in March 2000.
15
The data regarding dependence of three tiers of urban local governments in percentage share is for the period 1990-91 to
1997-98 as per Eleventh Finance Commission as reported by Gangadhar Jha in his paper on Municipal Finance Resource
Mobilisation : Status, Concerns and Issues – submitted in National Seminar on Municipal Finance – December 2003.
16
As per National Institute of Rural Development Study mentioned above.
17
Karnataka classified its municipalities in to two categories City Municipal Councils and Town Municipal Councils. Hence, two
separate figures have been provided.
18 th
As per study carried out on Municipal Finance by National Institute of Public Finance and Policy – New Delhi for the 12
Finance Commission presented in National Seminar on Municipal Finance – December 2003.
19
India’s Municipal Sector – A Study for Twelfth Finance Commission (TFC) – O.P.Mathur with Sandeep Thakur – (September
2004 ) – National Institute of Public Finance and Policy – New Delhi
20
UMP-Asia Occasional Paper No 47 – July 2000
15
of 10.32 per cent. The same conclusion emerges when we look at the aggregated expenditure levels
of municipalities. As a proportion of the combined gross domestic product of states (GSDP),
municipal expenditures have risen gradually from 0.74 per cent in 1997/98 to 0.75, 0.77 and 0.75 per
cent respectively in the successive years.
Transfers are an important constituent of the finances of municipalities in India, their share in the
revenues of municipalities being 31.7 per cent (2001/02). This is, however, the average;
municipalities in several states are almost entirely transfer-dependent for running of local services. In
this category are those that have historically been dependent on state transfers such as Bihar,
Himachal Pradesh, Jammu & Kashmir, Uttar Pradesh, West Bengal, and Tripura; and those whose
dependency on state transfers has risen in recent years, e.g., municipalities in Haryana, Orissa and
Rajasthan. Second: the importance of transfers in the finances of municipalities has risen over the
past five years. The dependence of urban local bodies was as high as 83.71 per cent in case of
Jammu & Kashmir, 83.33 in case of Rajasthan and 74.48 in case of Uttar Pradesh while dependence
was as low as 10.1 percent in case of Punjab, 13.82 percent in case of Maharashtra and 17.81
percent in case of Gujarat.
Table D
Revenue Significance of Municipalities21
21
International comparisons of local government revenues are usually hazardous; however, following figures on the position of
local government revenues relative to other tiers of government and relative to the country’s GDP will provide some idea about
international scenario. ? footnote reference is in bold not consistent with other footnotes
16
Year Municipalities Per cent of GDP Relative shares of own revenues (%)
own revenue Municipalities State Central
(Rs. crore) governments governments
1997/98 8,434.9 0.61 2.84 33.4 63.8
1998/99 9,451.7 0.59 2.97 34.3 62.7
1999/00 10,372.7 0.59 2.80 34.4 62.8
2000/01 12,018.4 0.63 2.98 35.1 61.9
2001/02 12,748.1 - 3.07 39.5 57.5
Note: Figure for municipal own revenues are adjusted to reflect the revenues for all statutory towns and cities.
Source - India’s Municipal Sector – A Study for Twelfth Finance Commission (TFC) – O.P. Mathur with Sandeep Thakur –
(September 2004 ) – National Institute of Public Finance and Policy – New Delhi
The transfers made by all the states to urban local bodies as per SFC reports or under other
devolution frameworks on an average amounted to 4.47 percent during 1997-98 to 2000-01 of State’s
Own Revenues.
The performance of municipalities on the criterion of expenditure levels runs along the same track as
that of own revenues. Estimated at about 0.75 per cent of the gross domestic product (GDP),
municipal expenditure levels are extremely low. Maharashtra, Punjab, Gujarat, and Goa post
relatively high per capita municipal
and higher expenditure ratios to the gross domestic product of states (GSDP). The states that show
medium levels of expenditures comprise Andhra Pradesh, Kerala, West Bengal, and Tamil Nadu.
Expenditure on establishment (salaries and wages) accounts for 54.2 per cent of the total municipal
expenditure. It is as high as 80.4 per cent in Madhya Pradesh, 69.7 per cent in Haryana, 50.6 per
cent in Orissa, 65 per cent in Uttar Pradesh, leaving fewer resources for operations and maintenance.
On average, municipal under spending in relation to Zakaria Committee norm is 130 per cent. This
and the average per capita expenditures (daily) ranging between Rs.0.20 and Rs.2.25 explain the
extremely low level of services and consequently, the deplorable service conditions in cities and
towns. With the exception of Maharashtra and Gujarat, there is no state where municipalities are able
to raise revenues that are adequate for meeting local expenditures.
1. The size of the own resources of Panchayats are extremely limited in relation to their needs.
During 19990-91 to 1997-98 the Internal Resource Mobilisation (IRM) of Panchayats at all
17
levels in 23 states constituted 4.17 % of the total revenue. In Bihar, Rajsthan, Manipur and
Sikkim there was virtually no IRM. The annual per capita IRM in some state was Rs. 8 only.
2. There has been phenomenal dependence of Panchayats on revenue transfers from Union
and State Governments. In 1997-98, the panchayats mobilised 0.04 per cent of GDP and
incurred the expenditure of 1.38 per cent of GDP.
3. Though State assistance to Panchayats amounts to more than 80 per cent of the total
resources of Panchayats, most of it is in the form of tide grants. The system of grants has not
been rationalised in many states and the quantum to be made available is often not
predictable.
CFCs and SFCs in the Context of Decentralisation and Local Finance Issues
As a result of the 73rd and 74th Constitutional Amendment Acts, 1992 and amendment of Article 280
(3) © to Constitution of India the entire framework of state-local relations was poised to undergo a
paradigm change through the SFC mechanism and various other provisions. In order to assess the
role of SFCs and their contribution, one needs to examine the following issues –
Before taking stock of the workings the of state finance commissions in the context of the above
issues, it will be worthwhile to look at the changes, which have taken place at the central finance
commission level.
The Working of Central Finance Commissions Post 73rd & 74th CAA
23 th
Report of the 12 Finance Commission (2004) page no.147
18
Report of the Eleventh Finance Commission June 2000
For the first time, it was the Eleventh Finance Commission (EFC), which was required to suggest, as
per its TOR the measures to augment consolidated fund of the state to enable them to supplement
the resources of local bodies. The TOR of EFC Clearly required it to make recommendations to
augment the consolidated fund of the states to supplement the resources of local bodies on the basis
of SFC recommendations. The EFC however, was, asked to make to its own assessment if the
recommendation of the SFCs were not available.
The Eleventh Finance Commission (EFC), which submitted its report in June 2000, found itself unable
to adopt SFC reports as the basis to formulate its recommendations because of
1. Non-synchronisation of the period of recommendations of SFCs and the Central Finance
Commission.
2. Lack of clarity in respect assignment of powers, authority and responsibilities of local bodies.
3. absence of time frame within which the state governments are required to take action on the
recommendations of SFCs, and
4. non-availability of reports of SFCs
In the light of these constraints, EFC recommended an amendment to the Constitution to delete
words “on the basis of the recommendations made by the Finance Commissions of the State”.
Finally using its own assessment EFC recommended a grant of Rs. 20000 million per annum for local
governments (Rs. 4000 million for municipalities and Rs. 16000 million for PRIs per annum) for a
period of five years beginning with 2000-01 to 2004-05. The recommended grant of Rs. 20000 million
per annum by the EFC is meant to supplement the funds that would normally flow from the state
governments to municipalities during the period 2000-2005. It would also supplement the amounts
that may accrue to municipalities because of the implementation of the recommendations of the
finance commissions of states. This grant is dedicated to improving the maintenance of civic services
such as primary education, primary health care, safe drinking water, street lighting, sanitation,
maintenance of cremation and burial grounds, public conveniences and other common property
resources, and is not expected to be used for payment of wages and salaries. The grant includes a
sum of Rs. 29.4 million for the creation of databases relating to the finances of municipalities and
such sum as may be needed by municipalities for proper upkeep and maintenance of their accounts
and audit.
The EFC has not only recommended the amount of the grant but has established a comprehensive
framework for the allocation of state grants to local governments. The framework consists of a set of
multiple criteria with each criterion being assigned a weight.
(Pl. refer Annexure IX and X)
The principle underlying the framework is that apart from the size represented by population and
geographical area, which is a major determinant of the financial requirement of municipalities and
which consequently commands a larger weight, the grant should be allocated on the basis of a set of
complementary criteria of efficiency, measured by the revenue raising efforts of local
governments/municipalities and equity represented by the distance of the state’s average per capita
non-agricultural gross domestic product from the highest average per capita non-agricultural GSDP.
The former is meant to serve as an incentive for municipalities to boost their revenue effort, while the
latter provides funds for the fiscally disadvantaged municipalities. An important criterion that
commands a 20 % weight in the grant allocation relates to decentralization as envisioned in the
Constitution Amendment Act, 1992. EFC report has formulated an Index of decentralization for
measuring decentralization.
Application of the comprehensive framework has changed allocation of grants to state governments
considerably. The comparative data regarding State share for local government grant as per TFC,
EFC and 12th FC is presented in Table E.
EFC has also suggested, recognizing that the financial requirements of local governments are
phenomenal and can not be met by the grant component alone, a string of measures for the
augmentation of the consolidated fund of the state, which in turn could supplement the resources of
local governments while strengthening their revenue base. Measures for augmenting the consolidated
fund include levy of land taxes by states, surcharge/cess on state taxes, which could devolve on local
bodies, and fuller use of profession tax as provided for under Article 276 of the Constitution. Similar
proposals have been advanced for improving local resource mobilization and include reforming
19
property taxation, substitution of octroi by a tax, which is buoyant, and fixation of user charges, which
are able to cover full operations and maintenance cost.
Table E
State Share of Municipalities as per Tenth & Eleventh Finance Commission Award
State Tenth Finance Eleventh Share of States as per Twelfth Increase/ Decrease
th th
Commission Finance Finance Commission % between 10 & 11
% Commission PRIs Municipalities FC
%
Andhra Pradesh 7.4 8.2 7.935 7.480
Arunachal Pradesh Neg. Neg. 0.340 0.060
Assam 1.4 1.1 2.630 1.100
Bihar 6.7 4.7 8.120 2.840
Chattisgadh NA NA 3.075 1.760
Goa 0.2 0.090 0.240
Gujarat 6.7 6.6 4.655 8.280
Haryana 1.7 1.8 1.940 1.820
Himachal Pradesh 0.2 0.2 0.735 0.160
Jammu and Kashmir 1.2 0.8 1.405 0.760
Jharkhand NA NA 2.410 1.960
Karnataka 7.0 6.2 4.440 6.460
Kerala 2.5 3.8 4.925 2.980
Madha Pradesh 6.2 7.8 8.315 7.220
Maharashtra 13.3 15.8 9.915 15.820
Manipur 0.2 0.2 0.230 0.180
Meghalaya 0.1 0.1 0.250 0.160
Mizoram Neg. 0.2 0.100 0.200
Nagaland 0.1 Neg. 0.200 0.120
Orissa 1.9 2.0 4.015 2.080
Punjab 3.1 2.7 1.620 3.420
Rajasthan 4.3 5.0 6.150 4.400
Sikkim 0.1 Neg. 0.065 0.020
Tamil Nadu 11.6 9.7 4.350 11.440
Tripura 0.1 0.2 0.285 0.160
Uttar Pradesh 12.1 12.6 14.640 10.340
Uttaranchal NA NA 0.810 0.680
West Bengal 12.0 9.9 6.355 7.860
Total 100.00 100.00 100.00 100.00
Source: Reports of the Tenth Finance Commission 1996, Eleventh Finance Commission 2000 and Twelfth Finance
th
Commission 2004. As 12 Finance Commission has given separate percentage share for rural and urban local bodies it is not
possible to compare increase or decrease in share of states due to change in formulae.
12th Finance Commission has dwell upon its role in the contexts of constitutional provisions (73rd &
74th Constitutional Amendments and Article 280 3 ©. It rejected notion these provisions are meant
only to be a mechanism for additional resource transfers from the centre to the states. It felt the
purport of the constitution provisions is two fold –
1. there may be a case to augment the consolidated fund of the states through additional grants
from the centre keeping in view special circumstances of the states which may justify such
assistance; and
2. certain recommendation of SFCs for augmenting revenues of state may require decision
making by central government as they may have centre-state or inter-state ramifications. The
central government may benefit from the expert advice of central finance commission on such
20
recommendations. Measures that central finance commission may choose to recommend
after taking into account recommendations of SFCs will be a substantial fulfilment of its
constitutional mandate.
The important recommendations regarding local bodies and SFCs of 12th Finance Commission are
summarised as follow -
1. Like EFC, 12th FC was forced to use its own assessment due to lack of reliable data and
SFCs recommendations to decide quantum of grant to supplement the consolidated fund of
the states to supplement resources that would normally flow from the state governments to
municipalities during the period 2005-2010. 12th FC has recommended grant of Rs. 500000
million per annum (Rs. 400000 million for rural local governments and Rs. 100000 million for
urban local governments). It estimated that this would be equivalent to 1.24 per cent of the
sharable tax revenues and 0.9 per cent of gross revenue receipts of centre during 2005-10.
2. It has retained 80:20 ratio adopted by EFC for sharing of resources between rural and urban
local governments.
3. 12th FC has recommended that the grants to the PRIs should be utilised to improve service
delivery especially of water supply and sanitation.
4. In case of urban local bodies, it has recommended that 50 per cent of the grant should be
earmarked for the schemes of solid waste management through public-private partnership. It
has also recommended to exclude six metros from allocation 12th FC grant.
5. It has introduced Index of Deprivation as a criterion for inter-se allocation of grant-in-aid to the
states. (please refer Annexure IX)
6. 12th Finance Commission has taken note of the shortfall in the release of EFC Grant to the
States. This is due to a) not utilisation/under utilisation of the amount already released and b)
the inability of the state/local bodies to raise match contributions. It specifically noted that
condition of matching contribution was not recommended by EFC. It felt that though concept
of matching revenue efforts is important, should not be applied to Central Finance
Commission Grant, as this grant is largely in nature of a correction in vertical imbalance
between centre and states. It has therefore not recommended any condition of matching
contribution and has asked centre not to impose any conditions other than those
recommended by 12th Finance Commission.
7. 12th Finance Commission has also taken note of the fact that the finance commission grants
take much longer time to reach local bodies even after release from central government as
state governments use these amounts for their ways and means comfort and show no sense
of urgency in passing them on to the rightful recipients. In light of 12th FC has recommended
centre to take serious view of any delay beyond 15 days in passing on these grants by state
government from the date of release of the grants by centre.
Review the macro-economic environment within which the municipalities in India operate
• Functions, powers, and authority;
• Limits and constraints within which the municipalities are permitted to function; and
• Degree of autonomy granted to municipalities.
24
Approach to State-Municipal Fiscal Relations – options and perspective – Om Prakash Mathur – National Institute of Public
Finance and Policy – New Delhi – 2001
21
• Trends in the volume and nature of transfers; and
• Key issues in making fuller use of revenue resources and reordering expenditure priorities.
The present status of state finance commissions in various states is provided in Annexure XII while
information about the share of Municipalities in State’s Resources as recommended by the first
Finance Commission of States is provided in Annexure XIII.
22
iii. Punjab – 20% of the net proceeds of 5 taxes (stamp duty, motor vehicle tax, electricity duty,
entertainment tax and cinematograph tax) and the projected gap of Rs. 3220 million
recommended to be met by the Central Finance Commission.
In sum, there is a large variation in the recommended shares of municipalities in the different states.
Many of these constitute marginal adjustments to the shares or amounts that municipalities were
receiving in the pre-amendment period, and do not display any fresh review of the finances of
municipalities.25
Contrary to the central government in principal accepting all the recommendations of successive
central finance commission, not all state governments have accepted the primary recommendation
about a shared pool of state resources.
rd
Box - Constitution of 3 State Finance Commission by the States
Andhra Pradesh January 16, 2003
Kerala September 19, 2004
Punjab September 19, 2004
Thus there is a sizeable experience on the functioning of the SFC mechanism, consequently it is now
possible and appropriate (as states will be going through the third round of SFCs) to examine the
workings of SFCs to know how far they have been successful in carrying forward decentralisation
rd th
envisaged by the 73 and 74 CAA and how far they have been successful in addressing local
finance issues.
In order to understand the role-played and the workings of the state finance commissions it is
necessary to evaluate their recommendations against the above-mentioned tasks or roles envisaged
for them by the constitutional amendment acts. Thus, various points mentioned above under the
heading regarding the fiscal package and beyond the package, together form the framework for
evaluating the working of SFCs. Annexure IXV provides summarized evaluation of SFCs under study
using this framework. The SFC reports of the five states namely Karnataka, Tamil Nadu, Andhra
Pradesh, Gujarat and West Bengal have been analysed in the light of the above framework and
placed at the end of this paper.
In order to examine the role played by SFCs in achieving fiscal decentralization for local bodies, the
reports of five SFCs were analyzed. At the outset it can be said that the reports of the Second SFCs
show that the new system of fiscal arrangement envisaged by Constitutional Amendments more than
a decade ago is coming of age in spite of a host of infancy blues and if the third generation SFCs of
the other states which are being set up or would be set up in the near future improve upon the
25
Approach to State-Municipal Fiscal Relations – options and perspective – Om Prakash Mathur – National Institute of Public
Finance and Policy – New Delhi – 2001
26
Mizoram, Nagaland and Meghalay are not required to constitute SFC as traditional local institution of self government exists
in the Schedule VI States
23
pragmatism and professionalism shown by the SSFCs while effectively dealing with policy
weaknesses reviewed in this paper.
The comparative analysis of workings of SFCs of five states reveals the following –
General Issues
In a way, the SFC mechanism was imposed upon the states by the Constitutional Amendment Act. As
a result, states have shown great apathy towards SFCs, in providing them with administrative or
technical assistance, information access and implementation of SFC recommendations.
There are at least six states, which have not yet set up their Second State Finance Commissions, and
five states, which have not yet submitted action taken reports. This list includes the Government of
Maharashtra and Karnataka sitting.
12FC commission has observed this lacklustre attitude/response of states towards SFCs and has
noted downed in following apt words –
“We find that most states are yet to appreciate importance of this institution (SFC) in terms of its
potential to carry the process of democratic decentralisation further and evolve competencies at the
cutting edge level by strengthening PRIs and the municipalities. The delays in the constitution of
SFCs, their constitution in phases, frequent reconstitution, submission of reports and tabling of ATR in
the legislature have in many cases defeated the very purpose of this institution.” (Para 8.33 12th CFC)
It recommended that the states should avoid delays in the constitution of SFCs, their constitution in
phases, frequent reconstitution, and submission of reports and tabling of ATR in the legislature. (Para
8.55 (ii) 12th CFC)
“It is necessary that the states constitute SFCs with people of eminence and competence, instead of
viewing formation of SFCs as a mere constitutional formality. (Para 8.33 12 CFC) In the matter of
composition of SFCs, state may well be advised to follow central legislations and rules which
prescribe the qualifications for the chairpersons and members and frame similar rules.”
24
Lack of a Reliable Data Base
All the SFCs have univocally regretted and complained about this aspect. In fact, Karnataka SSFC
explicitly noted the lack of reliable data for disbanding the normative approach adopted by the FSFC
and for selecting the second string of preference indicators in place of ideal indicators for horizontal
and vertical distribution of resources among local governments.
Michael F Carter, World Bank Country Director for India, on June 14, 2004 said “Neither the
panchayats nor SFCs nor GOI know the actual amount of funds available to panchayats or their
expenditure pattern” while sharing the recent World Bank Report on ‘Fiscal Decentralisation to Rural
Governments’.
The West Bengal FSFC Report had indicated in their report the constraints under which they had to
formulate their recommendation in the absence of any reliable data base, particularly at the sub-
district level. The SSFC of West Bengal observed, “availability of quality data has not improved much
in the intervening period’. (Para 5.02 West Bengal SSFC)
EFC faced same problem of lack of reliable data and therefore it provided special allocation of Rs.
