State – Local Fiscal Relations
Dr V N AlokIndian Institute of Public Administration11 December 2006 [email protected]
The federal ensemble in India comprises:
• Union Government• Twenty Eight States• Two UTs with legislatures• Five Other UTs• Rural local bodies• Urban local bodies
Institutions
• Finance Commission• Planning Commission • National Development Council• Inter State Council• Centrally Sponsored Schemes• State Finance Commission
Principle of Subsidiarity
Whatever can be done best at the lower level must necessarily be done at that level. Only that which cannot be effectively implemented at a lower tier might be taken to a higher tier
74th Constitutional Amendment
• Addition of Part IX A• 12th Schedule (243 W)• Powers to ULBs (243 X)• Metropolitan Planning Committees• District Planning Committees• State Election Commission• Finance Commission of States (243 Y)• Audit of Accounts of Municipalities
12th Schedule(243W)Core functions• Roads and Bridges• Water supply for domestic, industrial and commercial purpose• Public health, sanitation, conservancy and solid waste management• Burial and cremation grounds and electric crematoria• Public amenities including street lighting, parking lots, bus stops and public conveniencesWelfare functions• Safeguarding the interests of weaker sections of society, including the handicapped.• Slum improvement and up gradation• Urban poverty alleviation• Provision of urban amenities and facilities such as parks gardens, playgrounds• Promotion of cultural, educational and aesthetic aspects• Cattle pounds; prevention of cruelty to animalsDevelopment functions• Urban planning including town planning • Regulation of land-use and construction of buildings• Planning for economic and social development• Fire services• Urban forestry, protection of the environment and promotion of ecological aspects• Vital statistics including registration of births and deaths.• Regulation of slaughter houses and tanneries.
Legislations in other countriesAlbania 1992 Law 7572 on the
Organization and Operation of Local Government
. Bangladesh The Pourashava(Municipalities) Ordinance, 1977.
Bulgaria 1991 Law on Local Self-Government and Local Administration.
Hungary Law 65 of 1990 on Localself-Government.
Republic of Korea The Local Antonomy Act, 1988.Phillipines The Local Govt. Code, 1991Sri Lanka The Thirteenth Amendment to the
Constitution.
Mandatory Provisions of Part IX and IX A• Conformity Acts have been enacted in all the
States• Elections have been conducted in almost all
States• All States except six have received their first
generation Finance Commissions’ reports• About a million women have been elected
Reasons to cheer
Recommendatory Provisions of Part IX• ULBs in states starved of funds• But expanded responsibilities• Lack of capacity
– Institutional– Personnel
Areas of concern
Own Source Revenue of Each Level of Government (% Share)
Source: Mathur, O.P. (2006)
61.939.52.9800-01
62.835.12.8099-00
62.734.32.9798-99
63.833.42.8497-98
UnionStateMunicipalitiesYear
Own Source Revenue of Each Level of Government (% Share)
Source: Alok, V N (2006)
59.1138.430.4502-03
59.8737.050.4500-01
59.6537.010.4898-99
63.4233.210.3690-91
UnionStatePRIsYear
Expenditure by Local Bodies
• Rural local bodies – 0.98% of GDP• Urban local bodies- 0.56% of GDP
Municipal Spending
• 3.0 to 3.5 % of combined spending• 0.6 to 0.7 % of GDP of all States• 35 to 40 % lower than the norms
Revenue source of Municipalities
• Internal Sources– Taxes– Non- Taxes
• External Sources– Borrowings– Fiscal Transfers- Revenue Sharing, Grants
Internal revenues of Municipalities• Direct Tax revenue
– Property tax– Duty on Transfer of Property– Property related service taxes- water tax, drainage tax, conservancy tax,
lighting tax, fire tax etc– Profession tax– Advertisement tax– Entertainment tax– Environment tax– Passenger and goods tax– Tax on vehicles– Tax/toll on animals– Boat tax– Pilgrim tax– Timber tax
