A Reserve Bank of India-supported study has suggested to the Thirteenth Finance Commission a quantum jump in grants to local bodies to Rs. 94,451 crore (1.4 per cent of GDP for the year 2010-11) from Rs. 25,000 crore.

It also urges the Commission to set up an incentive fund flow of around Rs. 6,000 crore to help the local bodies access to the capital market.

“The fiscal position of local bodies (both urban and rural) does not seem to be promising in India. These local level institutions have to be strengthened by giving more revenue handles on the one hand and by transferring more resources on the other,” stated the study by the central bank’s Development Research Group, led by Abhay Pethe.

Grants

The study is an exercise to estimate local body grants based on a normative approach.

Based on operations and maintenance expenditure required for three major assets — water, education and roads — the amount of grants is estimated at Rs. 94,451 crore. This could be split up into 20:80 shares for the urban and rural local bodies, respectively.

The study has also devised a formulae (one simple and the other refined) for distribution of the grants across the States. The State governments have an active role to play in strengthening the local bodies.

The finances of the State governments display a healthier picture subsequent to enactment of fiscal responsibility legislations (FRLs). However, the fiscal correction process needs to be fine tuned by providing a micro design to the targets.

“This may enable the State governments to devolve more funds to the lower level without jeopardising the normal expenditure both revenue and capital of the State governments”. The functioning of State Finance Commissions (SFCs) in different States documents a dismal picture in India even after the 73rd and 74th constitutional amendments. The spirit of 73rd and 74th Amendments of the Indian Constitution in 1992 required simultaneous transfer of functions as well as empowerment of the local governments or panchayats.

Important suggestions

In view of this, the study suggested that the Central Finance Commission (CFC) may bring in tightened policy suggestions to enforce fiscal federalism at the third tier. The CFC may suggest a uniform template for the SFCs and may treat the progress made in the arena of SFC as a condition for the release of share in Central taxes.

In a nutshell, the important suggestions are: include a measure of decentralisation in the devolution formula for the share in Central taxes; keep the grants to local bodies unconditional; ensure that the release of local body grants is evenly distributed over the fiscal year; ensure that the State governments are transferring the local body grants promptly and efficiently to the local Government level; estimate the grants to local bodies on a normative basis; devolve the local body grant on a formula basis among the State governments; till such time as the decentralisation truly takes root and State Finance Commissions are well established and recognised, talk directly to the local bodies (at the district level), and think of transferring resources directly to them.