The final report of the 15th Finance Commission for the five year period 2021-22 to 2025-26 was tabled in the Parliament on February 1, 2021. The Government of India also tabled an explanatory memorandum on its responses to the recommendations of the 15th FC. Of special significance is its acceptance of the recommendations of the FC with respect to municipalities. Besides an overall outlay of approximately Rs 1,55,000 crores, the 15th FC has more importantly broken the status quo of poor fiscal governance in our municipalities in at least three specific ways.

Firstly, it has distinguished between million-plus urban agglomerations (UAs) and other cities, thus mainstreaming metropolitan governance arguably for the first time since the 74th constitution amendment in 1992. Larger cities have typically not found performance grants to be substantive enough for them to take the effort to accomplish reforms. By making 100% of grants for these UAs outcome-based, it has recognised that these cities should be held accountable for quality of life outcomes (air quality, water and sanitation) and therefore be incentivised significantly (with an outlay of Rs 38,000 crores) for the same. This recommendation therefore has far-reaching implications from both of the above perspectives.

Secondly, the FC has brought in a concept of entry conditions or basic conditions for any municipality to be eligible for grants. It has laid out two such conditions, namely online publication of audited and unaudited annual accounts (by 15th of May every fiscal), and notifying floor rates for property tax and showing increase in collections each year in line with the State’s Gross State Domestic Product (GSDP). The first entry condition ensures financial accountability and the second strengthens property tax base of municipalities thereby their potential to raise own revenues. For the first time, such reform measures are not being tied to relatively modest performance grants, but being acknowledged as fundamental building blocks of fiscal governance. The FC has however been reasonable in providing a reasonable preparatory window of two years.

Thirdly, the FC has shown courage in calling out state governments for their neglect of State Finance Commissions and prescribed a deadline of March 2024. Essentially, states would not be eligible for grants if they do not constitute State Finance Commissions, and table action taken reports on their recommendations in state legislatures by March 2024. Local governance is a state subject as per the Indian constitution. Therefore, states need to discharge their fair share of responsibility with respect to providing municipalities with predictable fiscal transfers. State Finance Commissions were envisaged in the 74th CAA as counterparts to the Central Finance Commissions but state governments did not invest adequately in nurturing them as credible and independent institutions. Therefore, if states respond with maturity and openness to this recommendation, that would be a watershed moment in fiscal decentralisation in India.

In order to accelerate the process of urbanisation in India, the 15th FC has also provided for Rs 8000 crores as incentive grant for the development of 8 new cities in eight States. This is an innovative seed-funding experiment which will encourage states to invest in area-based development and help spur investments and job creation. Further, the provision for Rs 450 crores for shared municipal services open up the possibility of “uber” ising municipal services, both finance and revenue related and other citizen-facing services too. The current shortage in skilled human resources, the time and funding required to ramp up, and the clustering of urban population in India, all taken together make this a very attractive proposition.

The 15th FC has definitively pushed the envelope with respect to financial accountability of municipalities and struck a balance between large cities and relatively smaller ones in terms of design of incentives. At Janaagraha, we are extremely honoured to have been associated with the 15th FC in heralding a new era for Indian cities.

Srikanth Viswanathan is CEO – Janaagraha
The article originally appeared in www.thefederal.com on February 2, 2021.