AGENDA OF 16th FINANCE COMMISSION (Syllabus: GS Paper 2 – Polity)

Context: The 16th Finance Commission (FC) has begun its work, established under Article 280 of the Indian Constitution, primarily focusing on the devolution of the consolidated fund.

Agenda for the 16th Finance Commission

• Cities as Engines of Growth: Cities contribute around 66% of India’s GDP and about 90% of total government revenues.

oUrban areas are crucial spatial zones for national development, requiring substantial infrastructure investments.

• Challenges in Financial Devolution: Despite efforts of multiple finance commissions, financial devolution to cities remains inadequate.

oIntergovernmental transfers to Urban Local Bodies (ULBs) in India are significantly lower compared to other developing nations.

• Impact of Taxation System: Introduction of GST has reduced ULBs’ tax revenue, posing challenges to their financial health.

oLow State Transfers: State transfers to ULBs recommended by State Finance Commissions have been minimal, hindering financial empowerment post-74th amendment.

• Growth of Parallel Agencies: Parallel agencies and schemes have weakened local governments both financially and operationally. Programs like MPLADS and MLALADS distort the intended roles of local governments in the federal structure.
• Importance of Census Data: Accurate population figures are crucial for effective resource allocation and planning for urban areas.
• Revisiting Financial Commission Principles: The 15th Finance Commission’s principles require adjustment to reflect current urbanization dynamics and infrastructure needs.

oDoubling IGTs to urban areas is essential to meet future urban infrastructure demands.

Local Bodies and Constitutional Amendments:

• Since the 73rd and 74th constitutional amendments, local bodies have gained significant recognition within the federal system.
• Financial Mandate: Amendments introduced clauses mandating the Finance Commission to recommend measures supporting panchayats and municipalities from State funds (sub-clauses 280(3)(bb) and (c)).