Finance Commission – Issues related to devolution of resources

15th Finance Commission could catalyse accountability, effective governance at grassroots


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 2- Catalysing accountability and creative governance in local government

The article explains the innovative approach adopted by the Fifteenth Finance Commission in devolution of funds.

Steep hike in grants

  • Local governments are the closest to the people at the grassroots level. 
  • They provide critical civic amenities such as roads, water and sanitation, and primary education and health.
  • With this in view, the Fifteenth Finance Commission (FFC) has recommended grants of Rs 4,36,361 crore from the Union government to local governments for 2021-26.
  • This is an increase of 52 per cent over the corresponding grant of Rs 2,87,436 crore by its predecessor for 2015-20.

Innovation in recommendations

1) Scaling of capacities in municipalities

  • The Commission has recommended Rs 8,000 crore as performance-based grants for incubation of new cities and Rs 450 crore for shared municipal services.
  • This is designed to foster innovations in urban governance to transform our cities with speed and scale.
  • There is an urgent need for synergistically combined area-based development to spur economic growth and job creation, and decongesting through the development of satellite townships.
  • Separately, the massive scaling of capacities in municipalities, particularly the 4,000-odd smaller ones, cannot be done by building capacities in each one of them, but through institutional and technological innovations, without compromising their autonomy.
  • The shared municipal services model, with mobile internet, maps, platform thinking, and outsourced services all taken together, can help us fast-track the creation of municipal capacities at scale.
  • This is one of the innovations in the FFC recommendations.

2) Allocation covers all three tiers of panchayats

  • Of grants for all local governments with 90 per cent weightage on population and 10 per cent on area remains unchanged from the Fourteenth Finance Commission.
  • For panchayats, the FFC allocations cover all the three tiers — village, block, and district — as well as the Excluded Areas in a state exempted from the purview of Part IX and Part IX-A of the Constitution.
  • Funds to all three can improve functional coordination and facilitate the creation of assets collectively across smaller jurisdictions.
  • This is the second new aspect of the FFC recommendations.

3) Focus on metropolitan governance

  • The FFC calls for a focus on urban agglomerations (UAs) that include urban local bodies, census towns and outgrowths.
  • In 2011, out of the total urban population of 377 million, 61 per cent lived in UAs.
  • The FFC has emphasised the need to focus on the complex challenges of air quality, drinking water supply, sanitation, and solid waste management in the million-plus UAs and cities.
  • Thus, for 2021-26, there is a Million-plus Challenge Fund of Rs 38,196 crore that can be accessed by million-plus cities only through adequate improvements in their air quality and meeting service level benchmarks for drinking water supply, sanitation, and solid waste management.
  • This focus on metropolitan governance through substantive but 100 per cent outcome-based grants is the third innovation.
  • For ULBs other than the million-plus category, the total grants are Rs 82,859 crore.
  • The grants to local governments, both urban (less than a million category) and rural, contain a mix of basic, tied as well as performance grants.

4) Entry-level conditions

  • The efficiency, smooth functioning and accountability of local bodies have been plagued by:
  • (i) lack of readily accessible and timely audited accounts,
  • (ii) absence of timely recommendations of State Finance Commissions and suitable actions thereon,
  • (iii) inadequate mobilisation of property tax revenues (especially in ULBs).
  • Finance Commissions in the past have drawn pointed attention to these issues, but with limited success.
  • These entry-level conditions for availing any grants and their applicability to all local governments is the fourth innovation.

Consider the question “Examine the innovative approach adopted by the Fifteenth Finance Commission for the devolution of funds to panchayats and municipal bodies.”


Hopefully, over the next five years, through a partnership among the Union, states, and local governments, in the spirit of cooperative federalism, these recommendations and innovations will catalyse progress in the accountability and effectiveness of local governments in India.


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