From UPSC perspective, the following things are important :
Prelims level : Local bodies.
Mains level : Paper 2- Issues with fiscal independence of the local bodies.
This article makes some suggestions to improve local finance and argues that the extant fiscal illusion is a great deterrent to mobilisation.
Advantageous position in handling disasters
- In terms of information, monitoring and immediate action, local governments are at an advantage, and eminently, to meet any disaster such as COVID-19.
- While increasing the borrowing limits of the state form 3.5% of GDP to 5%, there was a recognition that local governments should be fiscally empowered immediately.
- This is a valid signal for the future of local governance.
4 challenges posed by Covid and addressing them collectively
- COVID-19 has raised home four major challenges:1) economic, 2) health, 3) welfare/livelihood 4) resource mobilisation.
- These challenges have to be addressed by all tiers of government in the federal polity, jointly and severally.
Local government empowerment: 5 critical areas
- 1) Own revenue is the critical lever of local government empowerment.
- But the several lacunae that continue to bedevil local governance have to be simultaneously addressed.
- 2) The new normal demands a paradigm shift in the delivery of health care at the cutting edge level.
- 3) The parallel bodies that have come up after the 73rd/74th Constitutional Amendments have considerably distorted the functions-fund flow matrix at the lower level of governance.
- 4) There is yet no clarity in the assignment of functions, functionaries and financial responsibilities to local governments.
- Functional mapping and responsibilities continue to be ambiguous in many States.
- Instructively, Kerala attempted even responsibility mapping besides activity mapping.
- 5) The critical role of local governments will have to be recognised by all.
Let’s look into resource mobilisation issue: 3 Heads
- A few suggestions for resource mobilisation are given under three heads: 1) local finance, 2) Members of Parliament Local Area Development Scheme-MPLADs, 3) the Fifteenth Finance Commission (FFC).
1. Local finance
- Property tax collection with appropriate exemptions should be a compulsory levy and preferably must cover land.
- The Economic Survey 2017-18 points out that urban local governments, or ULGs, generate about 44% of their revenue from own sources as against only 5% by rural local governments, or RLGs.
- Per capita own revenue collected by ULGs is about 3% of urban per capita income while the corresponding figure is only 0.1% for RLGs.
- There is a yawning gap between tax potential and actual collection, resulting in colossal underperformance.
- When they are not taxed, people remain indifferent.
- LGs, States and people seem to labour under a fiscal illusion.
- In States such as Uttar Pradesh, Bihar and Jharkhand, local tax collection at the panchayat level is next to nil.
- Property tax forms the major source of local revenue throughout the world.
- All States should take steps to enhance and rationalise property tax regime.
- A recent study by Professor O.P. Mathur shows that the share of property tax in GDP has been declining since 2002-03.
- The share of property tax in India in 2017-18 is only 0.14% of GDP as against 2.1% in the Organisation for Economic Co-operation and Development (OECD) countries.
- If property tax covers land, that will hugely enhance the yield from this source even without any increase in rates.
Other 2 options for raising finances
- 1) Land monetisation and betterment levy may be tried in the context of COVID-19 in India. To be sure, land values have to be unbundled for socially relevant purposes.
- 2) Municipalities and even suburban panchayats can issue a corona containment bond for a period of say 10 years.
- We are appealing to the patriotic sentiments of non-resident Indians and rich citizens.
- Needless to say, credit rating is not to be the weighing consideration.
- That the Resurgent India Bond of 1998 could mobilise over $4 billion in a few days encourages us to try this option.
- The suspension of MPLADS by the Union government for two years is a welcome measure. The annual budget was around ₹4,000 crore.
- The Union government has appropriated the entire allocation along with the huge non-lapseable arrears.
- MPLADs, which was avowedly earmarked for local area development, must be assigned to local governments, preferably to panchayats on the basis of well-defined criteria.
3) Fifteenth finance commission-FFC
- A special COVID-19 containment grant to the LGs by the FFC to be distributed on the basis of SFC-laid criteria is the need of the hour.
- The commission may do well to consider this.
- The local government grant of ₹90,000 crore for 2020-2021 by the FFC is only 3% higher than that recommended by the Fourteenth Finance Commission.
- Building health infrastructure and disease control strategies at the local level find no mention in the five tranches of the packages announced by the Union Finance Minister.
Suggestions related to grants
- The ratio of basic (i.e. with no conditions) to tied (with condition)grant is fixed at 50:50 by the commission.
- In the context of the crisis under way, all grants must be untied for freely evolving proper COVID-19 containment strategies locally.
- The 13th Finance Commission’s recommendation to tie local grants to the union divisible pool of taxes to ensure a buoyant and predictable source of revenue to LGs (accepted by the then Union government) must be restored by the commission.
Consider the question “The stable source of revenue for the local government bodies whether from their own sources or in the form of grants should lie at the heart of efforts to empower them. Comment.”
COVID-19 has woken us up to the reality that local governments must be equipped and empowered. Relevant action is the critical need.
73rd and 74th Amendment Acts, 1993
- It’s been 25 years since decentralized democratic governance was introduced in India by the 73rd and 74th Constitution Amendments, which came into force on April 24 and June 1, 1993, respectively.
- The 73rd Amendment to the Constitution (Part IX) has given constitutional status to the Panchayats, and has provided it with a substantial framework. It envisions the Panchayats as the institutions of local self-governance and also the universal platforms for planning and implementing programmes for economic
development and social justice.
- The creation of lakhs of “self-governing” village panchayats and gram sabhas, with over three million elected representatives mandated to manage local development, was a unique democratic experiment.
- Article 243A gives constitutional recognition to the Gram Sabha as a body consisting of persons registered in the electoral rolls relating to a village comprised within the area of the Panchayat at the village level.
- The 74th Amendment Act provided for the constitution (Part IXA) of three types of municipalities in urban areas depending upon the size and area.
- The Constitution provides for a complete institutional mechanism including reservation for women and formation of State Finance Commissions (SFCs) for local democracy.