2000 million for creation of central data base regarding finances of local bodies and Rs. 9861 million
per annum for maintenance of accounts of village and intermediate level panchayats. But not much
has happened and even 12th Finance Commission faced the problem of lack /unreliable data. It
observed that “Both the EFC as well as this commission were hampered by the absence of credible
data”. (Para 8.35 12th CFC) “Even after considerable persuasion, the response (data) received from
different states, barring a few exceptions was found to be rather sketchy. The data furnished by the
states did not facilitate quantification of the required augmentation of the consolidated fund on the
basis of the SFC recommendations.”
Non Synchronisation of SFCs with Central Finance Commission and Five Year Plans
By this time the 12th Finance Commission should have been reviewing the third generation state
finance commission reports for basing its recommendations on local finance but it has received only
the second state finance commission reports only from one third of the states. Right from the
beginning, there is no synchronisation of the award period of SFCs with the award period of Central
Finance Commission and the duration of the Five Year Plans.
Synchronisation of SFCs with CFC aside, the 12 FC has to recommend, “The SFC reports should be
readily available to the central finance commission, when the latter is constituted so that an
assessment of the state’s need could be made by central finance commission on the basis of uniform
principles.”
25
14 Punjab 1.07 1.91 1.25 1.27
15 Rajasthan 2.25 5.91 6.48 6.53
16 Tamil Nadu 7.77 8.08 6.85 6.05
17 Uttaranchal - - - 14.24
18 Uttar Pradesh 5.26 7.26 6.21 5.52
19 West Bengal 9.01 10.37 15.25 11.95
20 All States Average 3.76 4.52 4.93 4.47
Source - India’s Municipal Sector – A Study for Twelfth Finance Commission (TFC) – O.P. Mathur with Sandeep Thakur –
(September 2004 ) – National Institute of Public Finance and Policy – New Delhi
Similarly, the grants-in-aid provided by the central finance commissions (10th and 11th) from the
resources of Union Governments have caused a miniscule impact on the finances of urban local
governments. It can be observed from Table G that the total impact of central finance commissions on
the finances of urban local governments was less than 3.35 percent.
O.P. Mathur and Sandeep Thakur observed that the ‘transfers to municipalities form 3.85 per cent of
the combined own resources of states. Between 1997/98 and 2001/02, these have risen by 0.54
percentage points which, in a crude way, could be said to be additional strain or the finances of state
governments. The SFCs have preferred to maintain the status quo, instead of examining de novo the
inter-governmental fiscal relations in relation to the requirements of the 1992 amendment’.27
Table G
Municipal Own Revenue and Distribution of Finance Commission Grant or Rs. 400 crore (in Rs. Lakh)
th
States Municipal own Municipal share of 11 FC grant as a
revenue 2001-02 Rs. 400 Cr. percent of municipal
own revenue
(Rs. Lakh) (Rs. Lakh) (%)
Andhra Pradesh 71745.71 3293.20 4.59
Assam 3825.81 430.80 11.26
Bihar 3408.44 1878.00 32.61
Chattisgarh 11599.83 - -
Goa 1858.772 92.80 4.99
Gujarat 144849.22 2650.40 1.83
Haryana 12106.95 732.80 6.05
Himachal Pradesh 1978.93 78.00 3.94
Jammu & Kashmir 1199.02 313.20 26.12
Jharkhand 2351.23
Karnataka 53448.98 2496.40 4.67
Kerala 22432.79 1504.80 6.71
Madhya Pradesh 29437.00 3120.40 7.60
Maharashtra 587058.29 6325.20 1.08
Orissa 10176.83 799.20 7.85
Punjab 68551.18 1094.40 1.60
Rajasthan 10339.68 1988.40 19.23
Tamil Nadu 88079.00 3867.20 4.39
Uttaranchal 2320.61 - -
Uttar Pradesh 26551.00 5032.80 17.43
West Bengal 442201.69 3949.60 9.36
Arunachal Pradesh - 136.00 -
Manipur - 88.00 -
Meghalaya - 776.80 -
Mizoram - 35.60 -
Nagaland - 4.00 -
Sikkim - -
All States total/average 1195520.92 40000.00 3.35
Source - India’s Municipal Sector – A Study for Twelfth Finance Commission (TFC) – O.P. Mathur with Sandeep Thakur –
(September 2004 ) – National Institute of Public Finance and Policy – New Delhi
27
India’s Municipal Sector – A Study for Twelfth Finance Commission (TFC) – O.P. Mathur with Sandeep Thakur – (September
2004 ) – National Institute of Public Finance and Policy – New Delhi
26
use of taxes and other assigned duties that already vest with the local bodies and the consideration
that any additional assignment may not be effectively used by the local bodies. There is a clear trend
in the reports of the SFCs favouring revenue sharing and grants-in-aid rather than tax assignments.
However, the SFCs certainly suggested better use of the existing tax jurisdiction, by reforming the
system of property taxation and giving greater autonomy to local bodies in matters relating to tax rate
setting.
Notwithstanding the Constitution (seventy-fourth) Amendment Act, 1992 that envisioned a change in
fiscal relations between the state governments and municipalities, the tax jurisdiction of municipalities
has not undergone any noticeable shift even with their changing functional portfolio.28
The concept of global sharing is gaining ground in India, which is also evident from the reports of the
SFCs. Nine SFCs have recommended adoption of this concept for sharing of resources. This involves
the creation of a divisible pool at the state level. The definition of the divisible pool is debatable and,
in fact, varies from state to state. Ideally, this should include the net proceeds of all taxes, fees, tolls,
etc., levied by the respective state governments. But the SFCs have interpreted the concept
differently. The variation in the definition of divisible pool by various SFCs is indicated in the following
tables. For instance, the Karnataka SFCs included all the ‘non-loan gross own revenue receipts’ of
the state government but excluded the state’s share of the central revenue transferred through the
Central Finance Commission, Planning Commission and the loans. The SFCs of Andhra Pradesh
interpreted this concept as the sum of tax and non-tax revenues of the sate government. The Tamil
Nadu FSFC interpreted it to constitute net proceeds of all State taxes, excluding entertainment tax
while SFCs of West Bengal have recommended total tax receipts of the State excluding entertainment
tax receipts. Tamil Nadu SSFC maintaining the FSFC definition of net proceeds of all state taxes as
divisible pool went one step forward and recommended 5 % share of central devolution to the state in
the divisible pool. Punjab SSFC has recommended net tax revenue of the state arrived after
deducting the cost of collection of tax from the total tax revenue. The Kerala SFC recommended
separate State Level Urban and Rural Pools. The former was to consist of various non-statutory non-
plan grants, basic tax (100%) and 25 percent of the proceeds of the surcharge on stamp duty.
It can be observed that the approaches/principles recommended by SFCs for dealing with the sharing
of resources with local governments by states are varied. While variation in approaches is inevitable
taking in to account the vastly different local situations, its long term implications need to be carefully
monitored. The likely result of variation in approaches will be asymmetrical decentralisation in different
states, which will occur at different paces and through different routes.
Along with global sharing and other approaches there appears to be a clear preference for creating a
divisible pool of resources at the level of states and allocating a proportion of the same to local
bodies. The size of the pool and the criteria for its allocation to local bodies, which forms the
mechanisms for revenue sharing, may vary depending on a number of factors, including spending
responsibilities of local bodies.
28
India’s Municipal Sector – A Study for Twelfth Finance Commission (TFC) – O.P.Mathur with Sandeep Thakur – (September
2004 ) – National Institute of Public Finance and Policy – New Delhi
27
Whilst the Kerala SFC recommended fixing the non-plan non-statutory grants at one percent of state
revenue, the state government rejected this on the grounds of it being an arbitrary estimation without
any rational justification. Similarly, the SFC in Andhra Pradesh recommended that 39.24 percent of
the state tax and non-tax revenues be transferred to local bodies based on past trends. The
government is yet to take a decision on this recommendation.
The second method is normative in approach. This involves identification of the core/ essential
services, establishing standards/ norms for the provision of services, calculating gaps between actual
service provision and needs, and estimating the costs of service provision at certain minimum levels
or as per the norms. This exercise should be undertaken for each local government and the
Karnataka FSFC used this approach. Here allocations were calculated on the total estimated
requirements of the local government. The Karnataka FSFC thus estimated a 36 percent requirement
(of the divisible pool, i.e., non-loan gross own revenue receipts of the state) for rural and urban local
government. Interestingly, this closely approximated the prevailing level (34.27 percent).
The Tamil Nadu SSFC approach has differed significantly. This has recommended an allocation
based on a share of the revenues of state taxes as a proportion of the divisible pool after calculating
service gap and fiscal gap on the basis of normative approach. Along with it, SSFC has
recommended fiscal accountability norms for local bodies. It has calculated and provided how much
resource improvement local bodies should undertake to improve revenue from their own resources
and to improve cost efficiency to address their fiscal gap. The SFC also recommended the creation of
equalisation and incentive grants representing 15 percent of the proceeds from the divisible pool.
The Karnataka SFC allocated 15 percent to urban local government and 85 percent to the Panchayat
Raj institutions from the divisible pool from 1996 – 97 onwards. Although the state government
accepted this in principle, it was decided to achieve the ratio of 15:85 between urban and rural local
government by the year 2001 – 2002.
Table H:
Formula for Resource Sharing Recommended by the SFC of Karnataka
Criteria FSFC SSFC
West Bengal SFCs adopted a very unique approach, instead of going for urban and rural categories
for sharing resources available for local governments, it opted for the district as the primary unit for
sharing resources from the district fund, FSFC recommended three ways of sharing among municipal,
panchayat and special areas. SSFC the retained three way sharing but in place of ambivalent special
areas it specified it as hilly area and recommended setting aside of 0.4 of total devolution to local
bodies before distributing it among districts as per formulae. Having set aside the special fund for hilly
areas the SSFC of West Bengal recommended sharing of the district fund between rural and urban
areas based on the proportion of rural and urban population in the district.
28
respective tiers based on the last census. For the horizontal distribution, a composite formula was
recommended with percentages varying across tiers. This consists of total population (40 to 45%),
SC/ST population (10 to 20%), per capita receipts of own revenues (15%) and per capita expenditure
on core services (20 to 35%). The state government accepted these proposals but, the formula
recommended for horizontal distribution was modified for the first year due to administrative reasons
and the weightage in respect of the service indicator was transferred to the total population and
SC/ST population of urban local government.
In Kerala, the municipal corporations were kept outside the urban pool, only municipalities were taken
into consideration, and a composite formula was suggested for horizontal allocation. This consists of
80% population (1991 Census) 5% for SC/ST population, 10% financial need and 5% tax collection.
A separate method was recommended for plan funds consisting of 75% population, 10% SC/ST
population and 15% for total workers, excluding workforce engaged in manufacturing, processing,
services etc. Contrary to these recommendations, the state government preferred a simple,
measurable and objective formula consisting of population (90%) and area (10%) in both the cases
for distributing plan grants and funds in the urban pool.
“There is no evidence in the report of any attempt to cost out standard local services or to rationalize
on either need or cost grounds the population /area formula employed”.29
“The SFC report does not discuss the appropriateness of the assignment of expenditure to different
classes of local government. It does not recommend real changes in local revenue sources. On the
30
other hand, it recommends removal of all local discretion in revenue-raising”. “In doing so, the SFC
has removed local accountability and hence any chance of establishing effective and democratically
accountable local government bodies.”31
29
Richard Bird. 1998 Designing State – Local Fiscal Transfers for Uttar Pradesh - mimeo
30
ibid
31
ibid
32
ibid
29
exercises, a suspect.33 Richard Bird observed similarly about Uttar Pradesh SFC report saying, “there
is no evidence in the report of any attempt to cost out standard local services or to rationalize on
either need or cost grounds the population / area formula employed”.34
12FC observed, “While estimating the resource gap, the SFCs should follow a normative approach in
the assessment of revenues and expenditure rather than make forecasts based on historical trends. A
careful examination of the SFC reports reveals that few SFCs have followed this approach.”
We will have to accept this political reality and the fact that situation can not be altered in day.
Equalisation grants can be a solution, wherein each local body first gets resources as per formulae
and the local bodies, which stand to get less resource through formulae based allocation than what
they were getting earlier get those resources from equalisation fund. Under a well planned out time
bound programme such local bodies are required to step up their resources and allocation through
equalisation fund is withdrawn in phased manner.
Except SFCs of Tamil Nadu, other SFCs have not given enough though to equalisation grants to
correct distortion in horizontal resource sharing among local bodies.
Implementation Issues
33
O.P.Mathur June 2000 – Decentralisation In India: A Report Card – UMP-Asia Occasional Paper No. 47. O.P.Mathur has to
th
repeat similar observation after conducting exhaustive study of municipal finance for 12 Finance Commission. He observed
that ‘this study is not the platform for making a critical review of the reports of the finance commission of states (SFCs). Two
points, may however, be made. One: there are serious drawbacks in many of the reports in that they have not even estimated
the revenue gap faced by municipalities. It is not evident as to how a devolution package could be formulated without any
reference to gap in resources. Two: the reports of the second SFCs appear, in most cases, an updated version of the first
reports, without containing a fresh review of the finances of municipalities.
34
Richard Bird. 1998 – Designing State – Local Fiscal Transfers for Uttar Pradesh - mimeo
30
administrative and functional powers, etc. Further, they also failed to implement various
recommendations pertaining to the above aspects, which were accepted in principle. Some such
glaring instances are as follows –
• First SFC of Tamil Nadu in all made 462 recommendations out of which 100
recommendations were not accepted. Though the acceptance/ recommendations ratio of the
Government of Tamil Nadu (GOTN) is much higher in comparison to other states, more than
20 percent of the recommendations were not accepted.
• In Andhra Pradesh out of 84 recommendations made by the first SFC, 24 recommendations
were not accepted while 5 recommendations were accepted with modifications. Thus, almost
one-third of the recommendations were not accepted by the Government of Andhra Pradesh
without recording reasons for non-acceptance. Several recommendations accepted by
Government of Andhra Pradesh were not implemented.
Like GOK, GOTN also deducted at source dues pertaining to the debt repayment payable by local
bodies to other institutions from the devolution amount.
31
Equalization Fund
As mentioned earlier it is only Tamil Nadu SFCs, which recommended equalisation fund to correct
past baggage of distortion in horizontal resource sharing among local bodies, but GOTN utilised this
fund to help select local bodies on discretionary basis sometimes even for creation of capital
infrastructure. No norms have been evolved regarding this fund by GOTN.
In sum, the message coming out from the detailed review of SFCs is that SFCs are constrained by
various factors and, as a result, SFCs have failed to address issues of local finance and to carry
forward decentralisation. The results of workings of SFCs in past decade can be summarised as
follow -
• Improved marginally budgetary certainty and a degree of predictability of flow of funds from
state to local bodies
• Increased devolution to local bodies to some extent
• Not much improvement in finances of local governments,
• No new tax assignments to local bodies
• No attempt to create rural-urban partnership
• Inadequate incentives for expenditure efficiency
• No improvement in budgetary and financial autonomy of local bodies
• No improvement in accounting system of local bodies. In Karnataka ULB budgets fail to
reflect deduction made at state level
• No granting of significant legal autonomy to local bodies
• Soft approach by SFCs towards State Government’s attitude of gross neglect towards local
bodies
The specific policy options in the context of various issues - general, policy or structural and
implementation observed earlier could be as follows:
12th Finance Commission has also recommended creation of permanent cell in the finance
department of state governments. (Para no 8.55 (x))
Synchronisation of SFCs with the Central Finance Commission and Five Year Plans
It is necessary to draw up a detailed calendar regarding various events and stages associated with
the SFC and this calendar should be followed meticulously to overcome problems of non-
synchronisation with CFCs and five year plans.
32
th
In fact, by the end of year 2007 when 13 CFC is likely, to be constituted fourth SFC report of all the states should ideally
become available but that is not possible in any condition. What states can aspire is to make third SFC reports available to
CFC, even that will require highly coordinated and sincere efforts. States can follow following calendar to achieve this
target.
•
nd
Last date by which 2 SFCs of the State should submit their report – June 2005
•
nd
Last date by which State should submit ATR on 2 SFC Report – December 2005
•
rd
Last date by which State should constitute 3 SFC in their state – March 31, 2006
•
rd
Last date by which 3 SFCs should submit its report – December 31, 2007
•
rd
Time period for Submission of ATR by States on 3 SFC report – During the year 2008
•
th
Likely date of constitution of 13 Central Finance Commission – Start of2008
•
th
Likely submission of 13 CFC report to GOI – End of 2009
12th Finance Commission has discussed this issue of non-synchronisation of SFCs in detail (para
8.36? 12FC) and has urged states to take necessary steps to achieve it (par ? a 8.55 (ii)). An
illustrative calendar to achieve this could be as follows
It is necessary that in the future SFCs should increasingly adopt the normative approach to calculate
the service and fiscal gap while basing their recommendations on the quantum of revenue sharing.
Along with their recommendations, SFCs should provide fiscal accountability norms for local bodies,
that is, the extent of efforts that local bodies should take to address service and fiscal gaps. The
scheme should also provide some equalisation grants to address needs of certain local bodies
suffering from weak economic base or other constraints.
Following are some recommendations that can be implemented within a time-frame of 2 to 5 years.
33
Principles of Revenue Sharing
SFCs have utilised different approaches while laying down principles of revenue sharing, but it is
necessary that there is broad uniformity about the principles of revenue sharing. In the absence of
such uniformity, there is a like hood of variation in approaches, which will result in asymmetrical
decentralisation in different states.
The concept of global sharing along with creation of divisible pool is gaining ground in India. Among
the various approaches, the approach adopted by Karnataka SFC for revenue sharing that of Non
Loan Gross Own Revenue Receipts is most pragmatic, broad based and capable of bringing benefits
of economic growth (buoyancy) in the State to local bodies.
Cities contribute to national economy and to the revenues of central government; municipal
expenditure creates positive externalities for central government’s income. In the light of this Tamil
Nadu SSFC has recommended that a 5 % share of the central devolution to the state should be part
of the divisible pool for sharing of resources with local bodies.
It can be said that if future SFCs adopt the concept of global sharing to form the divisible pool on the
basis of NLGORR (Karnataka model) coupled with 5 to 10 percent share in central devolution to the
State then India can move towards a broadly uniform pattern of revenue sharing to avoid
asymmetrical decentralisation in different states.
Resource sharing between urban-rural local bodies and between tiers of local bodies
Various SFCs have different methods for arriving at the share of urban and rural local bodies’ in the
divisible pool. Some SFCs have used only population as the basis for sharing resources while some
others have opted for the composite index made up of demographic, economic and social indicators.
Various indices utilised to formulate the composite index need a critical look. Population and area are
commonly used criteria. The second set of criteria widely used by SFCs is illiteracy and percentage
of SC/ST population. The third set involves a variety of criteria not used by more than one SFC and
these include people per hospital bed, road length per sq. kms., percentage of workers, financial
needs, revenue collection efforts, per capita receipts of own revenues and per capita expenditure on
core services. Surprisingly the SFCs under study have not opted for indicators like per capita income,
or people below poverty line or percentage of population living in slums. It is difficult to suggest policy
options or definite answers regarding the ideal set of indices. Specific research is required on the
merits and demerits associated with using these and other indicators for inter-se distribution of
resources.
34
grants throws the local fiscal devolution system out of gear. Since it may not be possible to curb
completely non-formula based transfers in a democratic setup, it is suggested that the state finance
commissions consider capping the extent of non-formula based grants to local bodies
Fiscal responsibility norms and index of self reliance for local bodies
This is a global trend. In India, union government has adopted Fiscal Responsibility and Budgetary
Management Legislation upon itself, Twelfth Finance Commission has recommended that States will
have to adopt such kind of legislations in order to qualify for various debt relief and devolution
packages. There should similar structure in place for local bodies. Tamil Nadu SSFC has already
suggested fiscal responsibility norms and index of self reliance for local bodies. Other SFCs by
following Tamil Nadu SSFC example should evolve appropriate Fiscal Responsibility Structure and
States should implement them strictly.
Conclusion
State Finance Commission, a new mechanism to structure the fiscal devolution framework and state-
local fiscal relations has by and large turned out to be inadequate and ineffective due to various
reasons including policy, implementation and general administrative issues. Though we find flashes of
creativity and policy innovations, most of the SFC reports have turned out to be unsatisfactory and
have failed to live up to their constitutional role.