• Indirect Tax- Octroi
Own revenues of Municipalities
• Non-tax revenue–Parking fees–Market fees –Toll on bridges / vehicles –Fee for fire services–Water rate
Contribution of Own Revenue in Total Expenditure of PRIs
92.187.990.787.9Others (%)
6.86.05.94.5Own Revenue (%)
2002-032001-022000-011990-01Revenue
State Finance Commission
Recommendations can be grouped into –• Global sharing of revenue from state to
local• Assignment of taxes to local bodies• Grants-in-aid from state to local bodies• Others
Global share by SFCsState % AcceptanceTotal Revenue of state
Andhra Pradesh (I) 39.2 NoAndhra Pradesh (II) 10.4 NoAssam 2.0 YesGoa 36.0 No
Own Revenue of StateJ&K (I) 13.5 NoM.P. (I) 11.6 Modified
Own Tax revenueKerala (II) 3.5 Not knownRajasthan (I) 2.18 YesRajasthan (II) 2.25 YesT.N. 8.0 YesU.P. (I) 10.0 YesU.P. (II) 12.5 YesW.B. 16.0 Yes
Amendment in Article 280
• 280 (3)(bb) recommend measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State
• 280 (3)(c) recommendations to be based on the recommendations made by the Finance Commission of the State
10th Finance Commission(1995-00)
• No mandate in its ToR for local bodies• Sue Moto Cognizance of the Amendments• Rs 4381cr for panchayats @ Rs 100 per capita• Rs 1000 cr for Municipalities • Distribution based on inter State slum population
11th Finance Commission (2000-05)• Rs 8000 crore for panchayats• Rs 2000 crore for municipalities• Accounts, data base and audit be the first
charge• Remaining amounts for the core services• Article 280 (3)(C) be deleted
EFC cited four reasons• (i) Non-synchronization of the period of the
recommendations of the SFCs and the Central Finance Commission
• (ii) Lack of clarity in respect of the assignment of powers, authority and responsibilities of municipalities
• (iii) Absence of a time frame within which the state governments are required to take action on the recommendations of the SFCs
• (iv) Non-availability of the reports of the SFCs.
EFC criteria for allocation
Criteria Weight• population, 1991 40%• geographical area 1991 10%• Revenue effort of local bodies 10% • Distance 20%• Index of decentralization 20%
Index of Decentralization• Enactment of state municipal legislation in conformity with the
Constitution (seventy-fourth) Amendment Act, 1992.• Intervention/restriction in the functioning of municipalities.• De-jure assignment of functions to municipalities vis-à-vis the
twelfth schedule of the Constitution of India.• De-facto assignment of functions to municipalities by way of
rules, notifications, and orders of state government.• De-jure assignment of taxation powers to municipalities.• Exercise of taxation powers by municipalities.• Constitution of the finance commission of states and
submission of action taken repots.• Action taken on the major recommendations of the finance
commission of states.• Election to the municipalities.• Constitution of district planning committees.
12th Finance Commission (2005-10)
• Sequentially the third Finance Commission• ToR – consolidated reproduction of 280 (3)(bb)(c)• SFC must identify issues for Union Government• Approach- Equalization of basic services• Rs 20000 cr to panchayats for drinking water
supply, sanitation • Rs 5000 crore to municipalities for solid waste mgt
Inter se Allocation
10-Deprivation Index
2010Revenue Efforts
-20Decentralization Index
2020Distance
1010Area
4040Population
12th FC 11th FCCriterion
Grants by 3 FCs (Rs crore)
1502500050002000012th
100002000800011th
538110004381 10th
% increase
Local Bodies
ULBsPRIsFC
Issues
• Grants to go up- No matching contribution• Releases in May and November• State to make allocation• Most SFC Reports are silent• Monitoring by State for utilization of funds• Monitoring at Central level for compliance
Thank You!