Over the years, the tendency of central and state governments to impose additional conditionalities on how local governments spend Finance Commission grants has increased. This has been expressly forbidden by the Commission — a welcome decision.
For the first time, the Commission has emphasised the importance of a learning management system. This opens the door for structured capacity-building programmes to strengthen both urban and rural local institutions. The focus on enhancing own source revenue is also an important and welcome step. In many northern states, own source revenues have steadily declined over the years.
Previously, states could afford to overlook this issue, but that will no longer be possible. To access the grants, local bodies will now be required to increase their own source revenue annually. This is a positive reform.
The provision of 60 per cent untied grants in the report is substantial. More importantly, the Commission has stipulated that no more than 20 per cent of the untied grant may be spent on roads. This is perhaps the most consequential decision. It will compel panchayats to shift their focus towards health, agriculture and other developmental sectors. In the past, nearly 95 per cent of available funds were often spent on cement-concrete roads. That pattern is unlikely to continue.
There is also adequate allocation for water management and related activities. Water management needs to be properly understood to include stream and river rejuvenation, ponds, wells, other waterbodies, rainwater harvesting, and watershed management — rather than being narrowly limited to water supply.
The Commission has also made it mandatory for states to transfer at least 20 per cent of their Finance Commission grants as devolution to local governments. This will certainly enhance the resource availability of local governments, especially panchayats.
The Commission has set a condition that local bodies should raise Rs 1,200 per household in own source revenue over time. This is a significant benchmark. Once panchayats reach that level, they are likely to strengthen their revenue base further.
In practical terms, this means that if states wish to access these funds, they will need to revive property taxation. Alternative taxation options are limited. Many states effectively abolished or weakened property tax over the past 15 to 20 years. They will now have to reconsider that approach. In several states, legislation does not even explicitly empower panchayats to levy taxes, although Urban Local Bodies generally retain this authority.
States will therefore have to rethink their fiscal strategy — or risk forfeiting these funds.
SM Vijayanand is former secretary, Union Ministry of Panchayati Raj.
Views expressed are the author’s own and don’t necessarily reflect those of Down To Earth