Finance Commission – Issues related to devolution of resources

Still no recognition of the third tier


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 2- Critique of the Fifteenth Finance Commission recommendations with regard to local government

The article highlights the issues with the Fifteenth Finance Commission recommendations with regard to the third tier of the local governments.

Significance of Finance Commission recommendations for local government

  • The primary task of the Union Finance Commission is to rectify the vertical and horizontal imbalances in resources and expenditure responsibilities between Union and States including the third tier of local governments.
  • Part IX and Part IX-A were incorporated into the Constitution by the 73rd and 74th Constitutional Amendment.
  • Part IX and Part IX-A mandate the Union Finance Commission to supplement the resources of panchayats and municipalities on the basis of the recommendations of the State Finance Commission.
  • Now, nearly 2.5 lakh local governments and over 3.4 million elected representatives form the real democratic base of the Indian federal polity.

Increase in vertical devolution

  • The Fifteenth Finance Commission has raised the vertical devolution recommended to local governments to 4.23% with a reasonably estimated amount of ₹4,36,361 crore.
  • Compared with the Fourteenth Finance Commission there is a 52% increase in the vertical share.
  • Even if we deduct the grant of ₹70,051 crore earmarked for improving primary health centres, the share is still an all-time high of 4.19%.
  • All the Commissions since the Eleventh Commission have tied specific items of expenditure to local grants and the Fifteenth Finance Commission has raised this share to 60% and linked them to drinking water, rainwater harvesting, sanitation and other national priorities in the spirit of cooperative federalism.

Reduction in performance-based  grants

  • The Fifteenth Finance Commission has reduced the performance-based grant to just ₹8,000 crore — and that too for building new cities, leaving out the Panchayati Raj Institutions (PRIs) altogether.
  • The performance-linked grants were introduced by the Thirteenth Finance Commission and covered a wide range of reforms.
  • The transformative potential in designing performance-linked conditionalities for improving the quality of decentralised governance in the context of indifferent states is missed.

Encouraging standardisation of accounting system

  • An important recommendation of the Fifteenth Finance Commission is the entry-level criterion to avail the union local grant (except health grant) by local governments.
  • For panchayats, the condition is the online submission of annual accounts for the previous year and audited accounts for the year before.
  • For urban local governments, two more conditions are specified: fixation of the minimum floor for property tax and improvement in its collection.
  •  It is not clear why gram panchayats are left out from this.
  • Although Finance Commissions, from the Eleventh to the Fourteenth, have recommended measures to standardise the accounting system and update the auditing of accounts, the progress made has been halting.
  • Therefore, the entry-level criteria of the Fifteenth Finance Commission are timely.

Missed opportunity to ensure minimum public services

  • The Fifteenth Finance Commission failed to carry policy choices forward systematically.
  • Articles 243G, 243W and 243ZD read along with the functional decentralisation of basic services like drinking water, public health care, etc., mandated in the Eleventh and Twelfth schedules demand better public services and delivery of ‘economic development and social justice’ at the local level.
  • A good opportunity to ensure comparable minimum public services to every citizen irrespective of her choice of residential location has not been taken forward in an integrated manner.

Missing equalisation principle for the local government

  • The Fifteenth Finance Commission claims that it seeks to achieve the “desirable objective of evenly balancing the union and the states”.
  • It is not clear why there is no recognition of the third tier in this balancing act.
  • It may be relevant to recall that the Alma-Ata declaration of the World Health Organization (1978) which outlined an integrated, local government-centric approach with a simultaneous focus on access to water, sanitation, shelter and the like.
  • There is no integrated approach in the recommendations of the Fifteenth Finance Commission about the local governments (in contrast to the recommendations of the Thirteenth Finance Commission).
  • Although the Fifteenth Finance Commission stresses the need to implement the equalisation principle, it is virtually silent when it comes to the local governments.

Equity and efficiency sidelined

  • The Fifteenth Finance Commission employed population (2011 Census) with 90% and area 10% weightage for determining the distribution of grant to States for local governments.
  • The same criteria were followed by the Fourteenth Finance Commission.
  • While this ensures continuity, equity and efficiency criteria are sidelined.
  • Abandoning tax effort criterion incentivises dependency, inefficiency and non-accountability.

Consider the question “Discuss the various aspects of the Fifteenth Finance Commission’s recommendations with regard to local governments.”


In sum, if decentralisation is meant to empower local people, the primary task is to fiscally empower local governments to deliver territorial equity. We are far from this goal.

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