At the same time it can also be said that the reports of the Second SFCs show that the new system of
fiscal arrangement envisaged by Constitutional Amendments more than a decade ago is coming of
age in spite of a host of infancy blues and if the third generation SFCs of the other states which are
being set up or would be set up in the near future improve upon the pragmatism and professionalism
shown by the SSFCs while effectively dealing with policy weaknesses reviewed in this paper.
35
Centralised
Data base
Permanent Statutory
Administrative Mechanism
Set up for SFC to monitor
Implementation
Making SFC of SFCs
Mechanism
Focal Point of
Fiscal
Decentralisation
Synchronisation
Creating convention of SFCs with CFC
Of accepting SFC and five year plans
Recommendations,
Public opinion Professional,
building independent
approach by
SFCs
th th
The 11 and 12 Central Finance Commissions have elaborately noted the weaknesses in the
working of SFCs and their reports. Though SFC reports were short on policy aspects the real reason
for the failure of the SFC mechanism in terms of bringing about a paradigm shift in the state-local
fiscal relationship was a weakness in implementation. States were never ready for such a mechanism
(it was thrust upon them through constitutional amendments) to determine the sharing of resources
with local governments. As a result, states have shown gross apathy in setting up SFCs, accepting
their reports and in implementing their recommendations. It is now high time for all states to come
together, with the central government in the lead, to pay attention to the institution of SFC and to
evolve a national consensus regarding the role, working, composition of the SFC and regarding the
moral commitment of state governments to implement the recommendations of SFCs. If these
measures are not taken urgently, there is a danger of jeopardizing the entire fiscal devolution
mechanism.
36
References
1. Andhra Pradesh (2002) – Second State Finance Commission Report – State Government of Andhra Pradesh –
Hyderabad
2. Crisil Infrastructure Advisory – Mumbai (2003), ‘Roadmap for the Reforming the State-ULB Framework in Karnataka.
3. Datta Abhijit (December 2003), ‘The national Finance Commission and Fiscal Devolution to Local Bodies’, Paper
presented in National Seminar on Municipal Finance held at New Delhi sponsored by the 12th Finance Commission.
4. Eleventh Finance Commission Report (2000)
5. GHK Consultant India Private Ltd – Vijay Tandon – (March 2004), ‘Fiscal Decentralisation and Devolution: An Indian
Overview
6. GHK Consultants – Richard Slater – March 2004 – Comparative Study of Devolution Frameworks in South Asia
7. Gujarat (1998) Report on Urban Local Bodies in Gujarat State – First Finance Commission, State Government of
Gujarat – Gandhinagar
8. Jha Ramanath – Regional Advisor, UMP-SA, ‘ Decentralisation in India –
9. Jha, Gangadhar (December 2003) ‘Municipal Finance Resource Mobilisation; Status,
10. Karnataka (2002) Report of the Second Finance Commission, State Government of Karnataka, Bangalore
11. Mathur Om Prakash (June 2000) – Decentralisation In India: A Report Card – UMP Asia Occasional Paper No. 47 –
United Nations Urban Management Programme
12. Mathur, O.P. (2000) “Decentralization and Fiscal Decision-Making”, The World Bank Institute - South Asia Urban and
City Management Course.
13. National Institute of Public Finance and Policy (NIPFP) – New Delhi - 2004 – ‘Municipal Finance Studies’, prepared
th
for 12 Finance Commission
14. National Institute of Rural Development – Hyderabad – (March 2000) – ‘Functional and Financial Devolution on PRIs:
A Study Across Select States – Sponsored by the Eleventh Finance Commission – Govt. of India
15. Rahim A. (March 2004), ‘Devolution to Local Bodies in West Bengal
16. Rao, M.G.(2004) “Linking Central Transfers to Fiscal Performance of States” Economic and Political Weekly, May 1,
pp 1820-1825
17. Rao.G.M,(2002), “ Decentralization of Institutions”, Development, Poverty and Fiscal Policy
18. Tamil Nadu (2002), ‘Report of Second Finance Commission’, Government of Tamil Nadu
19. Tenth Finance Commission Report (1996)
20. Twelfth Finance Commission Report (2004)
21. World Bank – Rural Development Unit – South Asia Region (January 2004), ‘India – Fiscal Decentralisation to Rural
Governments.
37
Decentralisation and Local Finance Issues –
The Workings of State Finance Commissions in India
Introduction
Karnataka has been among the forerunners in the implementation of number of policy reforms for the decentralized
governance. Particularly in the past decade and half it has become known for the growth of knowledge based industries
including software industry, development of educational and urban infrastructure. This is supplemented by a pragmatic stance
in relation to governance and decentralisation, which has been reinforced by innovative policy recommendations on fiscal
devolution from two Finance Commissions. Whilst these recommendations have not been implemented fully, they nevertheless,
rd
represent the basis of sound fiscal framework for the promotion of further devolution. In tune with the 73 CAA, GOK has
passed the new Karnataka Panchayat Raj Act in 1993. Similarly, it also suitably amended Karnataka Municipalities Act 1994 to
th
give effect to provisions of the 74 CAA.
rd th
It is not surprising that Karnataka is among the forerunners in the implementation of 73 & 74 CAA. In the late 1980s, also it
experimented with functional, fiscal and administrative devolution. The experiment included a short-lived attempt to subordinate
the powerful district bureaucracy to a locally elected council at district level. Later on, the government was forced to concede to
powerful interests that reinstated the dominant role of deconcentrated administration.
The First State Finance Commission (FSFC) was set up in 1994, which submitted its report in 1996. The Second State Finance
Commission (SSFC) was set up in October 2000 and submitted its report in December 2002.
Karnataka is one of the first states in India to extend property tax reforms to all urban local governments through the
introduction of capital value method of property tax assessment and self-assessment procedures for property tax. Another
innovation in Karnataka has been the introduction of a new solid waste charge to offset the additional costs of compliance with
Hon’ble Supreme Court rulings on environmental standards.
38
rd
3 Level Devolution/Sharing of 40 % Zilla Panchayat - The Committed expenditure to be
funds among different tiers of Rural 35 % Taluka Panchayat earmarked first out of the amount (32
& Urban Local Governments 25 % Gram Panchayat % of NLGORR) available to PRIs
- Block Grants to the Gram Panchayats
100 % (30.60 % of
Part A – Panchayats at the rate of Rs. 3.50 lacs per Gram
NLGORR)
Panchayats to be deducted next from
This formula was not accepted by the
the above amount –
State Government, as there was high
(Block Grant to increase every year
ratio of committed expenditure, that
by Rs. 25 thousand per village
is, salary. As a result, actual
- Rs. 100 million to be deducted next
allocation took place on basis of
from balance for giving Incentive
salary expenditure only.
Grant
- Remaining amount to be shared by
ZP & TP in the ration of 65:35
FSFC of Karnataka has applied this concept of index made up of indicators for determining the share of an individual local body
th
within the tier (4 level of devolution framework).
FSFC then identified certain normative standards pertaining to some core services and recommended that the existing physical
levels of the essential public services should be raised over a period of five years.
39
Table 1.2 - Framework for Distributing Eleventh Finance Commission Grants to local bodies
Particulars/Criteria/Norms for Distribution Total Amount
A. Panchayati Raj Institutions
Each Gram Panchayat to be given Rs. 1.0 lacs for the purpose of
Maintenance of civic services Rs. 56.59 Crores
Remaining Amount to be distributed between Zilla Panchayats &
Taluk Panchayats in the ration of 40:60.
(Inter-se distribution among the zilla and taluk panchayats as per
weightages assigned by SFC)
Zilla Panchayats Rs. 11.37 Crores
Taluk Panchayats Rs. 7.58 Crores
Amount required for development of data base to be deducted first Rs. 0.17 Crores
Remaining Amount to be distributed between municipal institutions
As per the weightages worked out by the SFC Rs. 24.79 Crores
Incentive Grants Scheme for Gram Panchayats and Urban Local Bodies
SSFC of Karnataka has recommended setting up incentive fund to encourage Gram Panchayats to maximize their revenue
mobilisation. An amount of Rs.100 million has been recommended to be earmarked every year as incentive fund and not to be
diverted for any other purpose. All Gram Panchayats whose Internal Resource Mobilisation (recovery against the demand-
current and past) is 60 percent and above in each year for three consecutive preceding financial years are eligible to be
considered for awarding cash incentive under this fund.
It also recommended that the state government formulate an incentive scheme on similar terms for municipal bodies after two
years of implementation of the capital value based property tax system.
40
SSFC, it should have opted for appropriate indicators like per capital income or population below poverty line and should have
fixed responsibility on GOK to work out necessary data base during the course of SFC implementation.
Incentive Fund
SSFC has set up incentive fund but it has suggested that the GP, which gets incentive for achieving more than 60 per cent
recovery ratio for three years in row, should not be considered for incentive fund for next three years. Such a provision is likely
to put an end to sustainability of good tax recovery performance by GP, as there is no incentive for it. Also, the amount
earmarked under the incentive fund has tended to be rather meagre and linked to only one sort of reform.
Borrowing Policy
Though there is ample scope to strengthen policy in the of debt financing drawing from the successful experience of
neighbouring Tamil Nadu and other parts of India, SFCs of Karnataka did not dwell upon borrowing policies for local
governments. In Karnataka Municipal Corporation have limited powers to borrow whilst municipalities and rural local
governments do not have significant borrowing powers. GOK manages loans on their behalf and transfers funds on a notional
basis, since the line departments or parastatals of GOK carry out capital works. The state government still undertakes a needs
assessments and fiscal capability analysis on a case-by-case basis. There have been several instances where the GOK
without assessing the debt absorption and repayment capability of a local authority, has allocated disproportionate loans to a
local government as a part of it’s (and not the local government’s) political agenda. The track record of funding agencies
(mostly multi-laterals) is very poor in this regard. Once the state has provided a guarantee of repayment, they have not looked
into the needs and capabilities of the recipient local government and have thus simply ended up serving the political agenda of
the State Government itself. Karnataka SFCs have not taken this present ‘totally top down practice associated with borrowing
by local government and has not provided any policy input regarding borrowing or debt financing policy for local governments.
Implementation Blues
Whilst the SFCs in Karnataka have recommended a simple but comprehensive fiscal allocation framework, in practice
implementation has been weak. The grants provided to local bodies do not fully corresponded to the recommended allocation
criteria. The inadequacies associated with the implementation of SFC recommendations are as follows
Table No. 1.3 - Actual Devolution of Funds to PRIs & Urban Local Bodies in Karnataka Rs. In Crores
___________________________________________________________________________
41
Sr. Item 1997-98 1998-99 1999-00 2000-01 2001-02
No. Actual Actual Actual Actual RE
1. Projected NLGORR 7825.55 8764.62 9816.37 10994.33 N.A.
of the State by
FSFC
Second SFC has also noted this linking of actual devolution to salary and not to the SFC formulae (para 6.52 & 10.20) but in a
very lenient way. It should have strongly commented on this and should have calculated distortion / inequality caused by this
approach of GoK. Also as a remedy to correct present practice, it should have devised mechanism of equalization grant for a
certain period for the ULBs, which are likely to suffer reduction in quantum of grant do to implementation of formula based
devolution.
Table 1.4 and 1.5 reveal another facet of the same fact how in actual practice GOK has not adhered to the FSFC formulae, it
can be observed that not only distortion exists at the first or second stage of devolution but also it has existed in all levels.
Tables 1.4 and 1.5 clearly indicate that GOK has not followed in actual practice inter se or horizontal distribution framework
suggested by First SFC. These tables also indicate that there also exists big gap between the devolution amount proposed in
the budget estimates and actually transferred to the local bodies.
Table No. 1.4 - Devolution to PRI as per SFC recommendations, Budget Estimates and Actual Figures
(Rs. In Crores)
___________________________________________________________________________1. NLGORR 1997-98
1998-99 1999-00 2000-01 2001-02 2002-03
Actual Actual Actual Actual RE (BE)
2. Allocation 2348.94 2574.37 2862.83 3275.01 3466.29 4148.93
should have
been made
to PRIs as
per First
SFC recomm-
endation
(30.6% of
NLGORR)
3. Allocation made to PRIs by the Govt. in the Budget (Link Document).
(i) Plan 732.00 732.00 792.00 762.00 1083.21 673.08
(ii)Non-plan 2020.99 2357.01 2707.95 2892.47 2993.94 3286.47
Percentage
to NLGORR 35.86 36.72 37.41 36.02 35.99 29.20
Thus, though the Karnataka SFC’s evolved a comprehensive devolution framework for fiscal devolution but in actual practice, it
has failed to take and cause any qualitative difference.
42
Chief Minister’s Special Development Grant –
The actual overall devolution for ULB does also include, though not provided by SFCs Chief Minister’s Special Development
Grant. These amounts are distributed to local bodies on the sole discretion of the chief minister. In a democratic polity, it may
not be feasible to ensure that all inter-governmental transfers are governed by an objective formula, but such transfers should
be guided by clarity and limits.
The practice of deducting the entire amount of dues (towards above items) pertaining to all Urban Local Bodies put together
from the total devolution amount is biased in favour of those local bodies who have higher amount payable. As a result of this
practice the local bodies, which have borrowed less, or consuming less water or electricity are paying for the local bodies,
which have higher amount of payables. The amount due from each local body should be deducted out of the allocation
available to that local body only. But GoK does not have such a system, as maintaining accounts of dues or receivable amount
from ULBs are not maintained individual local body-wise. Absence of such a system is resulting in to distortion or inequality.
SSFC has noted this practice also in its report (para 6.52) but again it has not worked out the actual distortion taking place due
to prevalence of such practice and has not pressed this point emphatically /forcefully. It is surprising that SSFC, which
recommended setting up of General Purpose Grant to carry out various reforms, has failed to notice lack of proper accounting
of dues and their recoveries at the State Government level.
Summing Up
The regular formation of SFCs and implementation of their various recommendations by GOK has certainly brought in
budgetary certainty and degree of predictability. The SFCs of Karnataka have developed a simple and transparent framework
for fiscal transfers. It certainly has allowed local governments to plan and budget their affairs with certainly but as the budgeting
practices in local bodies are highly defective and unaugmented, it is difficult to know how far they have benefited from well laid
out system of transfers. The institution of SFC has certainly brought in hard budgetary constraints in Karnataka but, as reported
by SSFC of Karnataka there are still sizeable amount of fiscal transfers, which are out side the SFC scheme and in actual
practice GOK has not delinked fiscal transfer from salary commitments of local bodies and finally it is carrying out various debt
related and other water and electricity consumption related deduction in a gross manner from the total amount of devolution.
These practices are creating distortions and inequality. Second SFC of the Karnataka has commented about it. But it has not
strongly criticized it or has not brought about clarity about such non-formulae based fiscal transfers or distortions taking place in
the actual share of devolution received by individual local body. In a democratic polity, it will not be feasible to bring each and
every transfer from state to local under devolution formulae (Chief Minister Special Development Grant Fund is testimony of it)
but clarity about it and an overall limit to such transfers will certainly serve the objective of hard budget constraints, predictability
and transparency. Similarly, a system of deducting dues of an individual local body from her own devolution share can certainly
be created and from the point of view of inter se equity must be created and adopted.
The SFCs of Karnataka have certainly addressed the issue of incentive structure, but the amount earmarked for this purpose is
far meagre and for singular reforms.
The degree of budgetary autonomy has not improved much because it depends on legal structure and degree of self-reliance.
Not much of the legal autonomy has been granted by carrying out legal amendments to the Acts and the dependency of local
43
bodies on State transfers still continues to be very high. The real budget autonomy will come through only when their degree of
self-reliance will improve through sustained internal system reforms by local bodies.
44
2
Case Study 2 - Review of Tamil Nadu State Finance Commissions
Introduction
Tamil Nadu is another state, which has shown high pragmatism in the field of urban sector particularly in the post economic and
structural reforms period. It is the only state in which all municipal bodies (107 in number) have successfully adopted accrual
based double entry accounting system. Also, it has implemented several urban reforms under Tamil Nadu Urban Development
Project.
rd th
Government of Tamil Nadu consequent to the enactment of 73 and 74 Constitutional Amendment Acts enacted the Tamil
Nadu Panchayats Act 1994 and has made amendments to the District Municipalities Act 1920 and the Municipal Corporations
Act.
The First State Finance Commission was constituted in April 1994 wide G.O. 350 and it submitted its report in November 1996
covering the period April 1997 to March 2002. This Commission comprised of a retired senior civil servant as chair along with
the Director of Municipal Administration, director Rural Development and a respected non-official member, with a senior civil
st
servant as member secretary. The Second State Finance Commission was constituted on 1 December 1999, which submitted
its report to the GOTN in May 2001.
rd
3 Level Devolution Vertical sharing After allocating the proposed salary
of funds among different tiers of requirements of District Panchayats, the
Rural & Urban Local Governments balance funds to be distributed between
Part A – Sharing among the three village Panchayats and Panchayat
Tiers of Panchayats Unions in the ratio of 60:40 respectively.
45
-Resource Potential
Inverse of Per Capita 10%
House/property tax
Inverse of assigned 10%
Revenue
Using these criteria SFC has fixed share
as follows
Municipal Corporations 33%
Municipalities 32%
Town Panchayats 35%
th
4 Stage of Devolution – Among Village Panchayats
Horizontal or inter se distribution - Population 60%
On the basis of Population
among Panchayats and municipal - SC/ST Population 10%
bodies. - Area 10%
-Among Panchayats - Asset Maintenance 10%
---------
100%
Among Panchayat Unions
- Population 60%
- SC/ST Population 10%
- Area 10%
- Resource Gap on Inverse10%
- Per Capita land revenue 10%
---------
100%
- Among Municipal Bodies
Among Corporations
- Population 50%
- Slum Population 10%
- Per Capita Own Income 20%
- Asset Maintenance 10%
- Salary and pension expenditure
10%
---------
100%
Among Municipality
- Population 50%
Among Municipality - SC/ST Population 10%
Population 40 % - Per Capita Own Income 20%
- Asset Maintenance 10%
SC/ST Population 20 % - Salary and pension
Financial and Service indicator expenditure 10%
40 % ---------
100%
Among Town Panchayats
- Population 50%
- SC/ST Population 10%
- Per Capita Own Income 20%
- Asset Maintenance 20%
---------
100%
Source- Constructed on the basis of information from first and second state finance commission reports of Tamil Nadu
46
Rs. In Million
Grants Assigned Revenue Total
Rural Local Bodies 1058.7 669.9 1728.6
Urban Local Bodies 1795.1 2358.8 4153.9
Pension commitment (both local bodies together) 600.0
Total 2853.8 3028.7 6482.5
___________________________________________________________________________
Source – SSFC of Tamil Nadu
Table 2.3 Statement showing devolution of funds under Pool A (Assigned Revenue) and Pool B (Global Sharing)
Rs. In Million
Year Pool A Pool B Total % of SOTR
(Assigned revenue)
1997 – 98 2951.0 6125.6 9076.6 8 %
1998 – 99 3649.1 7929.4 11578.5 8 %
1999 – 00 3919.6 8051.9 11971.5 8 %
Source – SSFC of Tamil Nadu
Thus, it can be observed that after FSFC report and its acceptance by GOTN, local bodies of Tamil Nadu have received
increasing devolution even though GOTN kept sharing of revenue stagnant at 8 percent of SOTR and did not increase it by 1
per cent every year as recommended by FSFC.
Equalization Fund –
FSFC suggested this fund at the rate of 15 % of the devolution amount to make good the imbalance and inadequacies, if any,
to Panchayat Raj Institutions and urban local bodies consequent on the adoption of inter-se distribution criteria.
Incentive Fund –
The FSFC suggested continuance of the then existing incentive grants provided statutorily to rural local bodies. Further, it has
recommended extension of the grants to urban local Bodies to improve their own source of income.
Implementation Blues
Though the First SFC of Tamil Nadu came out with a comprehensive and progressive fiscal devolution scheme in actual
implementation, it suffered from various constraints and inadequacies as follows –
Equalization Fund –
GOTN utilised this fund to help select local bodies on discretionary basis sometimes even for creation of capital infrastructure.
