Exploring the 16th Finance Commission

16th finance commission of india

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The newly constituted 16th Finance Commission (FC) of India under Article 280 of the Indian Constitution and set off on a significant mission to review and recommend the shares of the consolidated fund between different tiers of the government and local bodies. This blog explores the relevance of the 16th Finance Commission, economics of cities in India, problems in fiscal decentralization to ULBs, problems with twin structures, requirement of fresh census, and measures for better finances in Indian cities and towns.

Understanding of the 16th Finance Commission


Role and Mandate

  • The 16th Finance Commission of inter-state relations mainly focused on the distribution of financial resources in account with the Articles 280 of Indian constitution.
  • One of the major working areas of the Commission is to identify the strategies for improving the system of providing the fiscals transfers to the local bodies at the backdrop of the 73rd and 74th Constitutional Amendments mandating the panchayats and municipalities having more financial discretion.

Objectives

  • Fair Resource Distribution: Hammer out proper distribution of the consolidated fund between the central, state and local governments.
  • Enhancing Fiscal Autonomy: Enhance the financial stability of the local structures, especially panchayats and municipalities to improve delivery of their services as well as enhance the infrastructure facilities.
  • Addressing Urban Challenges: Emphasis has been placed on the core demand of fiscals for urban areas since they are critical to India’s advancement.

The Significance of Cities in the Indian Economy

  • Economic Contribution
    • The backcloth is that Indian cities are economic engines grossing nearly 66 per cent of the country’s gross domestic product and accounting for 90 per cent of tax revenues. This goes a long way in underlining the importance of urban areas as growth and development points of any country. Cities therefore play the role of an economic hub where business is carried out through promoting productivity that forms the economy.

Challenges Faced by Cities

  • Despite their significant economic contribution, Indian cities struggle with:Despite their significant economic contribution, Indian cities struggle with:
  • Inadequate Fiscal Support: Inadequate funds from the central or other state governments depending on the state government involved.
  • Infrastructure Deficit: Apparently, inadequate capital for fresh new schemes and enlargement of the existing ones.
  • Governance Issues: Drawbacks such as bureaucratic-legal arrangements that involve complicated procedures and duplication of authorities in the management of cities.

Issues in reforming the fiscal structure for devolving the funds to ULBs

  • Insufficient Intergovernmental Transfers (IGTs)
    • The amount committed to ULBs in the form of intergovernmental transfers sums up to as little as 0. Less than 5% of GDP, much lower to what is being spent by other developing countries. Such meagre support compounds budget stresses in municipalities threatening their capacity in delivering basic services and preserving the infrastructures in towns and cities.
  • The introduction of Goods and services tax (GST)
    • the independent source of revenues of ULBs has been drastically cut short with the introduction of GST. The need for unpredictable IGTs has risen, which have made the municipalities financially rigid and incapable of funding urban development schemes.
  • Comparison with Other Nations
    • similarly to the pre-crisis period, cities in other developing countries have much higher levels of ANFCD subsidies from central and state authorities, which allows them sufficient funding to invest in core infrastructures and services. The above-stated gap emphasized the importance of a much higher proportion of states’ GDP allocations for ULBs through IGTs.

Relation between Parallel agencies and fiscal Distortion

  • Overlapping Responsibilities
    • What was supposed to empower the local governments has been overshadowed by a web of parallel agencies and other schemes including the Member of Parliament Local Area Development Scheme. Many of these measures cause fiscals imbalances and interfere with the planned fiscals decentralizations and roles of local organizations.
  • Governance Complexity
    • Due to shared powers between local governments and parallel agencies, most of their required responsibilities cause wastage and more likely to display probable fiscal irresponsibility. That is why this puts an immense level of pressure on local governments and makes it difficult for them to fulfill their mandates and reach fiscal sustainability.
  • Need for Streamlining
    • As a result of the above challenges, there is a need to rationalize the governance structures as well as to define the functions of different agencies. This will help decentralised bodies to call shots on their core business and enhance on how they manage their resources.

