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The Finance Commission and the Third Tier

The 73rd/74th amendments to the Constitution took up the task of building a viable local government system and gave the Union Finance Commission an important role in this process. How can the Thirteenth Finance Commission work towards building a new public finance structure that involves the third tier in the country?

COMMENTARYaugust 16, 2008 EPW Economic & Political Weekly18mapping and financial devolution to local governments as part of its TOR to augment and supplement the resources of the local governments. To proceed with the latter without reference to the former would ap-pear too mechanical and meaningless to be effective.Interse DistributionFor interse allocation of the grants in aid and for sharing of taxes among the states, the general criteria that have been fol-lowed by the various finance commissions were based on needs (for example popula-tion), cost disabilities (for example area), tax efforts, fiscal discipline, equity and so on. But my contention is that grants for lo-cal governments must lay great stress on decentralised governance and local de-mocracy. For interse distribution of grants to panchayats and municipalities, the EFC used an index of decentralisation based on 10 parameters like enactment of pan-chayat/municipal legislation, election to the local bodies, constitution of district planning committee, etc, with a 20 per cent weightage. The decentralisation in-dex was so poorly designed and operation-alised that it did not reflect the ground re-alities relating to the progress towards de-centralised governance. The TFC aban-doned the decentralisation index on the plea that states have taken “effective steps” to implement 73rd/74th constitu-tional amendments but substituted it by a deprivation index with only 10 per cent weightage. Clearly both theEFC andTFC failed to appreciate the letter and spirit of the 73rd/74th constitutional amendments. The THFC may do well to reverse this situation by designing a good devolution index that will strengthen and support democratic decentralisation in the coun-try. The weightage should be heavily loaded towards this. A 100 per cent weightage to parameters of decentralisa-tion may sound extreme but profoundly rational. The THFC may do well to under-stand the continuing lack of clarity in respect of the assignment of powers, authority and responsibilities of the local bodies as well as the lack of fiscal decentralisation except in Kerala. If an index solely based on decentralisation parameters would be an extreme proposi-tion, the question of including some index of backwardness anchored to core services with appropriate weightage may be de-signed and combined with a good decen-tralisation index.Para 3, subsections (vii) and (viii) of the THFC, TOR relating to: (i) improving the quality of public expenditure to obtain better output and outcome; and (ii) the need to manage ecology, environment and climate change consistent with sustain-able development may be examined vis-à-vis the third tier. Although one can question the propriety of including these items in the TOR of a finance commission, I consider them important because the is-sues with regard to these cannot be ad-dressed without taking local governments into account and strengthening their capabilities. If you want growth to be equitable and inclusive, it is best achieved byensuring every citizen a certain mini-mum comparable quality of elementary capabilities in health, education, drinking water, sanitation, shelter, etc, irrespective of her choice of residential location. Prob-ably the best way to achieve this is through strengthening the financial base and ca-pabilities of the local governments. The THFC and the state finance commissions (SFCs) currently underway may do well to explore the possibilities of setting out a project to ensure a minimum quality of core services to every territory and sub-region along with the implementation of a citizen’s report card system recommended for Tamil Nadu by the secondSFC of Tamil Nadu and also by the Second Administra-tive Reforms Commission. The passing of a citizen’s charter by each local body as has been insisted upon in Kerala could be considered a first step in linking outlay to outcome. By introducing feed-backmechanisms, not only the quality of public expenditure but public institutions like the local governments can also be held accountable.As regards the “need to manage ecology, environment” etc, it is important to point out that the primary responsibility, given Article 243ZD rests with the District Plan-ning Committee, which is constitutionally mandated to prepare a draft plan for the district “having regard to matters of common interest between panchayats and municipalities, including spatial planning, sharing of water and other physical and natural resources, the inte-grated development of infrastructure and environmental conservation”. Reduced to specifics, the TOR involves investments to be made for removal of slums, restora-tion, deepening and maintenance of water bodies, protection of forests and the like, most of which cannot be done independent of local governments. A moot question before the THFC is whether it is going to add more special grant items with or without conditionalities or going