No norms have been evolved regarding this fund by GOTN.
47
Innovative Aspects of Tamil Nadu SSFC
SSFC of Tamil Nadu has continued tradition of pragmatism and progressiveness as evident from the following
The most noteworthy recommendation of second SFC is enlargement of divisible pool by recommending 5 per cent share for
local bodies in the central devolutions received by the state since SSFC felt that local governments provide a substantial part of
the infrastructure for the manufacturing and service sector and that these sectors, in turn, contributes considerable revenue to
the centre by way of corporate income tax, union excise duty and customs etc, which are all buoyant revenue sources and that
local government is justified in getting a share of such buoyant sources.
Relationship between Formula Based Devolution and Non-formula Based Transfers to Local Governments –
Taking note of the inevitability of non-formula based devolutions/transfers by state to local bodies under democratic polity,
second finance commission has come out with recommendation of 80:20 ratios between formulae and non-formula based
transfers. SSFC has precisely calculated all the non-formula based plan, non-plan and other discretionary grants, which are out
side SFC devolution, and has provided a clear picture about total funds flowing to local bodies from State. Having drawn a clear
picture it has recommended that all transfers outside devolution should be about 25 percent of formula based transfers.
Estimation of Fiscal Gap and its Correlation with the Devolution Recommended by SSFC
Second SFC has estimated the revenue gap of local bodies on a logical and objective norms basis. Having estimated the total
revenue gap it has correlated the revenue gap figures with the fiscal devolution figures, which it has recommended, and in this
way, it has clarified the sufficiency of devolution amount recommended by it against the estimated fiscal gap or requirements of
local government as follows
Table 2.4 - The requirement of all local bodies and quantum of transfer of funds (2002-07)
Rs. In Million
I 1) Revenue Gap of all Local Bodies 119528.00
2) Capital Requirements of all Local Bodies 50250.00
-------------
Total Fiscal Gap 169778.00
Reservation of certain portion of SFC Grant for capital works is a yet another innovative feature of the SSFC of Tamil Nadu.
48
Equalization as a concept has been introduced to make up shortfalls that may arise in the implementation of the principle
distribution. It is difficult to ensure that an objective formula will at all times meet the needs of all local governments. The
equalization grant is thus intended to meet specific service needs that are not covered under the new revenue sharing system.
Self-reliance Index –
The second SFC analyzed the resource base of local bodies in detail and has made various recommendations to improve the
utilization of own resource by the local bodies. As a part of it, the second SFC has provided present self reliance index and as
an important recommendation it has recommended that self reliance is to be achieved by the middle of the award period and
has asked GOTN and local bodies to work together to achieve it. The recommended self-reliance index for award period (2002-
07 is as follows
1. the own income of Municipal Corporations shall be in the range of 65 to 70 %
2. the own income of Municipalities shall be in the range of 55 to 60 %
3. own income of Town Panchayats shall be about 45 %, and
4. in respect of Village Panchayats the own income shall be about 25 %.
Staffing Norms –
Second SFC has discussed entire range of issues associated with the human resources of local bodies. The most important
aspect is it has recommended staff ratio per thousand for different types of local bodies as follows and has asked state
government and local bodies to maintain it strictly for control of salary cost
• Chennai Corporation - 3.5 employees per thousand population
• Other Municipal Corporations - 3 employees per thousand population
• Municipalities - 2.5 to 3 employees per thousand people
• Town Panchayats - 1.75 to 1.90 employees per thousand
• Involvement of professional agencies such as life insurance companies and banks to administer the contributory
pension scheme and commutation of pensions for all employees covered under the scheme.
The SSFC has also made a number of important recommendations on strengthening local government accounting and
auditing. The Director of Local Fund Audit verifies all transactions relating to urban local government. Municipal Corporations
st
are expected to compile and submit their accounts for audit before 1 July while other municipalities are expected to submit
49
th
accounts by 15 May. The audit function should then be completed within a period of one year. In practice, however, the
auditing of accounts is often delayed due to delayed compilation. In order to improve the efficiency of the audit function the SFC
has recommended that:
• Steps to be taken to accord statutory status to Director of Local Fund Audit to improve the expertise of auditors and
25% of the posts of Assistant Directors Local Fund Audit may be earmarked for direct recruitment to induct
professionals auditors such as chartered accounts and cost and works accountants.
• Pre-audit may be introduced for work bills in Municipalities, Town Panchayats and Panchayat Unions in place of
concurrent audit
At the same time, the SSFC recommended strengthening local government accounting systems by extending the accrual
accounting system introduced into all municipalities and corporations from 200-01 to Town Panchayats and Panchayat Unions
from 2003-04 after sufficient training and after completion of a pilot scheme in 10 municipalities and 2 corporations. GOTN has
implemented this reform with respect to municipal bodies and now is in the process of implementing it in Panchayat Unions.
Management Audit –
The State Planning Commission has evolved a scheme for management audit whereby all works taken up in different schemes
will be subjected to scrutiny at random. This process covers schemes under basic amenities, remunerative enterprises and
other development works. The SPC recommends that management audit team should comprise Additional Directors from office
of the Director of Rural Development/ Commissioner of Municipal Administration/ Director of Town Panchayats and an Officer
from State Planning Commission. The SSFC has recommended adoption of management audit system.
Budgeting Process –
The SSFC recommended that based on the experience of participatory budgeting in Brazil each local government should
develop a printed draft budget to be distributed free to relevant public stakeholder groups such as Gram Sabhas/ Urban Sabha/
and Ward Committees and after detailed debate any necessary modification should be reflected in the final budget document.
In addition copies of printed budgets may be displayed in the notice boards of Village Panchayats/ Panchayat Unions/ Town
Panchayats/ and Municipalities. Further, all the local governments, except Village Panchayats are to be encouraged to can
take advantage of the Internet and host websites providing salient features of their area including their budget. In the case of
Village Panchayats, relevant data such as works selected in the year, budget etc. can be made available through the
information kiosk at the Panchayat Union.
It further recommended step-by-step introduction of the Zero-base budgeting, at first instance in all municipal corporations and
special grade municipalities and in line agencies directly and intimately connected with local bodies viz. Tamil Nadu Water
Supply and Drainage Boards, TN Slum Clearance Board etc
Beside above specific landmark recommendations Second SFC of Tamil Nadu has also made the following important
recommendations
• Incentive funds for adoption of report card system for performance monitoring by local bodies.
• It recommended that a 25 per cent ceiling on deduction from gross state finance commission devolution towards
repayment of all loans and 20 per cent ceiling regarding non-debt deductions.
• The local body representatives to be declared as public servants to enable invoking the provision of Prevention of
Corruption Act, 1998 and Benami Act.
• Setting up of Ombudsman type of institution for local body representatives with six-month time frame to complete the
enquiry and give findings.
Implementation Blues
The same old story of inadequate implementation unfortunately got repeated with SSFC recommendation. Though government
has accepted principle and formulae of devolution and sharing of resources with the local government institutions, it has not
acted upon other recommendation especially about performance based devolution.
Summing Up
Substantial progress has been made in Tamil Nadu with regard to the local devolution and fiscal reforms. The SFCs of Tamil
Nadu has elaborated a progressive revenue sharing arrangement between state and local government based in line with the
50
Constitution Amendment Act. These recommendations, that have been largely but not wholly implemented, have resulted in the
emergence of a more efficient and transparent system of fiscal devolution with provision for an incentive fund to reward good
performance and an equalization fund to address unanticipated anomalies.
The Second SFC has made in all 132 main recommendations and 218 sub-recommendations touching all the aspects
rd th
envisaged by the 73 and 74 Constitutional Amendment Act. The overall quality, framework, layout, language, information,
data etc. of the SFC report is of very high standard. The report of the SSFC of the Tamil Nadu can be considered one of the
best SFC report and gives hope that the institution of SFC is coming to the age and will be able to serve objectives envisaged
by the Constitutional Amendment Acts.
st nd
Fiscal devolution in Tamil Nadu is an evolving process and derives from the recommendations of the 1 and 2 State Finance
Commissions. Overall, there has been little change in relation to tax assignments for local government other than attempt to
ensure more timely transfers of earmarked taxes from State to local level. The focus of innovation has, instead, been
concerned with revenue sharing and grants in aid. State-local revenue sharing arrangements are thus central to the evolving
fiscal devolution process in Tamil Nadu based on a revenue sharing concept from a tax pool made up of the net proceeds of all
state taxes, excluding entertainment tax.
The formation of SFC and implementation of their recommendation has certainly brought in budgetary certainty and degree of
predictability. The SFCs of Tamil Nadu have provided simple and transparent framework for fiscal transfers. It certainly has
allowed local governments to plan and budget their affairs with certainly but budgeting practices in local bodies are highly
defective and unaugmented, so it is difficult to know how far they have benefited from well laid of system of transfers. Institution
of SFC has certainly brought in hard budgetary constraints but as reported by Second SFC of Tamil Nadu still there are
sizeable amount of fiscal transfers, who are out side the SFC scheme. But Second SFC of Tamil Nadu has certainly brought
about clarity about such non-formulae based fiscal transfers and has even suggested limit to such transfers. In a democratic
polity, it will not be feasible to bring each and every transfer from state to local under devolution formulae but clarity about it and
an overall limit to such transfers will certainly serve the objective of hard budget constraints, predictability and transparency.
The SFCs of Tamil Nadu have certainly addressed the issue of incentive structure, Second SFC has recommended earmarking
of 13 per cent of devolution for various incentives or performance linked grants and has also provided norm for operation of
such funds.
The degree of budgetary autonomy has not improved much because it depends on legal structure and degree of self-reliance.
Not much of the legal autonomy has been granted by carrying out legal amendments to the Acts and the dependency of local
bodies on State transfers still continues to be very high. The real budget autonomy will come through only when their degree of
self-reliance will improve through sustained internal system reforms by local bodies.
It appears from its commitment to the devolution process that the GOTN has a rather pragmatic view of the benefits of reform.
Whilst the implementation of a more transparent and predictable formula for funding local government has undoubtedly
facilitated the states overall budget management and monitoring process it has also enabled local governments to develop a
greater measure of financial independence, and in turn, seek new ways to fund local infrastructure and services that place less
direct burden on state finances. There are numerous cases in Tamil Nadu of municipalities now leveraging development capital
from a variety of sources. It is interesting to note that the devolution reforms remain in place in spite of the fact that opposition
parties dominate many types of council.
Locally elected councils are strongly in favour of the current fiscal framework since it provides greater budgetary certainty than
the former ad hoc system of transfers that would commonly penalize opposition councils and allows for greater stability of cash
flows. It is also felt that the fiscal reforms have helped develop the role of politicians as responsible agents in the development
process as the new arrangements have contributed to improved service delivery.
51
3
Case Study 3 - Review of Andhra Pradesh State Finance Commissions
Introduction
Andhra Pradesh is yet another state from southern part India, which has made long strides in the last decade and has received
lot of acclaim for its initiatives in the area of e-governance, educational infrastructure and development of software and
computer industry.
Andhra Pradesh has long been noted amongst Indian states for the explicit emphasis its charismatic Chief Minister, Chandra
Babu Naidu, has placed on public administration reform. This has been arguably driven by a desire to promote private sector
investment and economic development. The primary articulation of the reform agenda is the 1999 “Andhra Pradesh Vision
2020,” which defines a long term development agenda for the state. Governance and public administration reform is central to
this vision. Moreover, the change process in the state is underpinned by a number of “articles of faith” (Mooij (2003)). These
include an emphasis on delivery and performance, the associated introduction of performance targets and measures; and the
use of technology for introduction of e-governance in order to achieve accountability and transparency and to reduce corruption
in governance. The direct manifestation of the reform agenda in policy terms includes:
1996 Policy paper on fiscal management;
The Andhra Pradesh case illustrates some innovative approaches to performance enhancement for local government, through
pilot programmes that aim to incentivise and reward improvement. One such programme is based upon a broad range of
performance criteria related to municipal reform and infrastructure service delivery, with donor support. Another approach,
running in parallel, focuses more exclusively on revenue improvements. Whilst the overall policy framework in the state is
based more on an economic reform agenda than on a strong orientation towards devolution, there is nevertheless a clear
recognition that effective local government underpins economic development.
In relation to decentralization, there has been a clear focus on improving the performance of local bodies, so that they can play
a more developmental role, promoting socio-economic development and service delivery. The GOAP has, however, arguably
sought to ensure such efficiency gains through a more regulatory approach rather than through directly empowering local
bodies. Certainly, the Telugu Desum Party (TDP) has sought to develop a rural power base, but generally the formulation and
implementation of policy remains highly centralized. At district level, an increasing number of powers are concentrated in the
hands of District Collectors (Indian Administrative Service Officers) rather than in control of local politicians or even district level
heads of departments. Mooij (2003) also notes that whilst the District Collectors have a direct line to the Chief Minister, which
helps to ensure implementation, this also serves to ensure central control.
nd
Andhra Pradesh Government constituted its First State Finance Commission 22 June 1994, which submitted its report in May
th th
1997. The Second State Finance Commission was constituted on 8 December 1999 and it submitted it report on 19 August
2002.
While working out devolution amount AP SFCs have adopted gap filling or “need based” devolution approach. The
multi-layered framework recommended by the SFC is as follows:
52
iii) Total amount required – Income from own sources of municipalities = net amount
required to be devolved.
iv) Net amount – EFC grant amount for municipalities = amount to be devolved by GOAP.
v) Inter-se allocation as per following criteria:
The inter se distribution may be made on the following basis keeping in view the varying per capita income of the Municipalities
and their expenditure needs. The Commission recommends that the amount earmarked for civic amenities may be distributed
on the following criteria:
a) Total population of the Municipal Council 60 per cent.
b) Area excluding slum 10 per cent
c) Slum population 10 per cent.
d) Municipalities where the tax demand is
less than the amount required for salaries
of the non-teaching staff. The amount
may be distributed in proportion to the
gap between the two, i.e. expenditure
on salaries of non-teaching staff minus
tax demand. 10 per cent
d) Revenue mobilization. 10 per cent
---------------
Total 100 per cent
----------------
The total devolution by way of assignments and grants recommended by the Commission for both the Rural and Urban Local
Governments is Rs.1, 7939.40 million (i.e. 1, 1673.30 million for Rural Bodies and Rs.6266.10 million for Urban Bodies). It
works out to 10.385 percent (i.e. 6.76 per cent to Rural Local Bodies and 3.63 percent to Urban Local Bodies) in the total Tax
and Non-Tax Revenues of the State Government including the share of Central Taxes, for the year 2000-2001. The details of
additional devolutions recommended by SSFC are shown below in table 7
___________________________________________________________________________
Source – First and Second SFC Reports of Andhra Pradesh
Table 3.2 - Additional Devolution As Recommended by SSFC for Rural (PRI) and Urban Local Governments
Rs. In Crores
For Rural Local Governments (PRI)
I Formulae Based Devolution
Requirement for civic amenities of Panchayats 367.94
(as explained in the Table 3.1 above)
II Assigned Revenue
Abolition of Land Cess Compensation 33.88
Excise Cess 42.08
III Grant-in-Aid
Construction of Office Buildings 31.00
Strengthening of small Panchayats 68.24
Special Repairs to Sub Centres 10.00
Office cum Residential buildings to ANMs 80.00
Rural Water Supply 168.60
Rural Sanitation 25.40
Minor Irrigation 19.40
Rural Roads 80.00
Construction of Mandal Panchayat Buildings 12.00
Toilet facilities in the schools 2.41
Drinking Water facilities in schools 0.41
Construction of new schools in place of old buildings 1.50
Special repairs to school buildings 6.50
Maintenance of Rural roads (Grant to Zilla Panchayats) 130.00
Maintenance of school buildings (Zilla Panchayat Grant) 26.00
Maintenance of Minor Irrigation (Z.P. Grant) 11.30
Maintenance of MP, ZP and other office buildings 4.88
Maintenance of Rural Water Supply (Z.P. Grant) 26.00
53
For payment of pension, etc 19.79
-------------
Total of I + II + III for Rural Local Governments (PRI) 1167.33
-------------
For Urban Local Bodies
I Formulae Based Devolution
For providing civic amenities to Municipalities (Table 6) 130.00
For providing civic amenities to Corporations (Table 6) 165.00
II Assigned Revenue
M.V. Tax Compensation 74.00
Excise Cess. 11.92
III Grant-in-Aid
Salary Grant where tax demand is less than Establishment charges 39.22
Incentive Grant for Solid Waste Management to Municipal Corporations 5.00
Urban Water Supply and Drainage 177.50
Maintenance Grant for Municipal buildings 3.35
Revised scales of pay and increase in D.A. 19.70
Salaries to Medical Officers, Staff and purchase of Medicines 0.92
---------
Total of I + II + III for Urban Local Governments 626.61
----------
Total Additional Devolution to local bodies (rural + urban) 1793.94
Source – Second SFC Report of Andhra Pradesh
Table 3.3 - Framework for Distributing Eleventh Finance Commission Grants to local bodies as worked by Second SFC of
Andhra Pradesh
Eleventh Finance Commission allocated grant of Rs. 152.05 crores per annum for rural local bodies and Rs. 32.93 crores per
annum for urban local bodies. Second SFC of Andhra Pradesh has worked out its inter se distribution among local bodies as
follows
For Panchayats
1(a) CIVIC AMENITIES TO GRAM RS. IN CRORES
PANCHAYATS (As fixed by Eleventh Finance Commission)
Criteria – Population:
i) For Tribal Panchayats 35% 43.60
ii) Panchayats with a population 30% 37.37
124.56
1. (b) CIVIC AMENITIES IN BEST
GRAM PANCHAYATS 0.07
(As fixed by Eleventh Finance Commission) ----------
124.63
2. DATA BANK
Creation of SFC Cell 0.30
Data Bank at Mandal, District 17.97
Level and State Level
(As fixed by Eleventh Finance Commission)
The Gram Panchayats shall prepare five-year plans and annual plans for utilization of the grants by prioritizing their needs.
Keeping in view, the varying per-capita incomes of the Municipal bodies and their expenditure needs, the Second State
Finance Commission recommends that the amount earmarked for civic amenities may be distributed on the following criteria.
54
• To Municipal Councils/ 60 percent based on population
Corporations
• To Slum areas. 20 percent based on population.
• To Municipalities in which the tax 20 percent based on population.
demand is less than the amount
required for salaries of the non-
teaching staff. The amount may be
distributed in proportion to the gap
between the two i.e. expenditure
on salaries of non-teaching staff
minus tax demand.
The Commission considers that the Municipal Corporation of Hyderabad, Vijaywada and Vishakhapatnam have good resources
and are in a better position to raise resources. Therefore, they need not be given any grant out of this. The other Municipal
Corporations may be treated on par with the 110 municipalities and be made eligible for the grant with reference to the
principles enunciated above.
The grant shall be utilized for providing civic amenities as prescribed in the Eleventh Finance Commission. The Municipal
bodies shall prioritise their needs, prepare a plan of action for 5 years, and utilize the amounts accordingly.
The grant of Rs.9.25 lacs for Data Base is meagre. The State Government may provide matching amount from the State
Budget and utilize the amount for providing Computers in Municipalities, which have not installed computers. If there is any
balance, the amount may be kept at the disposal of the Commissioner and Director of Municipal Administration for creating an
Urban Data Bank in his office.
MATCHING CONTRIBUTION:
As regards matching contribution, 20 percent may be fixed in respect of Municipalities where the tax demand is less than the
salaries of the non-teaching staff, 30 percent matching contribution may be prescribed in respect of other Municipalities and
corporations.
Though GOAP’s annual devolution to local bodies in 2000-2001 was Rs.52757.90 Million, that is 30.53 percent of the tax and
non-tax revenues of the State including the share of Central Taxes and will go up to 40.92 percent, if GOAP accepts additional
devolution of Rs.17939.40 million recommended by the Second SFC, no where GOAP is required to share specific percentage
of its resources compulsorily. The second SFC should have recommended/codified such a percentage sharing of resources of
State and from total share of those local bodies should have worked out different grant-in-aid or inter-se devolution packages.
