Why are Finance Commission grants to cities still so limited?, Pg8

Key Highlights:

• The 16th Finance Commission (FC) emphasizes that cities should increase their own revenue sources, even though the overall devolution of funds to urban local bodies remains limited.
• Under the 15th FC, urban local bodies received approximately ₹1.2-1.3 lakh crore over five years, which is about 0.12-0.13% of India's GDP.
• The 16th FC is expected to allocate around ₹3.56 lakh crore to urban local bodies between 2026 and 2031, remaining at roughly 0.13% of the projected GDP.
• A significant portion of funds from the 15th FC, estimated at ₹90,000-95,000 crore, remained unspent or pending utilization.

Detailed Insights:

• Tied grants for cities, earmarked for specific sectors like water supply and sanitation, restrict fiscal autonomy by requiring funds to be spent only on these categories.
• The 16th FC's approach includes performance-based grants, linking 20% of funds to conditions like increasing own source revenue (OSR) through property taxes and user charges, with a benchmark of ₹1,200 per household.
• A one-time incentive of ₹10,000 crore is proposed for the peri-urban merger of urban villages with populations over one lakh, raising concerns about federal intervention in a State subject.
• The 16th FC is criticized for its silence on climate change and its limited attention to the growing pool of cess revenues collected by the Centre, which amounts to about 2.2% of GDP.
• Merging rural areas into urban agglomerations could create administrative and civic complications, especially in states where rural local governments function effectively.

Key Concepts Involved:

• Finance Commission: A constitutional body that determines the distribution of tax revenues between the Union and the States.
• Own Source Revenue (OSR): Revenue generated by local bodies through taxes, fees, and user charges.
• Tied Grants: Funds allocated for specific purposes, limiting the flexibility of local bodies in utilizing them.