15th Finance Committee: Ignoring the lessons of the pandemic
The roadmap for the next five years for the deconcentration of funds to States, as recommended by the 15th Finance Committee (XVFC), is ready. Unfortunately, despite the many important lessons the COVID pandemic has taught us, the Finance Committee report appears to have largely ignored these lessons.
The XVFC draft recommendations completely ignore the aspirations of states and their hopes of obtaining their fair share. In fact, the structure of the recommendations has been made more discretionary in favor of the Center, with little regard for the needs of States, based on justice and equity.
In fact, the report’s recommendations do reduce the share of state revenues. The decentralization of central funds on the basis of need and equity increased from 92.5% to 75%, of which 25% based on the efficiency and performance of the state on various fronts.
The report also attacks the federal spirit of the Constitution since, for the first time, a report by the finance committee mentions the responsibility of states towards the sovereign or national cause.
To quote the report:
“… State finances have become an essential pillar of India’s fiscal framework. Overall, as stipulated by the FRBM law of 2003 (as amended in 2018), we believe that states should partner with the Union government in the pursuit of medium-term debt consolidation and place firmly India’s sovereign debt-to-GDP ratio on a sustainable basis. medium term. They must partner with the Union government to develop new ways of supporting the economy as a whole and India’s global commitments. Thus, the trajectory of the debt and the taxation of public administrations envisages this partnership of the Union and the States to achieve the key elements of macroeconomic stabilization through sustainable levels of debt and budget deficit.
As much has already been written on this aspect, I would like to focus on the XVFC recommendations on urban finance. Currently, urban centers represent nearly 34% of the population and contribute 67% of the GDP. It was expected that after witnessing the horrific scenes of inequality-induced reverse migration of workers to cities during the lockdown, the report would put more emphasis on this aspect.
However, the Commission largely ignored this issue. So let’s see what’s in his report for the urban segment.
But before we go into details, it’s important to note that the two quotes mentioned at the start of the main report are contradictory. The first comes from Mahatma Gandhi who“The future depends on what we do in the present”. The report therefore focuses on the arguments for why the present is more important.
The second quote is from the Roman philosopher Marcus Aurelius: “Never let the future bother you. You will face it, if necessary, with the same weapons of reason that today arm you ”.
Additionally, while in the current commentary, the report mentions the unusual times and challenges posed by COVID, the effective part and its recommendations are the reverse of what was needed to meet the new challenges and address the concerns of the population.
Although total spending for the urban segment is higher than what the previous finance committee recommended, in real terms or in numbers, XVFC maintains the status quo.
The total expense according to the previous commission was Rs 87,144 crore, of which 15% was not released. Therefore, the actual amount spent was Rs 74,529 crore. The current commission estimates the total expenditure of urban local bodies for 2021-26 at Rs.121,055 crore. However, spending in 2021 is lower than in 2020, dropping from Rs 25,098 crore to Rs 22,114 crore. This represents 11.71% of the total grants over five years.
The criteria for grants to urban local bodies are that these will be distributed among states based on population and area, with weights of 90% and 10%, respectively. There are, however, two conditions to benefit from these grants: first, local organizations will have to publish provisional and audited accounts and second, the setting of minimum floor rates of property taxes by the states and the improvement of its collection. Grants will not be paid to local organizations after March 2024, if the state does not establish a state finance commission and act on its recommendations.
The XVFC categorically states:
“We recommend to allow a period of one year to notify the floor rates of the property tax; this will be triggered in two stages from 2022-2023. In the first step, states should notify the floor rates and implement the provisions in 2021-2022. The condition of notification of the floor rates of the property tax will apply for the eligibility of subsidies from 2022-2023. Once the floor rate has been notified, the condition for the growth of property tax collection being at least equal to the average simple growth rate of the State’s own GSDP over the last five years will be measured and taken into account from 2023-24. “
Another fund, called Challenge Fund, is recommended for more than one million cities, but it will be linked to the performance of these cities in improving air quality and meeting service level standards by urban drinking water supply, sanitation and solid waste management. The total allocation under this heading is Rs 26,057 crore for five years.
Missing the core
The XVFC missed out on the central element of the deconcentration of funds. As stated at the outset, addressing the issue of equity and the transformation of the nearly 93% informal sector in cities is a significant challenge. Here are some missed points:
First, the devolution of just 11% of the total expenditure of Rs 1033,062 crore is far too meager to meet the challenges cities face today. According to a high-level committee set up by the MOUD in 2011, the urban infrastructure investment needs per year in 2013 were estimated at 50,000 crore rupees and are expected to reach 4 crore lakhs rupees by 2032. This represents almost 0.75% of GDP in 2012-13 and will represent 1.5% of GDP in 2032.
Currently, the total expenditure of the XVFC and the Union budget does not even represent 0.19% of GDP and the allocation to urban local authorities is only 0.07% of GDP. In fact, the combined spending of the country’s urban local governments has steadily declined from 1.74% of GDP in 1990 to almost 1% in 2011.
The memorandum from the Ministry of Housing and Urbanism submitted to the XVFC summarizes the requirements of the municipalities: “A substantial increase in grants is needed to fill the municipal resource gap, which is projected to be Rs. 12.27 lakh crore over the period 2021-22 to 2025-26. Devolution to municipalities can be increased by at least four times (up to Rs.348,575 crore), compared to the FC-XIV price. “
Second, it is important that the constant harping on the collection of property taxes and the link with the use of central grants must be abandoned. There is no doubt that the property tax is an important source of resource mobilization for municipalities. But to centralize too much would be a mistake.
The provision requiring state governments to decide the land area rate for property tax is also completely wrong. Each town and city has a different capacity and even within the city there are differences in the appreciation of property. This task should be left to municipalities, not state governments. In fact, best practices must be followed to ensure the collection of property tax.
Furthermore, the previous year had been a disastrous year for individuals and a large number of businesses. A better option would have been a complete exemption from property taxes, especially of the hotel industry, and the granting of a subsidy in its place.
Third, the same mistake of the past of seeing cities as the main engines of growth continues to plague the XVFC. Since UN Habitat III, there has been a concerted effort to focus on sustainability goals and not treat cities as market entrepreneurs. We have seen how unsustainable our cities have become with huge inequalities spreading rampantly.
The effort should have been to control this trend. Unfortunately, the recommendations continue with the same old jargon and the same intent. Take for example the language of the document: “Create models of PPP contracts, modernize municipal budgeting, develop the national framework for municipal borrowing, including provisions equivalent to the law on fiscal responsibility and budget management for urban local authorities”, which all point to the same mindset of converting cities into attractive investment zones.
Not realizing that nearly 90% of local urban organizations are unable to meet their salary expenses, such recommendations make absolutely no sense. In addition, the XVFC did not take into account the worsening inequalities in cities.
Fourth, in such a situation, the XVFC had to create a separate fund for an urban employment guarantee program or something similar to tackle the acute unemployment existing in the cities, similar to what it recommended on the pollution and air quality.
This is one of the main expectations that the Commission has completely denied.
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