55
Absence of Efficiency Based Criteria
It can be observed that entire devolution mechanism is based on gap filling approach and wherever composite index of different
criteria is used, there is complete absence of efficiency-based criteria. Only in one place, in the case of inter-se allocation
between Municipal Corporation, 20% weightage has been given to resource mobilization.
Simultaneously, except one incentive grant head of Rs.50 Million (one time) and that too for municipal corporations for
improving solid waste management, the entire existing devolution package of Rs.52757.90 million and additional devolution
package of Rs.17939.40 million does not contain any incentive grant.
While ending its report, the Second SFC has recommended linking of release of grants to the performance of the local bodies
in the matter of collection of taxes and non-taxes, but it has not provided any framework for it.
Similarly, there is a passing mention about the additional amount of devolution of Rs.9791.60 million per annum recommended
by the first SFC, but there is no further information about its bifurcation, main items, its actual implementation and attainment of
desired objectives, etc.
Implementation Blues
Inadequate implementation
SSFC has dwelt upon this aspect considerably. As noted by Second SFC, out of 84 recommendations made by first SFC, 24
recommendations were not accepted while 5 recommendations were accepted with modifications. Thus, almost one-third
recommendations were not accepted by GOAP without recording reasons for non-acceptance.
• It further points out that several recommendations accepted by GOAP were not implemented.
• Out of additional devolution of Rs.9791.60 million recommended by the first SFC, only 44.37 per cent that is devolution of
Rs.4344.20 million was accepted by GOAP.
In case of several Grants-in-aid, adequate amount is not released or the norms for allocation were not followed.
Summing Up
As discussed above workings of SFCs of Andhra Pradesh has suffered from both count one, inherent weakness in SFC’s
approach and inadequate implementation. Compare to pre SFC situation budgetary certainty and predictability of funding has
certainly improved but it has not introduced concept of hard budgetary constraints and formulae based fiscal devolution. It can
be observed from the table 9 that out of total additional devolution package of Rs. 17939.40 million recommended by Second
SFC of Andhra Pradesh only Rs. 6629.40 million (36.95) have been suggested under formulae based devolution while rest of
the funds have been suggested under grant-in-aid transfers. Further Andhra Pradesh SFCs have not calculated total fiscal
transfers taking place to local bodies beyond SFC devolution.
There is lack of incentive structure or performance-linked devolution of funds to local bodies. All Andhra Pradesh local bodies
suffer from the problem of high dependency on the fiscal transfers and not many legal amendments have been carried out to
suggest increase in budget autonomy in Andhra Pradesh Local Bodies. Thus barring some innovations SFCs of Andhra
Pradesh have not charted new way and has thus failed to provide new dimension to existing state-local relationship.
56
4
Case Study 4 -Review of Gujarat First State Finance Commission
Introduction
th
Government of Gujarat constituted First State Finance Commission on 15 September 1994 and the commission submitted its
th th
interim report on the recommendations of 10 Central Finance Commission on 8 September 1997. It handed over final report
on rural local government bodies on 13-7-98 and report on urban local bodies in October 1998.
As GOG has only recently constituted second state finance commission as a result its report is not available for review.
The FSFC being first generation SFC its report is of very preliminary nature. Gujarat State has the legacy of highly developed
rd th
local government system and fairly well developed Grant-in-code even prior to 73 & 74 CAA or formation of State Finance
Commission. Report of FSFC of Gujarat is more of documentary nature and in its fiscal devolution framework it has mainly
focused on listing of information regarding existing taxes, non-tax sources and grant-in-aid and possible ways for efficient use
of existing tax sources.
In the report of the FSFC one, find very good documentation about existing tax sources applied by local bodies and the grants
released to them. Also, there is a good data about local bodies but it does not contain data about finances of State and total
grant-in-aid over the years to local bodies – budgeted and actually disbursed.
However, SFC has provided estimation of devolution package recommended by it and its projection over five years, which is
provided in the table 4.1 and 4.2.
Table 4.1 - Size of Fiscal Transfer to Urban Local Bodies in Gujarat – 1995-96
Grant sanctioned to the urban local bodies: year 1995-96 (Rupees in lacs)
1. Decentralised district planning, 449.33*
1491.75
14954.92
* 9.17% of the District Decentralised planning grant
Source – First State Finance Commission Report of Gujarat
Table 4.2
Statement showing details of Additional Income to be given in the first year to urban local Bodies and new Additional burden on the State
Government as per the Recommendation of the First State Finance Commission of Gujarat
(Rs. In Lacs)
Bodies Service
Taker
57
4 2.6 Education Cess. 1400.00 1400.00
5 2.7 Conversion Tax on N.A. 8.83 8.83 14 Land Revenue on N.A. it distributed a rate of
85% instead of 75%. After increase of 20%
59.50 59.50 in the income of Rs. 70, lacs and considering
at the rate of 85% Rs. 71.40 lacs will be
11.90 -2.1
available.
6 2.8 Land Revenue 204.00 204.00 Additional Rs. 204 Lacs will be available for
land revenue after increasing the Recovery
347.00 -61.00 408.00 amount at 85% (Rs. 347 lacs) instead of
35% (Rs. 143 lacs)After Doubling the Rate of
land revenue.
7. 2.9 Local Cess. 110.00 110.00 Due to Doubling the Rate of local cess.
220.00 220.00
Antenna Tax
12 4.9 Incentive Grant-in-aid 1335.00 1335.00 As this is additional recovery burden will not
fall on anyone
Additional Recovery 9022.00
Table – 4.3
Estimates of Income for the next five years according to Recommendation of First State Finance Commission - Gujarat
2.2 Motor Vehicle Tax 341.59 358.66 376.6 395.43 It is estimated that Grant-in-
aid will be available from
Grant-in-aid for repairing
1999-2000 Growth Rate of
of Road
5% is taken due to price
rise.
2.4 Professional Tax 2499 2499 2499 2499 2499 No change in AGR.
2.5 Entertainment Tax 1409 1409 14.9 1409 1409 No change is made in
Annual Growth Rate.
2.6 Education Cess. 1400 1633.52 1905.99 2223.91 2594.86 Growth Rate of 116.68% is
considered for property tax.
58
2.7 Conversion tax on N.R. 80.23 88.25 97.08 106.79 117.46 AGR of 10% is considered.
2.8 Land Revenue 551 551 551 551 551 No change in Annual
grouching or in AGR.
2.9 Local Cess. 330 330 330 330 330 No change in annual growth
or in AGR.
3.1 Surcharge on (A) 2300 2530 2783 3061.3 3367.43 AGR10% Recovered
amount of surcharge in
Stamp Duty (B) 2440 2440 2440 2440
1988-89 to 1997-98 to be
distributed in five
instalments to GMFB.
3.2 Cable TV/Dish Antenna 200 220 242 266.2 292.82 Annual Growth Rate of 10%
Tax
4.2 Establishment 237 248.85 261.29 374.36 288.07 Annual Growth Rate of 5%
Expenditure
4.8 Per Head Basic Grant- 88 88 88 88 88 No change is made in
in-aid Annual Rate.
4.9 (A) Incentive Grant for 1334.95 2669.62 3900.82 5846.74 Particular of calculation are
enhanced recovery given in para 4.9
Total At the Rate At the Rate of At the Rate
Recovery of of 5% 6% of 8%
3%
4.9 (B) Additional Recovery 9022.23 12760.44 18416.47 19598.99 Particular of calculation are
due to incentive given in para 4.9
5.1 Decentralised Planning 8408.4 9249.24 10174.16 11191.58 Annual Growth Rate of 10%
7.1 Central Finance 1687 1687 1687 1687 1687 Calculation is made as per
Commission present annual instalment.
8.2 Fee/License Fee 333 333 333 333 No change in AGR
8.77 Property tax on open 435 526.35 526.35 578.98 AGR taken at 10%
land
8.9 Tax on advertisement 232 280.72 280.72 308.79 AGR taken at 10%
8.14 Theatre tax 200 200 200 200 No change in annual growth
rate
13.4 Facility of P form for 1100 1212.75 1212.775 1273.39 Annual growth rate of 5%
sales tax
Adoption of Area based (hybrid of capital value method) property tax system
In place of existing Annual Rental Value was recommended by the SFC. It provided two alternative models of area based
assessment system. With some modification in year 1999 GOG introduced Area Based Property Tax Assessment System and
Ahmedabad and Vadodara Municipal Corporations have successful adopted it.
Compulsory Taxation
First SFC observed that no taxes are compulsory for Municipalities at present. It recommended that property tax, water tax and
scavenging tax should be made compulsory but GOG has not acted upon this recommendation. Even today, there are few
municipalities, which are not levying tax.
Advertisement Tax
It recommended that local bodies should be authorized to collect tax on the advertisements and this feature has got introduced
through General Development Control Regulation of Town Planning.
59
Privatisation of Services
It recommended privatisation of the services wherever possible but not much has happened on this front.
Incentive Grants
It suggested that the present system of incentive grant being not effective should be discontinued and suggests various norms
and rules for restructuring of existing incentive grants. Not much has happened regarding this recommendation.
Perspective Planning
It made very good recommendation about adoption of concept of perspective planning by all local bodies. It recommended that
every local body should study and plan for development of their area for coming 20 years, which should be review every five
years, and a rolling plan should be prepared. Nothing has happened on this front.
Implementation Blues
Also, there is absence of incentive structure. SFC did try to rationalize norm and operational guidelines of incentive fund but
has not come out with fiscal aspect of it.
Degree of budgetary autonomy is surprisingly high, as traditional municipal and panchayat acts provided for greater budget
autonomy. Also, local bodies of Gujarat are again traditionally more self-reliant. But SFC report or recommendations have not
resulted into greater budgetary autonomy or increased fiscal devolution. As observed by the First SFC itself that in the year
1995-96 the total grants sanctioned for the urban local bodies was Rs. 1495.49 million which amounted less than 1.5 per cent
of the annual budget estimate of the GOG and it constituted less than 10 per cent of the total income of urban local bodies.
(Refer Table 13).
60
5
Case Study 5 -Devolution in West Bengal
Introduction
West Bengal illustrates a continuing strong commitment to devolution based upon a high degree of political certainty resulting
from over twenty five years of control by the CPI (M) party with a well embedded political structure at the local level
accompanied by little effective opposition in local government. Consequently, the state government has enacted a range of
innovative legislation designed to strengthen local political power bases. This includes the Chairperson in Council (Cabinet
style) system, coordinated local planning mechanisms, and the basis of a systematic fiscal framework.
The Government of West Bengal has consistently supported the empowerment of local government. The state’s urban and
rural local government system has been successfully functioning with regular elections and devolution of powers for almost
three decades. The state has led other states in India in developing a legislative framework for decentralised local government,
with separate Municipal Corporation Acts for large urban local authorities, a progressive West Bengal Municipal Act, 1993
governing the municipalities and the West Bengal Panchayats Act, 1973 for the various levels of rural local bodies in the state.
This strong commitment to empowered local government is closely linked to the nature of politics within the state. Since 1977,
West Bengal has been ruled by a Left Front coalition led by the Communist Party of India (Marxist). This has demonstrated a
strong ideological commitment to promoting decentralisation and rural reform especially. Decentralisation has also arguably
also served to strengthen local party power bases, and the CPI-M has evolved highly organised party cadre machinery.
rd th
In the light of the passing of the 73 and 74 CAA, the West Bengal government was quick to amend the laws relating to local
bodies providing them the functional authority for the responsibilities in the CAA. It was also pro-active in setting up State
Finance Commissions, as well as a Municipal Administrative Reforms Committee later in 2001. The state continues to show a
clear political commitment to the promotion of all forms of decentralization. Examples of this include:
Promoting the effective operation of the District Planning Committees. Such committees are central to the annual development
planning hierarchy, and whilst operational in other states in India have been more actively implemented within West Bengal
The establishment of the Kolkata Metropolitan Planning Committee. Although legally mandated within the 74th CAA, this is the
first such metropolitan planning body in India allowing municipal representation in this level of planning (Municipal councillors
comprise two thirds of the committee).
At a local level, the GOWB has supported the establishment of ward committees in all urban local authorities and an associated
ward level planning process. This is serving to promote a localised expression of need.
Local government finances need to be considered in the context of the serious fiscal crisis affecting the state government, with
a broadening revenue expenditure gap. This context has undoubtedly reduced the scope for more radical changes in the nature
of the fiscal framework.
Pre-SFC Scenario
Urban local authorities derive revenue from government grants, property tax and other assigned taxes such as entertainment
tax, motor vehicle tax etc. Despite having the delegated power to raise revenues, urban local authorities in the West Bengal are
largely dependent on government grants to meet their establishment costs. The entire salary payments and 80% of the
dearness subvention are provided by the state government together with a significant portion of pension dues. These have led
to a situation in which urban local authorities have become complacent about their own resource mobilization and
consequently, civic services are often poor. In relation to expenditure, the single largest expenditure head is salary and wages,
which generally accounts for more than 70% of expenditure.
Urban local authorities thus rely heavily on government grants, plan funds and development schemes to fund the necessary
infrastructure works. Studies have repeatedly shown that urban local authorities are capable of significantly increasing their
own revenues and easing the pressure on the state for funds.
Rural local authorities have three major sources of revenue: schematic funds, untied funds from the centre and funds from the
state. Although PRIs are empowered to collect certain local taxes and levy user charges, they are essentially grant-dependent
and experience poor local revenue collection.
In this context, the degree of fiscal autonomy enjoyed by local government is limited. Central schemes such as the Jawahar
Rozgar Yojana are routed through the panchayat system and are heavily specified in terms of details with perhaps the only
freedom being in terms of location or detailed choice of beneficiary. This highlights the fact that rural local authorities are almost
fully dependent on centre / state funding and hence the fiscal devolution policy is very important for these urban local
authorities. It is clear that there is a significant dependence upon vertical transfers. The State Finance Commissions have thus
been important in defining the nature of such transfers.
Administrative Mechanisms
An interesting administrative decentralization mechanism that reflects the extent to which urban decentralization is politically
underpinned in West Bengal is the cabinet style Mayor/ Chairman in Council structure. Under this arrangement, a number of
local councillors form a cabinet, each with executive responsibilities for separate service delivery functions. This is in marked
contrast to local government in other states in which councillors are generally subordinate to Municipal Commissioners (often
state appointed Indian Administrative Service officers). In West Bengal, the top official is generally a superannuated state
government officer appointed on a two year contract. As a result, his/ her knowledge of municipal governance is more limited
and these officials are generally considerably less powerful than the councillors are. Within rural local government, there are
standing committees at various levels that are the interaction points with district officials, opposition members and line
ministries.
61
In relation, the staffing, state government has significant control. It determines and controls the levels of staffing, recruitment
and transfers. As a result, individual local authorities can be unaware of their approved staffing patterns and these are also not
generally revised in line with changing needs.
62
Regulation and Support Mechanisms
In relation to regulation and support, the primary innovations of the GOWB relate to the “institutional architecture” established to
support urban local government. For its urban administration, GOWB has established a number of state level enabling
institutions under the Municipal Affairs Department. These include the following:
• The Directorate of Local Bodies (DLB), which is charged with monitoring urban local government operations and
legislative compliance. Created in 1980 the DLB serves to oversee the performance of the local bodies and to coordinate
their activities. This includes both an auditing role and final sanction of staffing levels. Under a new government programme,
with bilateral support, the roll of the DLB will be enhanced to guide and support local governments in the implementation of
financial, managerial and technical reforms.
• The Municipal Engineering Directorate (MED), which provides engineering support. MED was created in 1981 to function
as the engineering cell of the DLB for planning and implementation of water supply, drainage, sewerage and other
engineering works for urban local government.
• The Institute of Local Government and Urban Studies provides training. Established in 1982, its primary purpose was to
undertake research, training and consultancy services for urban local government. The institute will be strengthened through
a new capacity development programme that aims to introduce the concept of decentralised support to training and local
government.
• The West Bengal Valuation Board was set up in 1979 for centralised assessment and valuation of properties for tax
purposes. Such a body is unusual within Indian public administration, and represents an attempt to ensure economies of
scale, and objective standardised professional assessment.
• The State Urban Development Agency (SUDA) was set up in 1991 as a registered society to work as the state level body
for monitoring implementation of poverty-alleviation programmes in the urban areas in the state.
• Streamlining of certain shared taxes for local authorities and levying of a surcharge to compensate for earlier entry tax;
• Staff costs including full dearness allowance to be met by the state government;
• Greater allocation of untied funds as ‘entitlements’ to local authorities. For this the commission decided to earmark 16
percent of the net proceeds of all tax collected by the state in a year for transfer to local bodies. These will be untied
funds at the disposal of the local bodies and to be released to the districts in suitable instalments.
• Local authorities should be encouraged to step up their internal resource mobilization especially from property tax
• An Incentive scheme has been suggested to encourage Panchayats and Municipalities to raise their income. 2 percent
of the entitlement due to a district will be set aside to act as an incentive fund.
• Suitable adjustments in district organization should be made for ensuring effective use of the entitlement funds at local
level
• Improved financial systems such as audit, accounts and budgeting systems should be established in local governments.
The FSFC brought out clear percentage ‘entitlements’ at each level of local government and emphasized the importance of
untied funds as a vital tool for establishing the autonomy and responsiveness of local governments.
Although the Government accepted the FSFC recommendations in principle, these have yet to be fully implemented. Instead of
the entitlement fund, the state government is now allotting a part of the plan fund as lump sum ‘Grants in aid to Local
authorities, mainly to the Zilla Parishads. The department requests the ZPs to utilize these grants for schemes and programmes
already identified with some flexibility to prioritise them at the local level. Although funds thus released approximated 16 percent
of the tax revenues, this system hardly reflects the spirit behind the FSFC recommendation.
• The level of entitlement grant should be maintained at 16 percent of tax revenues. However, since the exact amount of
revenues cannot be determined until the audit by the Comptroller and Auditor General of India (CAG), a minimum
amount of Rs.7.0 billion should be provided for untied entitlement during the year, balance being issued after the
revenue is confirmed in next year.
• 2 percent of the entitlement should be retained as incentive at the state level instead of the district level.
• Legislation should be passed for local government to collect taxes on urban areas and multi-storied buildings
• Better capacity should be built locally for planning, implementation & monitoring.
63
• The administrative and institutional arrangements should be established in local government for participatory
democratic process and co-ordination with District Planning Committees.
At second level of devolution, the SFCs have used a number of basic criteria to calculate the entitlement for each district. These
are shown in the table 5.1 next page .
At the third level after completing the above procedure, and allowing for the 2 per cent incentive fund at each district level, the
FSFC recommended that the funds be split into three parts, namely
i) District Municipal Fund,
ii) District Panchayat Fund and
iii) District Special Area Fund.
Table 5.1 - State Finance Commission Criteria for district wise fund allocations
Criteria FSFC % Criteria SSFC
weight %
weight
Population of the district 50% Population 50%
Illiteracy level of the district 10% Non Literate Population 7%
Backward population of the district 10% ST Population 8%
Area of the district 10% SC and minority population 7%
Rural population 10% Density of Population 7%
Inverse ratio of per capita Bank Deposit 10% Rural population 7%
(including PAC working capital)
Infant Mortality Rate 7%
Per capita Net District Domestic Product 7%
(NDDP) at constant price
TOTAL 100% TOTAL 100%
Source – First and Second SFC Reports of West Bengal
The allocation to these three components is to be made in line with the population under each of the divisions. The special area
fund is expected to cover specific areas that do not fall under either Panchayats or Municipalities. The SSFC marginally revised
the procedure, suggesting that the 2 percent retention is made at the state level rather than the district level. It also suggested a
further 0.4 percent separate fund for hilly areas. The SSFC also suggested that the district fund should be split into only two
components namely a District Municipal Fund and District Panchayat Fund on the basis of the rural and urban population of the
district.
At the fourth level, the amount available for intra-district allocation in the urban sector is to be divided on the basis of a further
set of weighted population and socio-economic measures (population, literacy, scheduled caste/ tribe, population density,
length of kutcha drains etc).
At the fourth level amount available for rural bodies the SFCs specified a percentage allocation for the vertical allocation
formula as shown below:
At the fifth level of devolution that is inter-se distribution the sharing of entitlement funds amongst Panchayat Samitis to be
based on weighted criteria (population, SC/ST population, non literates, villages without power, and villages without pucca
approach roads). In Gram Panchayats the criteria used is based on population, SC/ST population, and non literates alone.
