ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Implications for Local Governments

The subject of local governments has not been comprehensively treated by the Fourteenth Finance Commission. The implications of the new inter se distribution formula of the commission's award for local governments have not been thought through and important conditionalities have been changed or watered down.

The Fourteenth Finance Commission (FFC) has attracted considerable attention for increasing the states’ share of the divisible pool to 42% and for further expanding the fiscal space to sub-national governments. Avowedly taking “a comprehensive view”1 of intergovernmental fiscal relations, public finance, plan/non-plan distinction and so on while working towards cooperative federalism, the FFC outlines the arguments for reforming the existing system of fiscal transfers. The FFC has given the refreshing title “local governments” as against local bodies used by the previous commissions to the chapter dealing with grants to the third tier of government, although the text in the report also follows the old tradition without exception. Actually the recommendations relating to the panchayati raj institutions (PRI) and urban local governments (ULG) leave many things to be desired. Some of them even seem to give wrong signals.

Equity is and should be the overarching concern of any federal polity worth the name. It is the underlying rationale for federalism. The criteria chosen for inter se distribution of transfers are therefore very important in determining the share of each state. Generally they are governed by the objectives to be served by the transfers. For inter se distribution of local government grants to the states, the FFC uses the 2011 population with weight of 90% and area 10%. The undue weightage given to population is iniquitous especially because of the use of 2011 Census figures. The deliberate omission of other relevant criteria can only help to put democratic decentralisation on the back burner. Clause 7 of the terms of reference (TOR) of FFC reads:

In making its recommendations on various matters, the Commission shall generally take the base of population figures as of 1971 in all cases where population is a factor for determination of devolution of taxes and duties and grants-in-aid; however, the Commission may also take into account the demographic changes that have taken place subsequent to 1971 (Report, p 3).

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