Strengthening the third tier of governance — the panchayati raj institutions (PRIs) and urban local bodies (ULBs) like municipal corporations, municipalities. — is one of the objectives of Central finance commissions.

The present Fifteenth Finance Commission (FFC) is also tasked to “to consider provision of grants-in-aid to local bodies for basic services, including quality human resources, and implementation of performance grant system in improving delivery of services”.

The FFC has to recommend specifically the amount to be devolved to the States during its award period (2020-25) for local bodies. As per Article 243 (I) of the Constitution, State governments have to constitute State finance commissions (SFCs) and obtain their recommendations, so that these can be suitably factored in by the Central finance commissions while recommending on the overall devolution from the central pool of divisible resources to the States.

The Fourteenth Finance Commission recommended a total devolution of ₹2,87,436 crore for all the local bodies, constituting an assistance of ₹488 per capita per annum at an aggregate level.

It is worrisome that many States have not been setting up their SFCs every five years as Constitutionally mandated after the 73rd Amendment Act, 1992 giving content to the panchayati raj institution. There are cases where the recommendations of an SFC have neither been formally accepted by the State government, nor was the SFC report laid before the State legislature.

There are also instances where the State government, despite having accepted its SFC’s recommendations fully or partially, has de-facto not implemented them and dealt with the recommendations in a perfunctory manner. These developments have affected empowerment and finances of local bodies. There have been political ramifications also, like in Manipur, where a near-complete hiatus prevailed between the recommendation of successive SFCs and the State government’s actual fund transfer to its hill districts’ local bodies, accentuating the grievances of hill tribes against their counterparts in the plains.

The Fifteenth Finance Commission must institutionalise the devolution process to PRIs and ULBs so that, the recommended funds flow to them in a time-bound manner. As per the existing system, all funds devolved to States on recommendations of Central finance commissions are directly transferred to State governments’ treasuries.

A fund-flow tracking system on real-time basis — public financial management system (PFMS), exists. Central non-statutory fund transfers for centrally-sponsored schemes, central schemes executed by State governments and flagship schemes such as the Mahatma Gandhi Employment Guarantee Scheme, the Swachh Bharat Abhiyan, the National Health Mission are routed and monitored through PFMS operated by the Controller General of Accounts.

The Fifteenth Finance Commission should recommend that the funds earmarked for PRIs and ULBs, should also be managed through PFMS, to eliminate delays in transfers to local bodies.

Local bodies are the interface between State institutions and the public towards obtaining basic services. The ability of PRIs and ULBs to render such services can be strengthened if they are empowered through the States’ legislative enactments and accompanying administrative measures, to enhance their revenue generating capacity in these functional areas and concomitant resources provided to them.

SFCs have their role cut out, but are constrained by the above-mentioned factors. The Fifteenth Finance Commission must incentivise the States to constitute their SFCs and empower their local bodies.

A portion of the earmarked funds for PRIs and ULBs could be distributed as incentive to States which constitute their SFCs as per the constitutional norm, and empower them for raising tax and non-tax revenue in areas specified by FFC and SFCs. Local bodies of States performing better will gain, which should induce the other State governments to be more conscious of their responsibilities and overcome the constraints mentioned above.

The 14th FC had recognised that governing cities is becoming a major challenge because of shortage of finances, weak institutional framework and lack of capacity for service delivery observing that the rural local bodies were in many cases not equipped to perform their core functions. Strengthening the SFCs is the only viable solution for which political will is needed. The role of governors is also crucial as a benevolent institution of oversight.

The writer is a retired official from IDAS and has served as advisor to two State governments

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