Table 5.2 - Fiscal Devolution Framework recommended by SFC for Local Governments in West Bengal
st nd
Level of Devolution 1 SFC Frame work 2 SFC Frame work
st
1 level Devolution 16 percent of total taxes collected by 16 percent of total taxes collected by the
Local Governments Share in State’s the state in a financial year to the state in a financial year to the local
Resources. local governments as ‘untied governments as ‘untied entitlement’.
entitlement’. Subject to minimum amount of Rs. 7000
million.
nd
2 Level Devolution Based on six Indicators Based on Eight Indicators
Division of Resources between Population 50.0 % Population 50.0 %
districts. Area 10.0 % Density of Population 7.0 %
Illiteracy Rate 10.0 % Illiterate Population 7.0 %
Backward Population 10.0 % SC Population and 8.0 %
Rural Population 10.0 % Minority Population
ST Population 7.0 %
64
Inverse ratio of per 10.0 % Rural Population 7.0 %
capita Bank Deposit (including PAC Infant Mortality 7.0 %
working capital) Per Capita Net District 7.0 %
Total 100.00% Domestic Product (NDDP)
At constant price
Total 100.00%
rd
3 Level Devolution/Sharing of On the basis of population under On the basis of proportion of rural and
funds among Rural & Urban Local three categories urban population in the district
Governments
District Municipal Fund District Municipal Fund
District Panchayat Fund District Panchayat Fund
District Special Area Fund (for the after setting aside 0.4 % amount from
areas not falling under municipal or district’s allocation for Hilly Areas
panchayat category)
th
4 Level Devolution/Sharing of On the basis of a further set of Based on five Indicators
funds among different tiers of Local weighted population and socio- Population 50.0%
Governments economic measures (population, Density of Population 12.5%
A – Among Urban Local literacy, scheduled caste/ tribe, SC & ST Population
Governments (intra-ULG Allocation population density, length of kutcha as per 1991 Census 12.5%
of District Municipal Fund) drains etc). Non Literates 12.5%
Length of Kutcha
Drains in Munici 12.5%
th
4 Level Devolution/Sharing of Zilla Parishads 30.0% Zilla Parishads 20.0%
funds among different tiers of Local Panchayat Samitis 20.0% Panchayat Samitis 20.0%
Governments Gram Panchayats 50.0% Gram Panchayats 60.0%
B – Among Rural Local Government
th
5 Level Devolution Inter se Amongst Panchayat Samitis to be Amongst Panchayat Samitis
distribution among local based on weighted criteria Based on five Indicators
governments of one tier (population, SC/ST population, and Population 50.0%
non literates) Density of Population 12.5%
a) inter-se sharing between SC & ST Population
panchayat samitis as per 1991 Census 12.5%
Non Literates 12.5%
In Gram Panchayats the criteria used Length of Kutcha
is based on population, SC/ST Drains in Munici 12.5%
population, and non literates alone Amongst Gram Panchayats
b) inter-se sharing between Based on two indicators
Gram Panchayats Population 50.0%
Non Literates 50.0%
Source – First and Second SFC Reports of West Bengal
Beside above formulae based fiscal devolution SSFC has recommended following to strengthen finances of local governments
–
• Entertainment tax may continue to be collected by the State and retaining 10 % collection charges rest of 90 per cent
amount to be transferred to local governments over and above fiscal devolution at 16 % of total tax collection as
explained above.
• Legislation enabling the LSGs to collect taxes on urban land and multi-storied buildings.
• Powers to collect land revenue and cesses may be devolved to the LSCs.
• Responsibility for collection of irrigation charges may be given to the Panchayats and the revenue devolved to them.
• Different rates and fees levied by the ULBs should be revised.
• Government should consider reconciliation of overlapping responsibilities for planning and allocation of fund between
DPC and regional development boards in the rural and urban areas.
Both SFCs recommended concept of untied fund for strengthening grass-root level democracy and will lead to participative
democracy. They felt that untied fund only would provide local government to carry out development schemes drawn by them to
meet their felt need. SFCs felt that the centrally sponsored projects have cut and dried framework, which did not permit
modifications to suit the local needs. (Para 2.04 West Bengal SSFC)
While justifying concept of untied entitlement SSFC observed, “Although the local self governments received only a small
amount as untied entitlements following the FSFC’s recommendations, they made good use of it. There was a general
appreciation of such fund by the people because it was possible for them to take up schemes, which helped to meet part of
their felt needs. During our discussions with representatives of LSGs in the districts, we were requested to enlarge the amount
of untied grants.” (Para 2.09 West Bengal SSFC)
Both SFCs rejected a needs based approach for determining the untied entitlement allocation for local government since it felt
there was insufficient reliable data to fulfil this purpose.
65
Both SFCs felt that local government should be allowed to devise their own approaches for managing their budgets based on
their estimation of the feasibility of rendering services within budgetary constraints. The state’s contribution (entitlement) should
be based more on broad principles of equity rather than on any assumed cost of services to be rendered.
Incentive funds
As described above both the First and Second SFCs recommended the establishment of an Incentive Fund to encourage the
mobilization of own resources by local government. The special feature is both SFCs recommended setting aside of 2 per cent
allocation at first place from the amount to be devolved as untied incentive funds to local government. FSFC suggested its
deduction from the district level allocation that is after first level of devolution while SSFC has recommended creation of
incentive fund by deducting 2 per cent amount from devolution at the state level that is before first level devolution.
Implementation Blues
“The State Government following the recommendations of the FSFC, decided to divide the state plan schemes into state and
district level schemes, but this was not reflected in the state budget.
Instead of devolving funds as recommended by the FSFC a part of the plan fund was allotted as lump sum grants-in-aid to local
bodies from different departmental budgets directly to the local governments mainly to Zilla Parishads. The departments
requested the ZPs to utilize grants-in-budget funds schemes and programmes already identified and proposed at the
departmental level giving ZP only the option to select and prioritize schemes to be executed. The objectives of the
recommendations of the FSFC were hardly met by this kind of transfer of fund by the departments even when the total
allotment approximated 16 per cent of the tax resources as recommended by the FSFC. Only a small amount of fund was
released as untied entitlement to the local bodies.” (Para 1.07 West Bengal SSFC)
The observations made by SSFC aptly summarize how entire scheme recommended by FSFC was made null and vide in
implementation.
These words of SSFC clearly reflect the impact of FSFC on the institutions and people managing and working in these
institutions.
66
Decentralisation and Local Finance Issues –
The Workings of State Finance Commissions in India
67
Annexure I A – Decentralisation Initiatives in Developing Countries
Japan - Decentralization Promotion Law of 1995 and Decentralization Promotion Plan, 2000
Thailand - 16th Constitution, 1997; Decentralization Plan and Process Act, 1999
Indonesia - Law No.22 of 1999 regarding regional governments and Law No.25 of 1999 concerning the fiscal
balance between the Central Government and the Regions
Cambodia - Law on the Administration and Management of Commune/Sangkat, January 12, 2001
and Sub-Decree on Decentralization of Powers, Roles and Duties to Commune
Sangkat Councils, February 21, 2002.
68
ANNEXURE – I B - THE STRUCTURE OF SUBNATIONAL GOVERNMENTS IN LARGE DEMOCRACIES
Other Countries
Argentina 23 provinces 1,617 municipios
Bangladesh - 4 city corporations, 129 pourashavas (smaller
municipalities), 4500 union parishads (which group
85,500 villages)
Brazil 27 states, F.D. 4,974 municipios
Colombia 32 departments, F.D. 1,068 municipalities
Ethiopia 9 regions, plus 2 special city administration, 66 550 woredas
zones
India 25, states, 7 union territories 3,586 urban local bodies (95 municipal corporations,
1,436 municipal councils, 2,055 nagar panchayats),
234,078 rural local bodies
Iran 25 provinces 720 districts and municipalities
69
rd
Annexure II - Constitution (73 Amendment) Act, 1992
Part IX
The Panchayats
243 In this Part, unless the context otherwise requires
(a) “District” means a district in State;
(b) “Gram Sabha” means a body consisting of persons registered in the electoral rolls relating to a village
comprised within the area of Panchayat at the village level;
(c) “Intermediate level” means a level between the village ad district levels specified by the Governor of a Sate
by public notification to be the intermediate level for the purposes of this Part;
(d) “Panchayat” means an institution (by whatever name called) of Self Government constituted under article
243B, for the rural areas;
(e) “Panchayat area” means the territorial area of a Panchayat.
(f) “Population” means the population as ascertained at the last preceding census of which the relevant
figures have been published.
(g) “Village” means a village specified by the Governor by public notification to be a village for the purposes of
this Part ad includes a group of villages so specified.
243A A Gram Sabha may exercise such powers ad perform such functions at the village level as Legislature of State may
be by law, provide.
243B (1) There shall be constituted in every State, Panchayats at the village, intermediate and district levels in
accordance with the provisions of this Part.
(2) Notwithstanding anything in clause (1), Panchayats at the intermediate level may not be constituted in a
State having a population not exceeding twenty lakhs.
243C (1) Subject to the provisions of this Part, the Legislature of a State may, by law, make provisions with respect
to the composition of Panchayats;
Provided that the ratio between the population of the territorial area of a Panchayat at any level and the number of
seats in such Panchayat to be filled by election shall, so far as practicable, be the same throughout the State.
(2) All the seats in a Panchayat shall be filled by persons chosen by direct election from territorial
constituencies in the Panchayat area and; for this purpose, each Panchayat area shall be divided into
territorial constituencies in such manner that the ratio between the population of each constituency and the
number of seats allotted to it shall, so far as practicable, be the same throughout the Panchayat area.
(3) The Legislature of a State may, by law, provide for the representation-
(a) of the Chairpersons of the Panchayats at the village level in the Panchayats at the intermediate level
or, in the case of a State not having Panchayats at the intermediate level, in the Panchayats at the
district level;
(b) of the Chairpersons of the Panchayats at the intermediate level, in the Panchayats at the district level;
(c) of the Members of the House of the People and the Members of the Legislative Assembly of the State
representing constituencies which comprise wholly or partly a Panchayat area at a level other than the
village level, in such Panchayat;
(d) of the Members of the Council of States and the Members of the Legislative Council of the State,
where they are registered as electors within-
(i) a Panchayat area at the intermediate level, in Panchayat at the intermediate level
(ii) a Panchayat area at the district level, in Panchayat at the district level.
(4) The Chairperson of a Panchayat and other members of a Panchayat whether or not chosen by direct
election from territorial constituencies in the Panchayat area shall have the right to vote in the meetings of
the Panchayats.
(5) The Chairperson of-
(a) a Panchayat at the village level shall be elected in such manner as the Legislature of a State may by
law, provide; and
(b) a Panchayat at the intermediate level or district level shall be elected by, and from amongst, the
elected members thereof.
In every Panchayat ad the number the seats so reserved shall bear, as nearly as may be, the same proportion to the
total number of seats to be filled by direct election in that Panchayat as the population of the Scheduled Castes in
that Panchayat area or of the Scheduled Tribes in that Panchayat area bears to the total population of that areas and
such seats may be allotted by rotation to different constituencies in a Panchayat;
(2) Not less than one-third of the total number of seats reserved under clause (1) shall be reserved for women
belonging to the Scheduled Castes or, as the case ay be, the Scheduled Tribes.
(3) Not less than one-third (including the number of seats reserved for women belonging to the Scheduled
Castes and the Scheduled Tribes) of the total number of seats to be filled by direct election in every
Panchayat shall be reserved for women and such seats may be allotted by rotation to different
constituencies in a Panchayat.
70
(4) The offices of the Chairpersons in the Panchayats at the village or any other level shall be reserved for the
Scheduled Castes, the Scheduled Tribes and women in such manner as the Legislature of a State may, by
law, provide:
Provided that the number of offices of Chairpersons reserved for the Scheduled Castes and the Scheduled Tribes in
the Panchayats at each level in any State shall bear, as nearly as may be, the same proportion to the total number of
such offices in the Panchayats at each level as the population of the Scheduled Castes in the State or of the
Scheduled Tribes in the State bears to the total population of the State.
Provided further that not less than one-third of the total number of offices of Chairpersons in the Panchayats at each
level shall be reserved for women:
Provided also that the number of offices reserved under this clause shall be allotted by rotation to different
Panchayats at each level.
(5) The reservation of seats under clauses (1) and (2) and the reservation of offices of Chairpersons (other
than the reservation for women) under clause (4) shall cease to have effect on the expiration of the period
specified in article 334.
(6) Nothing in this Part shall prevent the Legislature of a State from making any provision for reservation of
seas in any Panchayat or offices of Chairpersons in the Panchayats at any level in favour of backward
class of citizens.
243E (1) Every Panchayat unless sooner dissolved under any law of the time being in
force, shall continue for five years from the date appointed for its first meeting and no longer.
(2) No amendment of any law for the time being in force shall have the effect of causing dissolution of a
Panchayat at any level, which is functioning immediately before such amendment, till the expiration of its
duration specified in clause (1)
(3) An election to constitute a Panchayat shall be completed-
(a) before the expiry of its duration specified in clause (1)
(b) before the expiration of a period of six months from the date of its dissolution:
Provided that where the remainder of the period for which the dissolved Panchayat would have continued is less than
six months, it shall not be necessary to hold any election under this clause for constituting the Panchayat for such
period.
(4) Panchayat constituted upon the dissolution of a Panchayat before the expiration of its duration shall
continue only for the remainder of the period for which the dissolved Panchayat would have continued
under clause (1) had it not been so dissolved.
243F (1) A person shall be disqualified for being chosen as, and for being, a member of
a Panchayat-
(a) he is so disqualified by or under any law for the time being in force for the purposes of elections to the
Legislature of the State concerned.
Provided that no person shall be disqualified on the ground that he is less than twenty-five years of age, if
he has attained the age of twenty-one years;
(b) if he is so disqualified by or under any law made by the Legislature of the State.
(2) If any question arises as to whether a member of a Panchayat has become subject to any of the
disqualifications mentioned in clause (1), the question shall be referred for the decision of such authority
and in such manner as the Legislature of a State may, by law, provided.
243G Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow the Panchayats with such
powers and authority as may be necessary to enable them to function as institutions of Self-Government ad such law
may contain provisions for the devolution of powers and responsibilities upon Panchayats at the appropriate level.
Subject to such conditions as may be specified therein, with respect to-
(a) the preparation of plans for economic development and social justice;
(b) the implementation of schemes for economic development and social justice as may be entrusted to them
including those in relation to the matters listed in the Eleventh Schedule.
243(I) (1) The Governor of a State shall, as soon as may be within one year from the
commencement of the Constitution (Seventy-third Amendment) Act 1992, and thereafter at the expiration
of every fifth year, constitute a Finance Commission to review the financial position of the Panchayats and
to make recommendations to the Governor as to-
71
(a) the principles which should govern-
(I) the distribution between the State and the Panchayats of the net proceeds of the taxes, duties
tolls and fees leviable by the State, which may be divided between them under this Part and the
allocation between the Panchayats at all levels of their respective shares of such proceeds;
(II) the determination of the taxes, duties, tolls and fees, which may be assigned to, or appropriated
by, the Panchayats;
(III) the grants-in-aid to the Panchayats from the Consolidated Fund of the State;
(j) the measures needed to improve the financial position of the Panchayats;
(k) any other matter referred to the Finance Commission by the Governor in the interests of
sound finance of the Panchayats.
(2) The Legislature of a State may, by law, provided for the composition, of the Commission, the qualifications,
which shall be requisite for appointment as members thereof and the manner in which they shall be
selected.
(3) The Commission shall determine their procedure and shall have such powers in the performance of their
functions as the Legislature of the State may, by law, confer on them.
(4) The Governor shall cause every recommendations made by the Commission under this article together,
with an explanatory memorandum as to the action taken thereon to be laid before the Legislature of the
State.
243J The Legislature of a State may, by law, make provisions with respect to the maintenance of accounts by the Panchayats
and the auditing of such accounts.
243K (1) The superintendence, direction and control of the preparation of electoral rolls for, and the conduct of, all
elections to the Panchayats shall be vested in a State Election Commission consisting of a State Election
Commissioner to be appointed by the Governor.
(2) Subject to the provisions of any law made by the Legislature of a Sate, the conditions of service and tenure
of office of the State Election Commissioner shall be such as the Governor may by rule determine
Provided that the State Election Commissioner shall not be removed from his office, except in like manner and on like
grounds as a Judge of a High Court ad the conditions of service of the State Election Commissioner shall not be
varied to his disadvantage after his appointment.
(3) The Governor of a State shall, when so requested by the State Election Commission, make available to the
State Election Commission such staff as may be necessary for the discharge of the functions conferred on
the State Election Commission by clause (1).
(4) Subject to the provisions of this Constitution, the Legislature of a State may, by law, make provision with
respect to all matters relating to, or in connection with, elections to the Panchayats.
243L The Provisions of this Part shall apply to the Union territories and shall, in their application to a Union territory, have effect
as if the references to the Governor of a State were references to the Administrator of the Union territory appointed
under article 239 and references to the Legislature or the Legislature Assembly of a State were references, in relation
to a Union territory having a Legislative Assembly, to that Legislative Assembly.
Provided that the President may, by public notification, direct that the provisions of this Part shall apply to any Union
territory or part thereof subject to such exceptions and modifications as he may specify in the notification.
243M (1) Nothing in this Part shall apply to the Scheduled Areas referred to in clause (1), and the tribal areas
referred to in clause (2) of article 244.
(2) Nothing in this Part, shall apply to-
(a) the States of Nagaland, Meghalaya and Mizoram;
(b) the hill areas in the State of Manipur for which District Councils exist under any law for the time being
in force.
(3) Nothing in this part-
(a) relating to Panchayats at the District level shall apply to the hill areas of the District of Darjeeling,
Gorkha hill council exist under any law for the time being in force;
(b) Shall be construed to affect the functions and powers of the Darjeeling Gorkha hill council constituted
under such law.
(4) Notwithstanding anything in this constitution,-
(a) The legislature of a State referred to in sub-clause (a) of clause (2) may, by law, extend this Part, to
that State, except the areas, if any, referred to in Clause (1), if the legislative assembly of that State
passes a resolution to that effect by a majority of the total membership of that house and by a
majority of not less than two-thirds of the members of that House present and voting;
(b) Parliament may, by law, extend the provisions of this part to the Scheduled Areas and the tribal
areas referred to in clause (1) subject to such exceptions and modifications as may be specified in
such law, and no such law be deemed to be an amendment of this Constitution for the purpose of
article 368.
243N Notwithstanding anything in this Part, any provision of any law relating to Panchayats in force in a State
immediately before the commencement of the Constitution (Seventy-third Amendment) Act, 1992 which is
inconsistent with the Provisions of this part, shall continue to be in force until amended or repealed by a competent
Legislature or other competent authority or until the expiration of one year from such commencement, whichever is
earlier;
72
Provided that all the Panchayats existing immediately before such commencement shall continue till the expiration of their
duration unless sooner dissolved by a resolution passed to that effect by the Legislative Assembly of that State or, in the case
of a State having a Legislative Council, by each House of the Legislature of that State.
73
th
Annexure III - Constitution (74 Amendment) Act, 1992
Part IX A
The Municipalities
243P In this part, unless the context otherwise requires,-
(a) “Committee” means a Committee constituted under Article 243S;
(b) “district” means a district in a State;
(c) “Metropolitan Area” means an area having a population of ten lakhs or more, comprised in one or more districts
and consisting of two or more Municipalities or Panchayats or other contiguous areas, specified by the Governor
by Public notification to be a metropolitan area for the purposes of this Part;
(d) “Municipal area” means the territorial area of a Municipality as is notified by the Governor;
(e) ‘Municipality” means an institution of Self-Government constituted under Article 243Q;
(f) “Panchayat” means a Panchayat constituted under Article 243B;
(g) “Population” means the Population as ascertained at the last preceding census of which the relevant figures
have been published.
Provided that a Municipality under this clause may not be constituted in such urban area or part thereof as the
Governor may, having regard to the size of the area and the Municipal services being provided or proposed to be
provided by an industrial establishment in that area ad such other factors as he may deemed fit, by public notification,
specify to be an industrial township.
