Local governments — panchayats in rural areas and municipalities in urban — are the closest to the people at the grassroots level. They provide critical civic amenities such as roads, water and sanitation, and primary education and health. The Fifteenth Finance Commission (FFC) has recommended grants of Rs 4,36,361 crore from the Union government to local governments for 2021-26. This is an increase of 52 per cent over the corresponding grant of Rs 2,87,436 crore by its predecessor for 2015-20. Quite legitimately, you may conclude that local governments needed much more. But the fundamental problem is insufficient revenue mobilisation by the general government — meaning the Union, state, and local governments combined.
Add up what you want the general government to spend on education, health, defence, infrastructure, subsidies, law and order, and general administration as proportions of GDP. Factor in interest payments — about 4-5 per cent of GDP — that are obligations from the past. The sum will considerably exceed 22 per cent, which is the approximate share of GDP that the Union and state governments mobilise as tax and non-tax revenue. Spending enough on an item without spending less on others and/or destabilising the macroeconomic balance through a large fiscal deficit is an impossible task. To spend enough, governments, including local, must start mobilising enough revenues.
Given the pandemic, in the total grants of Rs 4,36,361 crore, the FFC has recommended Rs 70,051 crore for plugging the critical gaps in primary healthcare. It has also recommended Rs 8,000 crore as performance-based grants for incubation of new cities and Rs 450 crore for shared municipal services. The rural-urban distribution of the remaining Rs 3,57,860 crore gradually increases in favour of the urban local bodies (ULBs) from 67:33 in 2021-22 to 65:35 by 2025-26. The tilt reflects India’s ongoing rapid urbanisation. The urban share of the total population went up from 28 per cent in 2001 to 31 per cent in 2011 and is even higher now.
The allocations for the incubation of new cities and shared municipal services are designed to foster innovations in urban governance to transform our cities with speed and scale. They are seed or venture capital for innovations. The expectation is that state governments would complement these with larger outlays. There is an urgent need for synergistically combined area-based development to spur economic growth and job creation, and decongesting through the development of satellite townships. Separately, the massive scaling of capacities in municipalities, particularly the 4,000-odd smaller ones, cannot be done by building capacities in each one of them, but through institutional and technological innovations, without compromising their autonomy. The shared municipal services model, with mobile internet, maps, platform thinking, and outsourced services all taken together, can help us fast-track the creation of municipal capacities at scale. This is one of the innovations in the FFC recommendations.
Inter-se distribution among states, of grants for all local governments with 90 per cent weightage on population and 10 per cent on area remains unchanged from the Fourteenth Finance Commission. For panchayats, the FFC allocations cover all the three tiers — village, block, and district — as well as the Excluded Areas in a state exempted from the purview of Part IX and Part IX-A of the Constitution. The three tiers in the panchayats are parts of one system and interlinked through backward and forward linkages. Funds to all three can improve functional coordination and facilitate the creation of assets collectively across smaller jurisdictions. Similarly, for urban local bodies, the FFC grants cover cantonment boards also. This is the second new aspect of the FFC recommendations.
For the urban component of local governments, the FFC calls for a focus on urban agglomerations (UAs) that include urban local bodies, census towns and outgrowths. In 2011, out of the total urban population of 377 million, 61 per cent lived in UAs. Forty per cent of the urban population lived in just 53 million-plus cities, including 47 UAs. The FFC has emphasised the need to focus on the complex challenges of air quality, drinking water supply, sanitation, and solid waste management in the million-plus UAs and cities. Thus, for 2021-26, there is a Million-plus Challenge Fund of Rs 38,196 crore that can be accessed by million-plus cities only through adequate improvements in their air quality and meeting service level benchmarks for drinking water supply, sanitation, and solid waste management. This focus on metropolitan governance through substantive but 100 per cent outcome-based grants is the third innovation.
For ULBs other than the million-plus category, the total grants are Rs 82,859 crore. The grants to local governments, both urban (less than a million category) and rural, contain a mix of basic, tied as well as performance grants. For both, 40 per cent of total grants are basic or untied and can be used by them for felt needs under the 29 subjects enshrined for panchayats in the Eleventh Schedule, and 18 for urban local bodies in the Twelfth Schedule of the Constitution, except for salaries and other establishment costs. Thirty per cent is earmarked for drinking water, rainwater harvesting and water recycling. The balance 30 per cent is performance-linked to: (i) maintenance of open defecation free (ODF) status, including through management and treatment of household waste, and human excreta and faecal sludge management for rural bodies, and (ii) attainment of star ratings in sanitation (including solid waste and waste-water management) for urban local bodies (less than a million category).
The efficiency, smooth functioning and accountability of local bodies have been plagued by: (i) lack of readily accessible and timely audited accounts, (ii) absence of timely recommendations of State Finance Commissions and suitable actions thereon, and (iii) inadequate mobilisation of property tax revenues (especially in ULBs). Finance Commissions in the past have drawn pointed attention to these issues, but with limited success. These entry-level conditions for availing any grants and their applicability to all local governments is the fourth innovation.
Hopefully, over the next five years, through a partnership among the Union, states, and local governments, in the spirit of cooperative federalism, these recommendations and innovations will catalyse progress in the accountability and effectiveness of local governments in India.
This article first appeared in the print edition on February 19, 2021 under the title ‘Building from below’. The writer is member, Fifteenth Finance Commission and a former Chief Economic Advisor.
The FFC has emphasised the need to focus on the complex challenges of air quality, drinking water supply, sanitation, and solid waste management in the million-plus UAs and cities. (Illustration by C R Sasikumar) 
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