Agenda for the 16th Finance Commission

Context

Recently the 16th Finance Commission chaired by  Dr. Arvind Panagariya has begun its work.

About 

• The Government of India, with the approval of the President of India, has constituted the 16th Finance Commission, in pursuance to Article 280(1) of the Constitution.
• It Focuses on devolution of the consolidated fund to states and local bodies.

Duration and Scope

• The 16th Finance Commission guidelines will cover a period of 5 years beginning from April 1, 2026.
• Distribution of Tax Proceeds: Determine how taxes shared among the Union and States (under Part XII, Chapter I of the Constitution) ought to be disbursed.
  • Allocate shares of those proceeds to a number of the States.
• Grants-in-Aid Principles: Define concepts governing offers-in-useful resource of State sales from the Consolidated Fund of India.
  • Specify sums to be granted to States under Article 275 of the Constitution, aside from functions specified in provisos to clause (1) of that article.
• Augmentation of State Consolidated Fund: Recommend measures to beautify the Consolidated Fund of a State.
• This enhancement aims to supplement assets for Panchayats and Municipalities within the State, primarily based on recommendations from the respective State Finance Commissions.
• Review of financing Disaster Management initiative: It is likewise mandated to check the prevailing arrangements on financing Disaster Management tasks, with reference to the price range constituted under the Disaster Management Act, 2005 (53 of 2005), and make suitable suggestions thereon.

Existing Challenges and Issues 

• Despite efforts by a couple of Finance Commissions, economic help to Urban Local Bodies (ULBs) remains insufficient.
• The financial health of municipalities is poor, affecting each town’s productiveness and high-quality lifestyles. 
• Intergovernmental transfers (IGTs) to ULBs are only 0.Five% of GDP, a whole lot decrease than in other developing countries (2-5%).
  •  For example, South Africa allocates 2.6%, Mexico 1.6%, the Philippines 2.5%, and Brazil 5.1% in their GDPs to their cities. 
  • Other Issues encompass predictability, earmarking, and horizontal fairness of IGTs.
• Impact of Taxation System: Introduction of GST reduced ULBs’ tax revenue notably.
  • State Finance Commissions encouraged minimal IGTs from states to ULBs (about 7% of state revenue).
• Role of Census Data: Lack of updated Census records (2011 being the contemporary) hampers evidence-based economic devolution.
  • Significant urbanization and migration to Tier-2 and 3 cities underscore the want for accurate statistics.
• Concerns with Parallel Agencies: Growth of parallel organizations undermines local governments financially and operationally.
  • Programs like MP and MLA Local Area Development Schemes distort federal shape roles.

Conclusion and Way Forward 

• Cities contribute drastically to India’s GDP (66%) and authorities sales (90%) and they may be Essential for typical country wide development 
•  Therefore ,The 16th FC need to take into account India’s urbanisation dynamism 
• Migration to Tier-2 and Tier-3 cities underscores the importance of taking pictures, demographic adjustments and infrastructure demands as it should be.
•  The 16th Finance Commission must prioritize recommending sturdy fiscal measures to bolster ULBs financially.
• Stable IGTs are crucial to helping ULBs till they are able to decorate their personal sales generation skills.
• Property tax series must be advanced in parallel with State GST to beautify nearby revenues.
• Emphasis on keeping transparent accounts and green resource allocation for pollutants control, number one healthcare, solid waste control, and consuming water facilities.

Source: The Hindu

UPSC Mains Practice Question

Q. Discuss the recommendations of the 13th Finance Commission which have been a departure from the previous commissions for strengthening the local government finances. (2013)

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