(2) In this article, ‘a transitional area’, ‘a smaller urban area’ or ‘a larger urban area’ means such area as the
Governor may, having regard to the population of the area, the density of the population therein, the
revenue generated for local administration, the percentage of employment in non-agricultural activities, the
economic importance or such other factors as he may deem fit, specify by public notification for the
purposes of this Part.
243S (1) There shall be constituted Wards Committees, consisting or one or more
wards, within the territorial area of a Municipality having a population of three lakhs or more.
(2) The legislature of a State, may, by law, make provision with respect to-
(a) The composition and the territorial area of a Wards Committee
(b) The manner in which the seats in a wards committee shall be filled.
(3) A member of a Municipality representing a ward within the territorial area of the wards committees shall be
a member of that committee.
(4) Where a wards committee consists of-
(a) one ward, the member representing that ward in the Municipality; or
(b) two or more wards, one of the members representing such wards in the Municipality elected by the
members of the wards committee, shall be the chairperson of that Committee.
(6) Nothing in this article shall be deemed to prevent the Legislature of a State from making any provision for
the constitution of Committees in addition to the Wards Committees.
243T (1) Seats shall be reserved for the Scheduled Casts and the Scheduled Tribes in
every Municipality and the number of seats so reserved shall bear, as nearly as may be, the same
proportion to the total number of sets to be filled by direct election in that Municipality as the population of
the Schedule Castes in the Municipal area or of the Scheduled Tribes in the Municipal area bears to the
total population of that area and such seats may be allotted by rotation to different constituencies in a
Municipality.
(2) Not less than one-third of the total number of seats reserved under clause (1) shall be reserved for women
belonging to the Schedule Caste or, as the case may be, the Scheduled Tribes.
74
(3) Not less than one-third (including the number of seats) reserved for women belonging to the Scheduled
Castes and the Scheduled Tribes) of the total number of seats to be filled by direct election in every
Municipality shall be reserved for women and such seats may be allotted by rotation to different
constituencies in a Municipality.
(4) The officers of chairpersons in the Municipalities shall be reserved for the Scheduled Castes, the
Scheduled Tribes and women in such manner as the legislature of a State, may by law, provide.
(5) The reservation of seats under clauses (1) and (2) and the reservation of officers of chairpersons (other
than the reservation for women) under clause (4) shall cease to have effect on the expiration of the period
specified in article 334.
(6) Nothing in this Part, shall prevent the Legislature of a State from making any provision for reservation of
seats in any Municipality or offices of Chairpersons in the Municipalities in favour of backward class of
citizens.
243U (1) Every Municipality unless sooner dissolved under any law for the time being
in force, shall continue for five years form the date appointed for its first meeting and no longer;
Provided that a Municipality shall be given a reasonable opportunity of being heard before its dissolution.
(2) No amendment of any law for the time being in force shall have the effect of causing dissolution of a
Municipality at any level, which is functioning immediately before such amendment, till the expiration of its
duration specified in clause (1).
Provided that where the reminder of the period for which the dissolved Municipality would have continued is less than
six months, it shall not be necessary to hold any election under this clause for constituting the Municipality for such
period.
243V (1) A person shall be disqualified for being chosen as, and for being, a member of
a Municipality-
(b) if he is so disqualified by or under any law for the time being in force for the purposes of elections to
the Legislature of the State concerned;
Provided that no person shall be disqualified on the ground that he is less than twenty-five years of
age, if he has attained the age of twenty-one years;
(c) if he so disqualified by or under any law made by the Legislature of the State. (2) If any question
arises as to whether a member of a Municipality has become subject to any of the disqualifications
mentioned in clause (1), the question shall be referred for the decision of such authority and in such
manner as the Legislature of a State may, by law, provide.
243W (1) Subject to the provisions of this Constitution, the Legislature of the State may,
by law, endow-
(a) The Municipalities with such powers and authority as may be necessary to enable them to function as
institutions of Self-Government and such law may contain provisions for the devolution of powers and
responsibilities of Municipalities, subject to such conditions as may be specified therein, with respect
to-
(i) the preparation of plans for economic development and social justice;
(ii) the performance of functions and the implementation of schemes as may be entrusted to them
including those in relation to the matters listed in the Twelfth Schedule.
(b) the Committees with such power and authority as may be necessary to enable them to carry out the
responsibilities conferred upon them including those in relation to the matters listed in the Twelfth
Schedule.
243Y (1) The Finance Commission constituted under article 243-I shall also review the
financial position of the Municipalities and make recommendations to the Governor as to-
(a) the principles, which should govern-
(i) The distribution between the State and the Municipalities of the net proceeds of the taxes, duties,
tolls and fees leviable by the State; which may be divided between them under this Part and the
allocation between the Municipalities at all levels of their respective shares of such proceeds;
75
(ii) The determination of the taxes, duties, tolls and fees, which may be assigned to or appropriated by
the Municipalities;
(iii) The grants in aid to the Municipalities from the consolidated fund of the State;
the measures needed to improve the financial position of the Municipalities;
any other matter referred to the Finance Commission by the Governor in the interests of sound
finance of the Municipalities.
(2) The Governor shall pass every recommendation made by the Commission under this article together with
an explanatory memorandum as to the action taken thereon to be laid before the Legislature of the State.
243Z The Legislature of a State may, by law, make provisions with respect to the maintenance of accounts by the
Municipalities and the auditing of such accounts.
243ZA (1) electoral rolls for and the conduct of all election to the Municipalities shall be
vested in the State Election Commission referred to in article) The Superintendence, direction and control
of the preparation of 243K.
(2) Subject to the provisions of this Constitution the Legislature of a State may, by law, make provision with
respect to all matters relating to, or in connection with, elections to the Municipalities.
243ZB The provisions of this Part shall apply to the Union Territories and shall, in their application to a Union
Territory, have effect as if the references to the
Governor of a State were references to the Administrator of the Union Territory appointed under Article 239
and references to the Legislature or the Legislative Assembly of a State were references in relation to a
Union Territory having Legislative Assembly, to that Legislative Assembly;
Provided that the President may, by public notification, direct that the provisions of this Part, shall apply to any Union
Territory or part thereof subject to such exceptions and modifications as he may specify in the Notification.
243ZC (1) Nothing in this Part shall apply to the Scheduled Areas referred to in clause
(1), and the tribal areas referred to in clause (2), of Article 244.
(2) Nothing in this Part shall be construed to affect the functions and the powers of the Darjeeling Gorkha hill
Council constituted under any law for the time being in force for the Hill areas of the District of Darjeeling in
the State of West Bengal.
(3) Notwithstanding anything in this Constitution, Parliament may, by law, extend the provisions of this part to
the scheduled areas and the tribal areas referred to in Clause (1) subject to such exceptions and
modifications as may be specified in such law, and no such law shall be deemed to be an amendment of
this Constitution for the purposes of Article 368.
243ZD (1) There shall be constituted in every State at the District level a District
Planning Committee to consolidate the plans prepared by the Panchayats and the Municipalities in the
District and to prepare a draft development plan for the District as a whole.
(2) The Legislature of a State may, by law, make provision with respect to-
(a) the composition of the District Planning Committees;
(b) the manner in which the seats in such Committee shall be filled;
Provided that not less than four-fifths of the total number of members of such Committee shall be elected by, and
from amongst, the elected members of the Panchayats at the District level and of the Municipalities in the District in
proportion to the ratio between the population of the rural areas and of the urban areas in the District;
(c) the functions relating to District Planning which may be assigned to such Committees;
(d) the manner in which the chairpersons of such committees shall be chosen.
(3) every District Planning committee shall, in preparing the draft development plan-
(a) have regard to-
(i) matters of common interest between the Panchayats and the Municipalities including spatial planning,
sharing of water and other physical and natural resources, the integrated development of infrastructure and
environmental conservation;
(ii) the extent and type of available resources whether financial or otherwise;
(b) consult such institutions and organizations as the Governor may, by order, specify.
(4) The chairperson of every District Planning Committee shall forward the development plan, as
recommended by such Committee to the Government of the State.
243ZE (1) there shall be constituted in every Metropolitan area a Metropolitan Planning
Committee to prepare a draft development plan for the Metropolitan area as a whole.
(2) The Legislature of a State may, by law, make provisions with respect to-
(a) the composition of the Metropolitan Planning Committees;
(b) the manner in which the seats in such Committees shall be filled;
Provided that not less than two-thirds of the members of such committee shall be elected by, and from
amongst the elected members of the Municipalities and chairpersons of the Panchayats in the
Metropolitan area in proportion to the ratio between the population of the Municipalities and of the
Panchayats in that area;
76
(c) the representations in such Committees of the Government of India and the Government of the State
and of such organizations and institutions as may be deemed necessary for carrying out the functions
assigned to such committees;
(d) the functions relating to planning and co-ordination for the Metropolitan area which may be assigned
to such Committee;
(e) the manner in which the chairpersons of such committees shall be chosen.
(3) Every Metropolitan Planning Committee shall, in preparing the draft development plan,-
(a) have regard to-
(iii) the plans prepared by the Municipalities and the Panchayats in the Metropolitan Area;
(iv) matters of common interest between the Municipalities and the Panchayats, including coordinated
spatial planning of the area, sharing of water and other physical and natural resources, the
integrated development of infrastructure and environmental conservation;
(v) the overall objectives and priorities set by the Government of India and the Government of the
State;
(vi) the extent and nature of investments likely to be made in the Metropolitan area by agencies of the
Government of India and of the Government of the State and other available resources whether
financial or otherwise;
(b) consult such institutions and organizations as the Governor may, by order, specify
(4) The Chairperson of every Metropolitan Planning Committee shall forward the development plan, as
recommended by such committee, to the Government of the State.
243ZF Notwithstanding anything in this Part, any provision of any law relating to Municipalities in force in a State
immediately before the commencement of the Constitution (Seventy-fourth Amendment) Act, 1992, which
is inconsistent with the provisions of this Part, shall continued to be in force until amended or repealed by a
competent Legislature or other competent authority or until the expiration of one year from such
commencement, whichever is earlier;
Provided that all the Municipalities existing immediately before such commencement shall continue till the
expiration of their duration, unless sooner dissolved by a resolution passed to that effect by the Legislative
Assembly of that State, or, in case of a State having a Legislative Council, by each House of the
Legislature of that State.
77
Annexure IV - Eleventh Schedule - (Article 243G)
rd
[Added by Constitution (73 Amendment) Act, 1992]
1. Agriculture, including agricultural extension.
2. Land improvement, implementation of land reforms, land consolidation and soil
conservation.
3. Minor Irrigation, water management and watershed development.
4. Animal husbandry, dairying and poultry.
5. Fisheries.
6. Social forestry and farm forestry.
7. Minor forest produce.
8. Small scale industries, including food processing industries.
9. Khadi, village and cottage industries.
10. Rural housing.
11. Drinking water
12. Fuel and fodder.
13. Roads, culverts, bridges, ferries, waterways and other means of communication.
14. Rural electrification, including distribution of electricity.
15. Non-conventional energy sources.
16. Poverty alleviation programme.
17. Education, including primary and secondary schools.
18. Technical training and vocational education.
19. Adult and non-formal education.
20. Libraries.
21. Cultural activities
22. Markets and fairs.
23. Health and sanitation, including hospitals, primary health centers and dispensaries.
24. Family welfare.
25. Women and child development.
26. Social Welfare, including welfare of the handicapped and mentally retarded.
27. Welfare of the weaker sections, and in particular, of the Scheduled Castes and the
Scheduled Tribes.
28. Public Distribution system.
29. Maintenance of community assets.
78
Annexure V - Twelfth Schedule - (Article 243W)
th
(Inserted by Constitution (74 Amendment) Act, 1992)
1. Urban planning, including town planning.
2. Regulation of land-use and construction of buildings.
3. Planning for economic and social development
4. Roads and bridges.
5. Water supply for domestic, industrial and commercial purposes.
6. Public health, sanitation, conservancy and solid waste management.
7. Fire services.
8. Urban forestry, protection of the environment and promotion of ecological aspects.
9. Safeguarding the interests of weaker sections of society, including the handicapped and
mentally retarded.
10. Slum improvement and upgradation.
11. Urban poverty alleviation.
12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.
13. Promotion of cultural, educational and aesthetic aspect.
14. Burials and burial grounds; cremations, cremation grounds and electric crematoriums.
15. Cattle ponds; prevention of cruelty to animals.
16. Vital statistics, including registration of births and deaths.
17. Public amenities, including street lighting, parking lots, bus stops and public conveniences.
18. Regulation of slaughterhouses and tanneries.
79
Annexure VI – Amended Article 280 of Constitution of India
280. (1) The President shall, within two years from the commencement of this Constitution and thereafter at the expiration
of every fifth year or at such earlier time a the President necessary by order constitute a Finance Commission which
shall consist of a Chairman and four other members to be appointed by the President.
(2) Parliament may by law determine the qualifications, which shall be requisite for appointment as members of the
Commission and the manner in which they shall be selected.
(3) It shall be the duty of the Commission to make recommendations to the president as to –
(a) the distribution between Union and the States of the net proceeds of taxes which are to be, or may be,
divided between them under this Chapter and the allocation between the States of the respective shares of such
proceeds;
(b) the principles, which should govern the grants-in-aid of the revenues of the States out of Consolidated Fund
of India.
(bb) the measures needed to augment the Consolidated Fund of State to supplement the resources of the
Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State.
rd
[Inserted by the Constitution (73 Amendment) Act, 1992]
© the measures needed to augment the Consolidated Fund of a State to supplement the resources of the
Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
th
[Inserted by the Constitution (74 Amendment) Act, 1992]
(d) any other matter referred to the Commission by the President in the interest of sound finance.
(4) The Commission shall determine their procedure and shall have such powers in the performance of their functions
as Parliament may, by law, confer to them.
80
ANNEXURE – VII - Comparative Statement on Revenue Income and Expenditure by Local Bodies of Tamil Nadu for 1997-98 to
2001-02
Table VII.1 – Statement showing revenue and expenditure of all Tamil Nadu Local Bodies 1997-98 to 2001-02
(Rs. in lakhs)
Sl. Local Revenue Income Utilisation % of % of
No. Body salary & SFC
O &M in devolutio
n in
Own Assigned SFC Total Salary O&M Total
Revenue Revenue devolution
1 VPs 45269 47700 131788 224757 32315 118205 150520 67 87
2 Pus 48224 2602 99699 150525 57425 38120 95545 63 96
3 Dt. Pts - - 17658 17658 1871 17 1888 11 100
4 TPs 61581 33675 49860 145116 40765 60005 10771 69 49
5 Mpts. 129849 44147 36367 209863 93472 81985 175457 84 21
6 Corpns 206655 68835 54445 329935 117766 112764 230530 70 24
Total 490578 196959 390317 1077851 343614 411097 754711 61 63
(average (average
) )
Source – Second SFC Report of Tamil Nadu
Table VII.2 - Statement showing revenue gap of all Tamil Nadu Local Bodies for 2002-07
(Rs. in lakhs)
Local Own Expenditure for 2002-07
Body Revenue
income
Salary Pension O & M Addl. Debt Non- Total Revenue Total Fiscal
O&M servicing Debt Gap Gap
liabilities
V.Ps 100465 54422 - 369707 - - - 424129 -323664 5988.63
P.Us 40000 74395 29724 112086 - - - 216205 -176205 2373.23
Dt. Pts. - 2786 - - - - - 2786 -2786 27.86
T. Pts. 102621 83304 14404 101516 19940 29303 4815 250282 -147661 3461.13
Mpts. 208373 183592 48772 157026 10755 42264 13516 455925 -247552 0.65
Corpns. 338988 231257 74032 222592 12273 82548 13698 636400 -297412
Total 790447 626756 166932 962927 42968 154115 32029 19857.27 -1195280 24882.27
Source – Second SFC Report of Tamil Nadu
Table VII.3 - Capital Requirements to fill in Gaps in Services Based on Norms for 2002-2007
Components Village Panchayat Town Municipalities Corporations Total
Panchayats Unions Panchayats
(Rupees in Crores)
Water Supply 500.00 - 454.61 266.02 137.81 1358.44
Sewerage - - 13.52 70.94 124.71 209.17
Roads 1150.58 211.18 131.10 190.02 375.28 2058.16
SWD - - 220.79 91.20 224.51 36.50
Street Lighting 96.76 - 40.99 49.41 26.39 213.00
Solid Waste - - 6.62 32.93 87.55 127.10
Management
Others - - 91.23 122.88 154.40 368.51
Additional Cost - - - 0 154.12 154.12
Factors
Total 1747.34 211.18 958.31 823.4 1284.77 5025.00
Source – Second SFC Report of Tamil Nadu
Table VII.4 – Class-wise total fiscal gap
Local Body Revenue Exp. Requirement Capital Expenditure Requirement Total Fiscal Gap
V.Ps 4241.29 1747.34 5988.63
P.Us 2162.05 211.18 2373.23
Dt. Pts. 27.86 - 27.86
T. Pts. 2502.82 958.31 3461.13
Mpts. 4559.25 823.40 5382.65
Corpns. 6364.00 1284.77 8648.77
Total 19857.27 5025.00 24882.27
Source – Second SFC Report of Tamil Nadu
Accordingly, the Commission has identified major areas and parameters of fiscal responsibility as applicable to Urban Local
Bodies.
81
1) Prepare budget based on the need and performance covering a 3 year rolling plan of expenditure and revenue
projections.
2) Fix pre-determined target for achieving revenue surplus of 5%
3) Strictly adopt right size of staff strength based on norms.
4) Widen Tax Base
5) Eliminate Fiscal deficit
6) Fix limit on Debt.
7) Cut the time, and cost over run of capital expenditure on projects on internal rate of return basis.
8) Levy right level of User Charges (“)
9) Target for Collection :
(a) Current Demand 95 %
(b) Arrear Demand 75%
10) Assess returns and recovery for new projects.
After getting this vetted by Law department, suitable provisions may be made in the common Urban Local Bodies
Act.
(“) The end users who reap the benefits from the services should be made to pay for the services on the principle of service
provider – service receiver relationship (Examples: water supply and solid waste management).
82
ANNEXURE VIII - Total Receipts and Dependency of A.P. Local Bodies for the years 1996-97 TO 1999-2000
Table VIII.1 - Statement showing total receipts of A.P. Municipalities for the years 1996-97 to 1999-00
Rs. in lakhs
Sl.
Sources of Revenue Receipts during
No.
1996-97 1997-98 1998-99 1999-2000
1 2 3 4 5 6
Table VIII.2 - Statement showing the percentage own revenues of municipalities to the total receipts during 1996-97 TO 1999-
2000
Rs. in lakhs
1 2 3 4
Table VIII.3 – Statement showing the income of Municipal Corporations in the State from various sources during the period
from 1996-97 TO 2000-2001
Rs. in lakhs
Sl.
Sources of Revenue Receipts during
No.
1996-97 1997-98 1998-99 1999-2000
1 2 3 4 5 6
83
3. Assigned Revenues 8339.07 9580.84 11530.55 12125.30
Table VIII.4 - Statement showing overall dependence of local bodies of Andhra Pradesh
Rs. in lakhs
Income from own sources
Year Total Receipts Income from Own Sources
as %
1 2 3 4
Average 49.61 %
(Source: Second SFC Report of Andhra Pradesh)
84
Annexure IX – Tenth, Eleventh and Twelfth Central Finance Commission’s Framework for the Allocation of Grant to States for
Local Governments
For the Panchayats Rs. 100 per capita of rural population as per the 1971 census population.
Allocated grant amount for the urban local bodies to be allocated on the basis of the 1971 ratio of the inter-state slum to urban
population.
Criteria for Inter Se Allocation of grant in aid amount among the states
Criteria Weight
Index of Decentralisation
Criteria for Inter Se Allocation of grant in aid amount among the states
Criteria Weight
It has used 2001 census data regarding availability of drinking water and sanitation in rural and urban areas to construct the
index of deprivation. The formula used is D.I = 0.5x + 0.25(y=z) where D.I is deprivation index; x is the percentage of
households fetching water from distance, y is the percentage of households without latrines and z is the percentage of
households without drainage. A standard deviation of 0.5 is allowed so as to enable the least deprived state also to get a share.
