15th Finance Commission recommendations are overtly pro-urban, to 'hit' federal spirit

By Tikender Singh Panwar* 
For the next five years, the road map for devolution of funds to the states recommended by the 15th Finance Commission (XV FC) is ready. The commission had many meetings in the last few years, and last year of Covid-19 pandemic turned out to be a natural corollary from which lessons are to be learned.
However, the recommendations tend to belie the states' aspirations and the people from getting a due share. The structure of recommendations is more discretionary with the Union. The funds devolved based on need and equity have fallen from 92.5 percent to 75 percent, 25 percent based on efficiency and performance. This has hit the federal spirit.
For the first time in the running commentary, one finds mention of the states' responsibility to the sovereign-for a national cause:
"…State finances have become a crucial lynchpin of India's fiscal framework. Overall, as stipulated by the FRBM Act, 2003 (as amended in 2018), we believe that the States must partner with the Union Government in pursuit of medium-term consolidation of debt and firmly place India's sovereign debt to GDP ratio on a sustainable footing in the medium term. They must partner with the Union Government in developing new ways to support their residents, the economy as a whole, and India's global engagements. Hence, the debt and fiscal trajectory of the general government envisages this partnership of both the Union and the States to achieve the key features of macroeconomic stabilization by way of sustainable levels of debt and fiscal deficit."
The commission made two quotes in the beginning of the main report which are contradictory to each other. The first one is Mahatma Gandhi's quote where it states that "the future depends on what we do in the present". The focus is on planning and why present is more important. The second one is from the Roman philosopher Marcus Aurelius: "Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today are you against the present." Apparently, the XV FC report is also quite contradictory to the quotes.
In the running commentary, the recommendations mention the unusual times and challenges posed by Covid-19; however, it does not ameliorate the concerns effectively.

Recommendations for urban areas

Urban areas accounts for 34 percent of the population and contributes 67 percent to the GDP. Ghastly scenes of the inequity led to reverse migration of the workers from the cities during the lockdown. Thus, it was expected that greater emphasis on FC recommendations would be to affect this aspect directly. However, this aspect remained unnoticed by the commission.
The total outlay for the urban is more than the XIV FC; however, it is a status quo in actual terms. The XIV commission's total outlay was Rs 87,144 crore, and 15 percent of this was not released. Hence, the actual expenditure was Rs 74,529 crore. The total outlay for the urban local bodies (ULBs) for 2021-26 is Rs 1,21,055 crores. However, there is a shortfall from Rs 25,098 in 2020 crore to Rs 22,114 crore in 2021. The grant to ULBs is 11.71 percent of the total grant (10.33 lakh crore) in five years.
The criteria for grants to local bodies are distributed amongst states based on population and area, with 90 percent and 10 percent weightage.
There are two conditions to availing of these grants:

• The local bodies will have to publish provisional and audited accounts
• Fixing minimum floor rates for property taxes by states, and improvement in property tax collection

Grants will not be released to local bodies after March 2024 if the state does not constitute and State Finance Commission and act upon its recommendations.
The XV FC has categorically stated:
"We recommend the provision of a one-year window for notifying the floor rates of property tax; this will trigger in two stages from 2022-23. In the first stage, States are expected to notify the floor rates and operationalize the arrangements in 2021-22. The condition of notifying the floor rates of property tax will apply for eligibility of grants from 2022-23. Once the floor is notified, the condition of growth in property tax collection being at least as much as the simple average growth rate of the State's own GSDP in the most recent five years will be measured and taken into account from 2023-24 onwards."

Another fund called the challenge fund is opened up for million-plus cities. This will be linked to these cities' performance in improving air quality and meeting service level benchmarks urban drinking water supply, sanitation, and solid waste management. The total fund under this head is Rs 26,057 crores for five years.
The XV FC missed the core element in the devolution of funds. Addressing the issue of equity and transforming the large informal sector to almost 93 percent in the cities is an important challenge.

Meagre allocation to ULBs

The devolution of a mere 11 percent is meager to meet any of the challenges faced by cities. According to a high-powered committee set up by the Ministry of Urban Development in 2011, urban infrastructure investment requirements are estimated to be Rs 50,000 crore in 2013 (0.75 percent of GDP), and Rs 4 lakh crore by 2032 (1.5 percent of GDP).
Currently, the total outlay from the XV FC and the union budget is not even 0.19 percent. Urban grants mergerly stand at 0.07 percent. Urban local bodies' total expenditure is continuously shrinking from 1.74 percent of GDP in 1990 to near one percent in 2011.
The memorandum of the ministry of housing and urban affairs submitted to the XV FC sums the municipalities' requirements: "A substantial increase in grants is needed for bridging the resource gap of municipalities, which is anticipated at Rs. 12.27 lakh crore over the period 2021-22 to 2025-26. Devolution to municipalities may be increased by at least four times (Rs. 3,48,575 crore), as compared to the FC-XIV award."

Paranoid collection of property tax

Secondly, the paranoia over the collection of property tax and linking it to availing the grant must be given up. No doubt that the property tax is one of the important sources of resource mobilization in the municipalities but to over centralize it would be erroneous. 

The provision for asking the state governments to decide the property tax floor area rate is entirely flawed. Every town and city has a different capacity, and even intra-city differences in property appreciation exist. This task must be left out to the municipalities and not to the state governments.
The previous year has been a year of disaster for the people and many businesses. A complete waive off of property taxes, especially from the hospitality industry, and in lieu of that, a grant could have been a better option.

Delusion of cities as engines of growth

The notion of cities being the engines of growth continue to plague the XV FC. Since the UN-Habitat III there has been a concerted effort to focus on sustainability goals and not treat cities as market entrepreneurs. Unsustainable cities have been complemented with humongous inequity. The measures should reduce such inequality.
Unfortunately, the recommendations continue with the same jargon and intent. It is evident with the language of the report emphasizing on creating PPP model contracts, modernizing municipal budgeting, evolving national municipal borrowing framework including provisions equivalent to the Fiscal Responsibility and Budget Management (FRBM) Act for urban local bodies. 

These recommendations originates from the conventional mindset of cities being converted into attractive investment zones. These insinuations are berserk. Not realising the fact that nearly 90 percent of the urban local bodies are unable to even meet their salary expenditure.
Further, XV FC does not address the widening inequality in cities. It was expected to create a separate fund for the urban employment guarantee or likewise to address acute unemployment existing in the cities; akin to what it has recommended on pollution and air quality.

Health intervention: A welcome move

The commission’s recommendations on the health sector with granting an outlay of Rs 70,051 crore is a welcome move. Taking a cue from the Kerala experience which is affirmatively quoted in the report the commission has admired the people's plan of the Kerala government started in 1996 where 35-40 percent of the state government's developmental budget was marked to local governments.
Universal comprehensive health care is planned to be provided through urban health and wellness centres and polyclinics. Linking it with the urban local bodies is a welcome move. The state governments must provide space and capacity for this idea to bloom and as the pandemic has proven the public health institutions stand as a saviour. How will this be effectively implemented in absence of both will and resources will have to be watched keenly in the coming years?
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*Former deputy mayor of Shimla