- The 16th Finance Commission has begun its work under Article 280 of the Indian Constitution, focusing on the devolution of the consolidated fund.
- Since the 73rd and 74th constitutional amendments, local bodies have gained significant recognition, mandating the FC to recommend measures to augment state-consolidated funds for supporting panchayats and municipalities.
- Importance of Cities:
- The National Commission on Urbanisation described cities as “engines of growth,” contributing around 66% of India’s GDP and 90% of total government revenues.
- Despite this, financial devolution to cities remains inadequate, with the World Bank estimating $840 billion needed for urban infrastructure in the next decade.
- Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs) in India are about 0.5% of GDP, much lower than other developing nations (e.g., South Africa 2.6%, Mexico 1.6%, Philippines 2.5%, Brazil 5.1%).
- IGTs, making up about 40% of ULBs’ total revenue, face issues regarding predictability, earmarking for vulnerable groups, and horizontal equity.
- The introduction of the Goods and Services Tax (GST) has reduced ULBs’ tax revenue (excluding property tax) from about 23% in 2012-13 to around 9% in 2017-18.
Dig Deeper: Read about the terms of reference of the 16th Finance Commission and its constitutional mandate.
