Fifteenth Finance Commission’s Recommendations on Local Bodies

The Fifteenth Finance Commission recommendations on local bodies, particularly those relating to urban local bodies, are a dampener. The recommendations lead to an anomalous situation of a least urbanised state getting higher per capita urban grants. Similarly, the segmentation of urban grants into too many components and very rigid conditions leaves a big question mark on grants utilisation.

Views expressed are personal.

Government reports are usually not known for attractive cover designs. It is, therefore, striking that the cover of the Fifteenth Finance Commission has a graphic of a set of scales to send the message perhaps that the commission had been evenhanded in balancing the interests of the union and the states in its recommendations. This was significant because the terms of reference (ToR) of the commission raised apprehensions among states that it might be biased in favour of the union. The four ToRs that worried the states related to whether deficit grants will be provided at all, the impact of higher tax devolution recommended by the Fourteenth Finance Commission, imposition of conditions while providing consent for borrowings by states, and the use of 2011 population numbers in the devolution criteria. Equally worrisome was the additional ToR asking the commission to examine whether a separate mechanism for funding of defence and internal security ought to be set up, and if so, how such a mechanism could be operationalised.

An objective evaluation of the commission’s recommendations shows that it has indeed been judicious in its approach. In its second report for 2021–26, the commission recommended post-devolution revenue deficit grants to as many as 17 states in 2021–22, the highest since the Tenth Finance Commission. The commission more or less retained the share of states in tax devolution. The commission did not recommend imposition of any conditions when the union provides consent to states’ borrowings. The adverse impact of the use of the 2011 population numbers on states with low population growth was moderated by reducing the weight of population from 25% assigned by the Fourteenth Finance Commission to 15% and by assigning a weight of 12.5% to demographic performance. The commission recommended constitution of a non-lapsable modernisation fund for defence and internal security with funding from the Consolidated Fund of India, without dipping into the divisible pool of taxes.