Moving to a New City

Context: The Fifteenth Finance Commission of India (XV FC) in its interim report has raised the bar on the financial governance of India’s municipalities. 

Aspects XV FC (interim report) that reflect a transformation to financial governance of India’s municipalities

• Increase the overall outlay for municipalities: XV FC has set aside Rs 29,000 crore for FY 2020-21 and indicated the intent to raise the share of municipalities in the total grants’ of local bodies gradually over the medium term, from the existing 30 % to 40 %.
• Enhance financial accountability: It had setup 2 entry conditions for municipality to receive FC grants:

1. 1. Publication of audited annual accounts.
   2. Notification of floor rates for property tax.

• Outcome-based funding: XV FC has adopted a nuanced approach of distinguishing between million-plus urban agglomerations (where 44% of the total urban population resides), and other cities.
  • It recommended providing Rs 9,000 crore to million-plus urban agglomerations (excluding Union Territories) with emphasis on air quality, water supply and sanitation
  • It recommended for basic grants to the rest of the cities, with 50 % of the end-use tied to water supply and sanitation. 
  • It acknowledged the metropolitan area as a unified theatre of action to solve complex challenges of air quality, water, and sanitation, etc.
• Effective management of accounts and finances: It recommended for a common digital platform for municipal accounts, a consolidated view of municipal finances and sectoral outlays at the state level and a digital footprint of individual transactions at the source.

Way forward: For municipal finance reforms

• State government should take the lead: Rather than putting the onus on Constitutional bodies such as the FC to drive transformational change in our cities.
• Empower the municipalities: through five reform agendas

1. 1. Fiscal decentralization: by strengthening state finance commissions.
   2. Enhance own revenues: through revenue optimisation.
   3. Accelerate municipal borrowings: through fiscal responsibility and budget management.
   4. Enhance institutional capacities: towards an adequately skilled workforce.
   5. Enhance transparency & citizen participation: for democratic accountability at the neighborhood level.

• Formula based approach for fiscal transfers (from state governments to municipalities): Instead of the present practice of ad hoc, discretionary grants.
• Strengthen complex political economy around devolution of funds: from state governments to municipalities.
• State finance commissions should emerge as credible institutions.
• Enhance the role of State finance commissions: By ensuring that they are constituted on time, resourced right, and their recommendations are taken seriously.