COMMENTARYEconomic & Political Weekly EPW august 16, 200819to launch a monitorable environmental programme through District Planning Committee or other sub-district level local governments.Maintenance of AssetsMaintenance of assets has been a running item in theTOR of UFCs since the fifth commission. Para 6, subsection IX of the THFC virtually repeats the wording of the EFC andTFC. Surprisingly none of the ministers who presented papers at the national seminar thought it important to raise the issues of maintenance of capital assets. I venture to suggest that the THFC may do well to examine the long-pending subject in a new perspective. The ques-tion of maintenance of capital assets created afresh as well as old ones should be part of an asset management and as-set renewal policy of a state and probably of the country as a whole, which takes into account the entire life cycle of a project. Both state governments and local-self governments have accumulated an increasing maintenance deficit lead-ing to poor delivery of services and which quite often resulted in premature fail-ures and even in the collapse of assets. Kerala was one state that took some initiative at the state sub-state level.Following the recommendations of the second KeralaSFC, the state devolved 5.5 per cent of the state’s own tax revenue for the maintenance of assets coming under the panchayats and ULBs to be divided on the basis of the magnitude of road and non-road assets in each local government. Now this is not followed. My suggestion is to go for a comprehensive policy initiative through theUFC.In general, one can firmly say that there is a clear absence of a planned metho-dology for the renewal of capital assets. The planning and budgeting process do not recognise the much-needed renewal strategy. My plea is that the THFC should at least consider the creation of an asset renewal fund somewhat like the Calamity Relief Fund to ensure that adequate invest-mentsare made for the maintenance of institutions that predominantly provide services to the poor such as primary health centres, primary and secondary schools, panchayat offices, krishi bhavans and so on. The local governments should also beinvolved in the operation of this asset renewal fund.Restructuring of Public FinanceThe failure of the successive finance com-missions to restructure public finance vis-à-vis the centrally-sponsored schemes (CSSs) has resulted in considerable loss of the development space of the states as well as of the local bodies and affected their autonomy and responsibility. The 200-odd CSSs, which in the mid-2006 accounted for Rs 72,000 crore and is today heading towards Rs 1,00,000 crore have heavily transgressed the areas belonging to panchayats under Article 243G and the Eleventh Schedule. Moreover, as per para6, sub-clause (ii) of the Commission’s TOR, the gross budgetary support (GBS) to the central plan and central assistance to the state plan are treated as demands on the resources of the central government for the first time along with defence, ex-penditure on civil administration, border security, debt servicing and such other committed expenditure and liabilities. The inclusion of the GBS in the demands of the resources of the centre more than 50 per cent of which are CSSS is wrong on several counts. A few with specific refer-ence to panchayats only are mentioned below. One, theTOR affirms allCSSs as a normal and legitimate devolution item. Indeed they are not. It is important to note that as far back as 1969, it was specified that the size ofCSSs should not be more than one-sixth of central assistance. This norm has been persistently violated and the panchayats have been the worst victims. I think one reason to limit the size was because continuously asking the states to fit themselves into the straitjacket of central government guide-lines via the CSSs can be counterproduc-tive. The most acceptable way, which is to put a ceiling to their total size and custom-ise them has been avoided.2 Two, while the flagship programmes of recent central government budgets are widely hailed, the euthanasia of decentralised planning and decentralisation underway has been carefully ignored. Three, it is only fit and proper that the impact of CSSs on the life of the people of each region and state and the economy of the country as well as on the decentralised democratic process issubjected to an independent enquiry before their continuance is approved and legitimised.Along with the issue of the CSSs, it is important to underscore the fact that the functions fund flow matrix at the level of the PRIs is bedevilled by multiple and parallel agencies, which have considera-bly vitiated the entire transfer system, especially at the state sub-state level. It is interesting to hear the comments of the second administrative reform commis-sion report on this. “The implementation space at local levels is occupied by a mul-tiplicity of governmental agencies – un-ion, state and local – even in the case of the single sector. Confusion, unnecessary duplication, inefficiency, wastage of funds, poor output and outcomes are the result of this organisational jungle. The local organisations, which should be the most directly and fully concerned are at best treated as a small part of the implementation, occasionally consulted but in most cases bypassed and ignored”. I think the amendment to Article 280 and addition of 280 3(bb) and (c) are not only meant to mandate the UFCs to recommend ways to augment or supplement the consolidated fund of the state but also to uphold the organic link of a federal constitutional organ over the public finance of the country and the underlying task to help to shape out it in the most rational and equitable manner possible.Failure of Sub-state TransfersEven a casual student of local public finance in the country will be struck by the failure of the transfer system at the state sub-state level in the country. While acknowledging that the EFC and TFC have raised some relevant issues relating to this, I suggest that the THFC may commission a quick study of the SFC recommendations to see what hap-pened on the ground in regard to the state sub-state level transfer system, since the mid-1990s.The task of estimating the revenue gap of the local governments and the UFC trying to fill part of this gap can only lead to a dependency syndrome unless you enhance thecapabilitiesof the panchayats, especially the gram
