State – Local Fiscal Relations

Dr V N AlokIndian Institute of Public Administration11 December 2006 vnalok@gmail.com

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!