This article critiques the recommendations of the last four Union Finance Commissions (UFCs) vis-à-vis the third tier and accordingly offers some suggestions for the consideration of the Fifteenth Commission (FC-XV).

Though the decentralisation reforms introduced by the 73rd/74th Constitutional Amendments (CAs) have several loose ends (for example, the lack of a local list), Part IX and Part IX A of the Constitution provide the necessary conditions to facilitate a viable local governance (LG) system in the country. The sufficient conditions needed for its smooth and efficient functioning have to be fleshed out in detail by the union and State governments with the help of the institutions created.

It is here that the institutions of Union Finance Commission and State Finance Commission (SFC) have to play a critical role.

The crucial issue here is that UFCs from the eleventh one have been mandated as per Article 280(3)(bb) and (c) to make recommendations on the measures needed to augment the consolidated fund of a state; this is to supplement the resources of panchayats and municipalities “on the basis of the recommendations of the finance commission of the state”.

The mandate of Article 280 (3)(bb) and (c) to make recommendations “to supplement the resources” of panchayats and municipalities raises the question, ‘for what’? Broadly speaking, it is to facilitate the process of fiscal decentralisation (which means restructuring of fiscal balances to empower LGs) and to ensure the provisioning of basic services. The recommendation of UFC-XI to delete the words “on the basis of the recommendations made by the Finance Commission of the state” tantamount to questioning the wisdom of the two Constitutional amendments in integrating local finance as part of India’s fiscal federalism.

The linking of the UFC with the SFCs shows that the local governance is organically linked to Indian fiscal federalism. The economic counterpart of Indian political federalism as exemplified in the Constitutional amendments consist of Articles 243I, 243Y, 243G and 243W besides 243ZD.

To be sure, the UFC and SFC are modelled the same way, the UFC to rectify the vertical and horizontal fiscal imbalances at the union-State level and the SFC the corresponding fiscal imbalances at the state sub-state level. That the Constitution treats the state and local governance systems on par when it comes to sharing of financial resources is loud and clear.

While a restructuring of Indian public finance is fully warranted under the new dispensation it is doubtful whether the UFCs except UFC-XIII have appreciated the decentralised mandates and Article 280(3)(bb) and (c). UFC XI and UFC XII despite a ToR to suggest a plan for “restructuring of the public finance” studiously kept out local finance.

Fiscal decentralisation

In refreshing contrast UFC-XIII not only felt the need to facilitate the fiscal decentralisation process, supported local governance systems through “ a predictable and buoyant source of revenue substantially higher than the present levels”, and linked the support flow with the union divisible pool.

Moreover, they thoughtfully introduced a performance grant system which was a bold initiative to incentivise the “laggard” States to be viable partners in Indian fiscal federalism.

It is widely acknowledged that many state governments are deliberately reversing the decentralisation process through creating parallel bodies, putting activity mapping in cold storage, starving local governance systems of funds, frequently reconstituting the SFC, ignoring or soft-pedalling SFC reports and so on. The nine-point package of conditionalities (only six for panchayats) of UFC-XIII to utilise performance grant carried the potential to streamline and take forward a decentralised governance system.

Indeed, continuity and change are the essence of progress. However, the initiative of UFC-XIII has not been carried forward by UFC-XIV in spite of their repeated reference to pursue “a comprehensive view” and their claim that ‘continuity and change’ will be upheld. True, the UFC XIV retained the performance grant, but restricted it to making available reliable data and improving own source revenue collection. These are important but certainly not demanding when it comes to improving decentralised governance.

The argument of UFC XIV that “there are several practical difficulties in considering an appropriate index or indices for devolution, without assuming that there is an optimal model of devolution or decentralisation that is uniformly applicable to all states” is untenable.

The Constitutional amendments do present a model that consists of creating “institutions of self-government” mandated to deliver “economic development and social justice’, (Articles 243G and 243W), establishing district planning committee and implementing spatial planning, environmental conservation etc., (Article 243ZD), rationalising state sub-state level fiscal relations (Article 243I and 243Y) and so on. Clearly, there is an integrated model. Unfounded assertions by experts can be counterproductive.

The choice of relevant horizontal distribution criteria is very important to carry forward fiscal decentralisation process. Some criteria followed like decentralisation, devolution, deprivation indices, and revenue efforts are certainly important. Even so, the choice of variables and the weightage assigned are significant. For example the choice of variables for decentralisation by UFC XI reveal indifference if not ignorance.

UFC XIV totally assigns 90 per cent weightage to population and leave out useful criteria. For the consideration of fifteenth commission (FC-XV), we may mention (i) untied investible funds devolved to LGs as a percentage of state expenditure (2) the own source revenue of LGs as a percentage of State’s own revenue (3) the number of employees under LGs as a percentage of state employees (4) the creation of a register of road and non-road assets created by LGs (5) the creation of parallel bodies as a negative item and so on.

If the commission institutes a study to map out a matrix of functions of local governance systems and the sources of funding of them (including MPLADS and MLALAD) one can provide empirical evidence to show the eclipse of the decentralisation process underway in the country.

To be sure, the four UFCs have been generous in their transfers to local governance systems. The devolution increased from ₹10,000 crore by FC-XI to ₹2.87 lakh crore by the FC-XIV. The local governance share in the Centre’s divisible pool increased from 0.78 per cent to 3.06 per cent during the period. Will FC-XV facilitate a process of meaningful local democratic life?

Data woes

The lack of a reliable fiscal data base and financial reporting system for local governance systems is a running sore. The most important contribution of UFC-XI is that they brought home the fragility of the data base at the local governance level and initiated steps to rectify them.

All the UFCs drew attention of the states, union and the public on this malady. Even so, the progress made is nothing to report. It is a very serious drawback of Indian fiscal federalism that it lacks a reliable and consistent financial reporting system at the third tier of government.

Even in Kerala which admittedly made remarkable progress in fiscal decentralisation and decentralised planning, the budget and budget-making process is in doldrums.

In sum, it will be a great contribution if the UFC-XV make an objective assessment of the progress of fiscal decentralisation.

The UFC and SFCs are complementary institutions, UFC tasked to rectify inter-state vertical and horizontal equity and the SFC the same tasks at the state sub-state level. The economic prowess of the Constitution can be demonstrated only when it is translated into development.

The writer is Honorary Fellow, Centre for Development Studies, Thiruvananthapuram