COMMENTARYaugust 16, 2008 EPW Economic & Political Weekly20panchayats, which aloneenjoysubstan-tial revenue raising powers. This cannot be done by more revenue assignments alone. It is as much a function of tax ef-forts, functional devolution as of making the size of panchayats viable in terms of convergence of services, technical and administrative capability and availability of revenue – raising potential. There is a great need to make the majority of pan-chayats viable units, at least in terms of population and revenue. While this is primarily the task of the SFCs and depends a great deal on the political will of the concerned state government, the UFC cannot stay away from the task of building local democracy in Indian fiscal federal system.Special ClaimOctroi, which was a substantial source of revenue for local governments is being phased out. The entertainment tax, an im-portant revenue source of local govern-ments, is treated as a service tax. My plea is that goods and services tax should be made a shareable tax with a special share assigned to local governments to compen-sate for the losses they suffer.In brief, the task of building a viable local government system, which is made an integral part of Indian federal polity is a challenging task and a continuing lega-cy of the 73rd/74th constitutional amend-ments. The UFC has an important role in this. This note seeks to underscore the issues in the context of the THFC, which should work towards a new public finance architecture in the country.Notes1 The TFC, in one of its conditionalities for debt relief, specially mentions that it may not be linked with performance in human development.2 The need to customise CSSs was raised by the finance minister of Jammu and Kashmir at the national seminar on centre-state relations.ReferencesBrecher, Michael (1969): Nehru: A Political Biography, Jaico Publishing Co, Bombay.Kumudini S Hajra, P H Rakhe and Dhirendra Gajb-hiye (2008): ‘Issues before the Thirteenth Finance Commission: Correction of Horizontal and Ver-tical Imbalances’,Economic & Political Weekly, Vol 43, Nos 12 and 13, pp 89-96.Reddy G R (2007): ‘Imbalance in Agenda of Finance Commission’,Economic & Political Weekly,Vol 42, No 51, pp 8-10.Community Sanitation Campaign: A Study in HaryanaVikas Gupta, Mahi PalThis article presents a case study of a successful Community-led Total Sanitation Campaign from Bhiwani district in Haryana. Social acceptance of hygienic sanitation practices has led to enormous benefits for the village community. Since independence, various efforts have been made to alleviate the severity of insanitation but these efforts did not receive the desired impetus in rural areas as these were mostly made in a piece-meal and un-coordinated manner. Only 20 per cent of the rural population has access to sanitation even after 60 years of inde-pendence. The launch of the Total Sanitation Campaign (TSC) under the restructured Central Rural Sanitation Programme (CRSP) and re-strategising it to follow a community-led and people-centred approach in its implementation [TSC Guidelines 2002] has been a significant departure from the earlier principle of state-wise allocation based on the poverty criteria. This approach lays critical emphasis on information, education and communication (IEC) inputs for demand generation for sanita-tion facilities through sensitisation, motivation and behavioural-attitudinal reorientation of the individual and the community. This study of its performance in Haryana assumes some importance in the context of the state’s economic advancement and social backwardness. Haryana had the highest per capita income level (Rs 29,504) in 2003-04 at current prices, but at the same time it also shows very high expenditure on health. This is because of poor sanitation facilities in villages as well as in cities. In rural Haryana, 52 per cent of the households have televisions, 76 per cent have radios but only 29 per cent have latrines or toilets in their houses as per the 2001 Census. This implies that non-availability of toilets has not been due to economic reasons but because of the lack of aware-ness about the benefits, both intrinsic and extrinsic, in accessing toilets within the household. The lack of awareness about sanitation and better hygiene prac-tices also results in an unnecessary ex-penditure on health and loss of income because of productive days wasted due to sickness. This article focuses on studying the processes and outcomes of the implemen-tation of the community-led total sanita-tion (CLTS)1 in Bhiwani district where this approach was practised for the first time in Haryana. For evaluating the processes and outcomes of the CLTS, out of 26 villages where this approach was adopted six gram panchayats were visit-ed and in addition to that primary data was collected from 119 households from four villages selected randomly for this purpose. Vikas Gupta ( is a member of the IAS with the government of Haryana and Mahi Pal ( is a member of the Indian Economic Service, currently with the ministry of rural development, government of India.

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