The Need to Have Up to Date Census Data

  • Delay in Census 2021
  • The delay of the 2021 Census presents multiple consequences to the entire process of policy formulation based on data and the distribution of funds between nation and regions. Footnotes based on statistics for the year 2011 is not sufficient to understand demographic and urbanization changes over the past decade along with creation of new cities and growth of existing ones.
  • Challenges of Outdated Data
  • There are several difficulties arising from the use of censuses that are outdated: they do not help comprehend what is required and is happening in cities at the present moment. This can result to wrong decisions as to which resources are to be allocated where thus making strategic planning for urban development difficult.
  • Importance of Accurate Data
  • It is important for the 16th Finance Commission to have correct and timely census that it requires to formulate its recommendations for the fiscal devolution and attendance to the changing demands of the urban sectors in India. Census data should be updated from time to time because this will assist in matching finances to current demographics.

Recommendations for the 16th Finance Commission

  • ULBs budget holding/ Share of ULBs in GDP
    • For improving the financial condition of cities, the 16th Finance Commission should call for a considerable enhancement in intergovernmental transfer ratios for ULBs in terms of the GDP share. This is will enable the municipal to secure resources needed to proceed with infrastructural development to enhance service provision.
  • Reform Property Taxation
    • Strengthening of property tax regulations with the present framework of state GST would help augment cost recovery by all the local bodies. Making property taxation less complicated as well as enhancing the collection methods has been identified to have a great impact in improving the city’s wealth.
  • Make Certain That Contemplated Funds Will Provide Sufficient Needs for the Basic Services
    • There is the need to set adequate budgetary provisions for critical urban infrastructures such as water supply and sanitation among others. This means that providing assurances of adequate funding by local bodies in the delivery of the aforementioned functions will go along way to improving the quality of life of the urban populace as well as supporting sustainable development.
  • Address Fiscal Distortions
    • Parallel agencies and overlapping responsibility areas are main sources of fiscal distortion and the Commission should pay more attention on them. Simplified fiscal mechanisms and the codification of the roles of several agencies shall improve the fiscal devolutions and fiscal governance in the local areas.
  • Implement Evidence-Based Fiscal Policies
    • These ideas are correct in asserting that using up-to-date accurate population figures for planning economic development or fiscal policy mechanisms is crucial. Therefore, the 16th Finance Commission must consider research based decisions for the fact that strategies devised have to suit today’s demography and economic characteristics of the urban centres.

Conclusion

  • The responsibility ofmeeting the principles of fiscal equity has been rightly entrusted with the 16th Finance Commission as a step towards making stronger the pillar of the Indian federation and flowing a consistent stream of power to the local self-governments.
  • Possible ways of the Commission’s positive impact on the financial situation and the infrastructure of cities remain in providing solutions to such challenges as insufficient intergovernmental transfers and fiscal imbalances in cities, and requiring up-to-date census information. These recommendations will help in the sustainable initiatives of the growth of Urban areas making them more stable in order to drive the economical development of the nation.
  • This means that the 16th Finance Commission now has the responsibility of providing direction on what young towns and cities require in terms of financial provisions to adequately respond to the modern issues of urbanization that will contribute to the growth and development of the country’s economy.

FAQS

Q1: what is the 16th Finance Commission and Its Terms of Reference?
Answer: The 16th FC is a Constitutional body formed under Article 280 of Indian Constitution; it is a recommended Finance Commission. Its main function is to advise the areas of how the financial resources are to be distributed among the central, state and local governments. It also involves recommending how the consolidated fund should be distributed and how principles for distribution of grant in aid to the states and local bodies for achieving a stable fiscal structure for the development throughout the country.

Q2: What are fiscal implications for local bodies from the recommendations of the 16th Finance commission?
Answer: The 16th Finance Commission is responsible to assess and provide recommendations on the proportion of funds to be provided to local bodies – the ULBs and the Panchayats. The objectives of its recommendations are to improve the financial decentralisation strategy of the country and to create conditions for the increase of share of IGTs of local governments, to guarantee the existence of sufficient funds for local development and infrastructure, as well as for providing essential public services. This is especially pertinent in the backdrop of the 73rd and 74th Constitutional Amendments which are concerning decentralisation of local bodies.

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