85
Annexure X – Eleventh Central Finance Commission Report - Summary of Recommendations Relating to State Local Bodies
(Ref: Para 2.1)
14.31 Article 2431 should be amended to enable the States to set up the Stale Finance Commissions (SFC) at the
expiration of every fifth year or earlier, akin to the provision that already exists under article 280 for constituting the
Finance Commission. The synchronization of availability of the Slate Finance Commission reports may also be
ensured through either a Central legislation or an appropriate provision in the Constitution. (Para 8.11a).
14.32 State Finance Commission reports may contain specific chapters, as indicated in Para (8.11 b) so as to make them
more useful lo the Finance Commission. (Para 8.11 b).
14.33 Stale Governments should take their decision on the recommendations of the State Finance Commission, especially
in regard to matters relating to resource transfer, and place the ATRs on the floor of the State Legislature within six
months. Amendments to the laws, if necessary, should be made to ensure this at the earliest. (Para 8.11 c)
14.34 The words ‘on the basis of the recommendations made by the Finance Commission of the Slate’, appearing in sub-
clauses (bb) & © of article 280(3) of the Constitution, may be deleted. (Para 8.11.d).
14.35 States should, by legislation, ensure that the chairpersons and members of the SFCs might be drawn from amongst
experts in specific disciplines such as economics, law, public administration and public finance. (Para 8.12).
14.36 Taxes on land / farm income may be levied in suitable form to strengthen the resource base of the local bodies. The
amounts so collected may be passed on to these bodies for improving and strengthening the civic services. Local
Bodies may also be involved in collection of these taxes. (Para 8.15a).
14.37 Cess on land based taxes and other State taxes / duties may be levied and devolved to the local bodies for
augmenting specific civic services. (Para 8.15 b)
14.38 States should levy profession tax with a view to supplementing the resources of local bodies, or they should empower
the local bodies to levy it. The rates should be suitably revised from time to time. (Para 8.15c)
14.39 Property tax or house lax has not been exploited to its full potential. The relevant tax legislation should be suitably
modified to delink this tax from the rent control laws. Where a property has been let out, the property tax should be
made recoverable from the occupier. (Para 8.16a)
14.40 Abolition of octroi should invariably be accompanied with its replacement by a suitable tax that is buoyant and can be
collected by the local bodies. (Para 8.16b)
14.41 The rate structure of user charges levied by the local bodies should be revised regularly to keep pace with inflation
and to recover at least; as far as possible, the full-operations and maintenance cost. Local bodies should have the
power to fix the rates of taxes and user charges. (Para 8.16c)
14.42 The grants recommended for local bodies in this report should be given to those local bodies, which have the primary
responsibility for maintenance of civic services. The grant should be untied, but should not be used for payment of
salaries and wages. (Para 8.19a)
14.43 States should review the existing accounting heads under which funds are being transferred to the local bodies. For
each major head / sub major head, six minor heads should be created - three for the consultation with the
Comptroller and Auditor General of India (C&AG) and the Controller General of Accounts, to ensure uniformity
among the States. (Para 8.19a)
14.44 The C&AG should be entrusted with the responsibility of exercising control and supervision over the maintenance of
accounts and their audit for all the tiers / levels of panchayats and urban local bodies. (Para 8.19b)
14.45 The Director, Local Fund Audit, or any other agency made responsible for the audit of accounts of the local bodies,
should work under the technical and administrative supervision of the C&AG. In no case, should be the Director of
Panchayats or for Urban Local Bodies be entrusted with this work. The prescribed authority entrusted with the audit
and accounts of the local bodies should not have any functional responsibility in regard to these bodies, so as to
ensure his independence and accountability. (Para 8.19c)
14.46 The C&AG should prescribe the format for the preparation of budgets and for keeping accounts by the local bodies,
which should be amenable to computerization. (Para 8.19d).
14.47 Local bodies, which do not have trained accounts staff, may contract out the upkeep of accounts to outside agencies
/ persons. The C&AG may lay down the qualification and experience required for this purpose. The Director, Local
Fund Audit, or his equivalent authority, may do the registration of such agencies / persons. (Para 8.19 e)
14.48 Audit of accounts of the local bodies may be entrusted to the C&AG, who may get it done through his won staff, or by
engaging outside agencies on payment of remuneration fixed by him. An amount of half percent of the total
expenditure incurred by the local bodies should be placed with the C&AG for this purpose. (Para 8.19f)
14.49 The report of the C&AG, relating lo audit of accounts of the Panchayats and the municipalities, should be placed
before a committee of the State Legislature constituted on the same lines as the Public Accounts Committee. (Para
8.19g)
14.50 An amount of Rs. 4,000 per Panchayat per annum, on an average, should be adequate to meet the expenditure on
maintenance of accounts on contract basis, if the staff / facilities are not available within the Panchayat. The amount
may be paid from the grants that are recommended for the rural local bodies. Any additional fund required for this
purpose should be met from the grants given to the Stales for the Panchayats. Where a Panchayat has got staff
available for upkeep of accounts, these funds need not be so earmarked. If any municipality does not have a regular
staff for this purpose, the grants provided to it may also be so earmarked. (Para 8.20).
14.51 A database on finances of the Panchayats and municipalities should be developed at the district. Stale and Central
Government levels and be easily accessible by computerizing it and linking it through V-SAT. The Director, Local
Fund Audit, or the authority prescribed for conducting the audit of accounts of the local bodies, may be made
responsible for this task. The Chief Secretary of the State may do the State level coordination and monitoring. The
C&AG should be involved at all stages. (Para 8.21).
14.52 A total grant of Rs 1,600 crores for Panchayats and Rs.400 crores for the municipalities is recommended to be given
to States for each of the five years starting from the financial year 2000-01. The amounts indicated for maintenance
of accounts, audit of accounts and for the development of database, would be the first charge on these grants and
would be released by the concerned Ministries of the Government of India, after the arrangement suggested become
operational. Shares in respect of the scheduled, tribal and other excluded areas should be made available to the
rd th
respective States only after the relevant legislative measures are taken extending the provisions of the 73 and 74
amendments to such areas. (Para 8.22).
14.53 Inter-se share of States in the grants provided for the Panchayats and the municipalities is based on the rural / urban
population of the State (40 per cent), index of decentralization (20 per cent), distance from the highest per capita
86
income (20 per cent). Revenue effort of the local bodies (10 per cent) and geographical area (10 per cent). (Paras
8.23, 8.24, 8.25 & 8.26).
14.54 While all the States barring Arunachal Pradesh have either enacted a new Panchayat / Municipal Act or have
rd th
amended the existing legislation in conformity with the 73 and 74 amendments, the schemes relating to the
subjects included in the Eleventh and Twelfth Schedules have not yet been transferred to these bodies in most of the
States as contemplated in articles 243G and 243W. Transfer of functions and schemes to the local bodes should be
specifically provided by legislation. (Para 8.28a)
14.55 The roles of the three tiers of the Panchayats have generally not been delineated in the State legislations and the
matter has usually been left to be decided by way of executive instructions. Legislative arrangements should be
made to indicate clearly the role that these bodies have to play in the system of governance in the rural areas of a
district. (Para 8.28b)
14.56 The two Union Ministries - the Ministry of Rural Development and the Ministry of Urban Development - have to
ensure that the local bodies function as institutions of self-Government and all impediments to the realization of this
ideal are removed. These Ministries should take the initiative for transferring the schemes related to their subjects
included in the Eleventh and Twelfth Schedules, to the local bodies. (Para 8.28c)
14.57 The three-tier Panchayat Raj System is very rigid arrangement. States may be provided flexibility to decide whether a
two-tier system would operate with greater efficiency and economy or a three-tier structure would be essential. (Para
8.28d).
th
14.58 For extending the provisions of the 74 amendment to the Fifth Schedule areas, Parliament is yet to enact the
enabling legislation. This may be speeded up. (Para 8.28c)
14.59 The Legislatures in the States of Meghalaya, Mizoram and Nagaland should take suitable action for extending the
provisions of the 73rd amendment to the non-Sixth Schedule areas. Alternatively, the existing village level institutions
rd
in these areas may be recognised as Panchayats for the purposes of the 73 amendment, by appropriate legislative
charges. (Para 8.28f)
14.60 Suitable enabling provisions in the Constitution may be introduced so that the hill areas in the State of Manipur and in
rd
the district of Darjeeling in West Bengal could get the benefit of the 73 amendment. (Para 8.28g)
14.61 Administrative reorganization of Panchayats is necessary to ensure their development as viable institutions of self-
Government (Para 8.28h)
14.62 The District Planning Committees and the Metropolitan Planning Committees should be constituted and made
functional. (Para 8.28i)
14.63 All Government properties of the Centre as well as the States should be subject to the levy of user charges. It should
be regulated by suitable legislation. (Para 8.32).
87
Annexure XI- Twelfth Central Finance Commission Report - Summary of Recommendations Relating to Workings State
Finance Commissions
Para 8.55
ii) The states should avoid delays in the constitution of the SFCs, their constitution in phases, frequent reconstitution,
submission of reports and tabling of the ATR in the legislature. It is desirable that SFCs are constituted at least two
years before the required date of submission of their recommendations, and the deadline should be so decided as to
allow the state government at least three months’ time for tabling the ATR, preferably along with the budget for the
ensuing financial year.
iii) The SFC reports should be readily available to the central finance commission, when the latter is constituted so that
an assessment of the state’s need could be made by the central finance commission on the basis of uniform
principles. This requires that these reports should not be too dated. As the periodicity of constitution of the central
finance commission is predictable, the states should time the constitution of their SFCs suitably.
iv) SFCs must be constituted with people of eminence and competence with qualification and experience in the relevant
fields.
v) The convention established at the national level of accepting the principal recommendations of the finance
commission without modification, should be followed at the state level in respect of SFC reports.
vi) The SFCs must clearly identify the issues which require action on the part of the central government to augment the
consolidated fund of the state and list them out in a separate chapter for the consideration of the central finance
commission.
vii) The suggestion made by SFCs regarding raising the ceiling on professional tax is endorsed for action by central
government.
viii) It is desirable that the SFCs follow the procedure adopted by the central finance commission for transfer of resources
from the centre to the states in respect of resource transfers from state governments to local bodies. The SFC reports
should contain an estimation and analysis of the finances of the state government as well as the local bodies at the
pre and post transfer stages along with a quantification of the revenues that could be generated additionally by the
local bodies by adopting the measures recommended therein. The gaps that may still remain would then constitute
the basis for the measures to be recommended by the central finance commission.
ix) While estimating the resources of the local bodies, the SFCs should follow a normative approach in the assessment
of revenues and expenditure rather than make forecasts based on historical trends.
x) A permanent SFC cell may be created in the finance department of state governments as the collection and collation
of data would need to be done constantly and data would need to be made available to the SFC.
88
th
Annexure XII - Status of State Finance Commissions in Various States as on November 22, 2004 (as reported in 12 Finance Commission)
1. Andhra Pradesh June 22,1994 May 31,1997; ATR on Nove 29, 1997 December 8, 1998 August 19, 2002; ATR on March 31, 2003
2. Arunachal Pradesh May 21, 2003 June 6, 2003; ATR on July 3, 2003 Not Constituted -----------------
3. Assam June 23, 1995 Febru 29, 1996; ATR on March 18, 1996 April 18, 2001 August 18, 2003; ATR Not Submitted
6. Goa April 22, 1994 June 5, 1999; ATR on Nove 12, 2001 Not Constituted ----------------------------
8. Hariyana May 31,1994 March 31, 1997; ATR on Sept 1, 2000 September 6, 2000 Not Submitted
9. Himachal Pradesh April 23, 1994 November 30, 1996; ATR on February 5, 1997 May 25, 1998 October 24, 2002; ATR on June 24, 2003
10. Jammu & Kashmir April 24, 2001 May 2003, ATR Not Submitted Not Constituted -------------
11. Jharkhand* Not Constituted ------------------------------------------ January 28, 2004 SFC Report Not Submitted
13. Kerala April 23, 1994 February 29, 1996; ATR on March 13, 1997 June 23, 1999 June, 2002 ATR Not Submitted
14. Madhya Pradesh August 17, 1994 July 20, 1996; ATR on the Same day June 17, 1999 July 2003; ATR Not Submitted
15. Maharashtra April 23, 1994 January 31, 1997; ATR on March 5, 1999 June 22, 1999 March 2002; ATR Not Submitted
89
April 22, 1994
16. Manipur December 20, 1996; ATR on July 20, 1996 January 3, 2003 Submitted; ATR Not Submitted
May 31, 1996
17. Meghalaya Not Applicable Not Applicable Not Applicable Not Applicable
18. Mizoram Not Applicable Not Applicable Not Applicable Not Applicable
19. Nagaland Not Applicable Not Applicable Not Applicable Not Applicable
26. Uttar Pradesh October 22, 1994 December 26, 1996 ATR on January 20, 1996 February 25, 2000 June 2002, ATR Submitted on April 2004
27. Uttaranchal* January 31, 2001 Submitted 2002; ATR in 2002 Not Constituted ---------------------------
28. West Bengal May 30, 1994 November 27, 1995; ATR on November 27, 1995 14 July, 2000 6 February, 2002; ATR Not Submitted
30. Chandiarh April, 1995 December 31, 1997 January 9, 2001 Submitted
90
33. D & N Haveli September 8, 1995 August 28, 1998 NA NA
st
* - Chattisgadh, Uttaranchal and Jharkhand being newly carved states; their local bodies were covered by 1 SFC of their mother States.
th
Source - Nagarpalika Update – September-October 2003 – Vol.1 No. and 12 Finance Commission – Annexure 8.10
91
Annexure XIII - Share of Municipalities in State’s Resources as Recommended by the Finance Commissions of States
Andhra Pradesh 39.24% of state tax and non-tax revenue to all local 40.92%of state tax and non-tax revenue to all bodies,
bodies. both rural and urban bodies, 9.67% is allocated to
municipalities.
Assam 2% of state tax for local bodies, both rural and
urban. (The share of urban local bodies has not
been specified).
Himachal Pradesh An amount equal to Rs.12.2 crore as grants in lieu An amount equal to Rs.19.66 crore as development
of octroi for 1996/97, to raise to Rs.17.9 crore in grants for the year 2002/03, with a 10 per cent mark-
2000/01 and CSS grants to accrue to municipalities. up to neutralize inflation, rising to Rs.28.79 crore by
2006/07, and CSS grants to accrue to municipalities.
Karnataka 5.4% of the total non-loan gross own revenue 8% of non-loan gross own revenue receipts for
receipts for meeting the plan and non-plan municipalities.
requirements.
Madhya Pradesh 8.67% of the tax and non-tax revenues of state 1.07% of divisible pool of state own tax revenue.
government.
Punjab 20% of the net proceed for five taxes namely, stamp 4 per cent of net tax proceeds of all state taxes to be
duty, motor vehicle tax, electricity duty, devolved to all local bodies.
entertainment tax, cinematograph shows should be
transferred to municipalities, and the projected gap
of Rs.322 crore should be met by the Central
Finance Commission.
Rajasthan 2.18% the net proceeds of state taxes should be Total devolution of Rs.794.43 crore consisting of
devolved on the local bodies; the division of these 2.25% share in states net own tax revenue (excluding
proceeds between rural and urban should be in the entertainment tax); 15% share in entertainment tax for
ratio of 3.4:1. ULBs for the award period 2000-05 and 1% share in
royalty receipts from minerals to Gram Panchayats.
Tamil Nadu 8% of the state’s net tax revenue should be 8% of state’s own tax revenue, after excluding
devolved on the local bodies in 1997/98; this entertainment tax to local bodies for each year from
percentage should gradually increase in successive 2002/03 to 2006/07; shares of PRIs and ULBs in the
years to 9%, 10%, 11% and reaching 12% in recommended devolution will be in the ratio 58:42.
2001/02. The division of this amount between rural
and urban should be on the basis of population as
in the last Census.
93
Uttar Pradesh 7% of the net proceeds of state’s total tax revenue
should be transferred to urban local bodies.
West Bengal 16% of the net proceeds of all taxes collected by the (a) Nearly, 72 percent tax proceeds from
state should be transferred to local bodies. Such entertainment tax.
funds should be released to the Districts. These (b) 16 percent allocated from states revenue as
proceeds should be divided between urban and untied entitlement fund, the proceeds of which are to
rural based on population. be distributed between ULB and Panchayats.
Source – O. P. Mathur (June 2000) – Decentralisation In India: A Report Card – UMP Asia Occasional Paper No. 47 – United
Nations Urban Management Programme
Source - India’s Municipal Sector – A Study for Twelfth Finance Commission (TFC) – O.P. Mathur with Sandeep Thakur –
(September 2004 ) – National Institute of Public Finance and Policy – New Delhi
Source – State Finance Commission Reports
94
Annexure IXV – Review of Role Expected of SFCs
Role/Functions Expected of SFCs Tamil Nadu Karnataka Andhra Pradesh West Bengal Gujarat
95
G. Other Aspects Relevant to Improving Local Bodies
1. Self Reliance and Fiscal Responsibility Norms Y N N N N
2. Debt Management (Borrowing) Policy Y Y N N YN
3. HRM / Staffing Review and Norms Y Y N N N
4. Budgeting Process Y N N N N
5. Administrative and Procedural Streamlining/Reforms Y Y N N YN
6. Accounting and Auditing Reforms Y Y N N N
96
Annexure XV – Views, suggestions of State Governments, Concerned Central Ministries regarding addressing local finance
35
issues and Role Expected of SFCs
8.7 Some states have sought compensation for the loss of revenue on account of abolition of octroi. Grants have been sought
for improving the training infrastructure and for continuing the efforts to streamline the data base and maintenance of accounts.
Several states have suggested the withdrawal of the condition, which requires either the state government or the local bodies to
provide matching contribution.
8.8 We have taken due note of these suggestions and kept them in view while arriving at the quantum of central grants that
could be set apart for the purpose of supplementing the resources of the local bodies.
8.10 MRD expressed the view that if a decentralization index is to be used, it should comprise parameters which are simple,
transparent and objective. It may include (i) constitution and functioning of district planning canters as required under article
243ZD; (ii) assignment of all the 29 functions given in eleventh schedule along with funds and all functionaries (iii)
implementation of the SFC recommendations.
35
As reported in the Report of Twelfth Finance Commission – (Chapter – 8 Local Bodies) September 2004
97
viii) municipalities must progressively recover full costs covering operation and maintenance, billing and collection
and capital;
ix) inter-governmental transfers including share in state taxes and grants-in-aid should be formula based and not
amenable to negotiation;
Abbreviations
98
Figure 2 - Overall (Macro) Fiscal Devolution Framework in India
Union Level
Resources State Level
Resources
Rural Local Government’s Rural Local Urban Local Government’s Urban Local Government’s
Own tax / non-tax Government’s Share Share of State & Own tax & non-tax
Control Resources Resources
99
Figure 3 - Schematic Model of Devolution of State’s Resource to LBs
State’s Resources
State’s Local
Share
Ist Level
Government’s Share
Devolution
IIIrd Level
Zilla Panchayats Taluka Panchayats Gram Panchayats Municipal Corporations Municipal Council for Nagar Panchayat for
(District Boards) (Taluka Boards) (Village Boards) for Larger Urban Area Smaller Urban Area a transitional area
MC 1 MC 1 NP 1
MC 2 MC 2 NP 2
ZP 1 ZP 2 ZP 3 GP 1 GP 2 GP 3 MC 3 MC 3 NP 3
MC 4 MC 4 NP 4
IVth Level Inter 101
se Allocation
TP 1 TP 2 TP 3
View publication stats
Local Local Local State’s State’s State’s Centre’s Centre’s Centre’s Centre’s
Tax Capital Tax Non-tax Capital Other
Non Capital Tax Non-tax Resource Resource
Resource Tax Resourc Resourc Resourc Resourc Resourc s Resourc
Share of Share of a
Local Bodies State Govt. Share of Share of
State Govt Central Govt
Non-formula
Discretionary Grants for State Plan Schemes as
Grants to ULB per Planning Commission
from State