What is Fiscal Federalism (Local Finance & Resource Allocation)?
Historical Background
Key Points
17 points- 1.
Constitutional Basis:
- 2.
- Articles 268-281 deal with financial relations between the Centre and States.
- 3.
- Article 280 mandates the constitution of a Finance Commission (Central) every five years to recommend devolution of central taxes and grants to states.
- 4.
- Article 243I (for Panchayats) and Article 243Y (for Municipalities) mandate the constitution of a State Finance Commission (SFC) every five years to review the financial position of local bodies.
- 5.
Revenue Sources for ULBs:
- 6.
- Own sources: Property tax, professional tax, entertainment tax, octroi (abolished in many states), user charges, fees, and non-tax revenues.
- 7.
- Assigned revenues: Taxes collected by state governments but assigned to ULBs.
- 8.
- Grants: From state government (based on SFC recommendations) and central government (e.g., through Central Finance Commission recommendations or Centrally Sponsored Schemes).
- 9.
- Borrowings: From financial institutions or through municipal bonds.
- 10.
Expenditure Responsibilities for ULBs:
- 11.
- As per the Twelfth Schedule (18 items) of the Constitution, including urban planning, roads, water supply, sanitation, public health, slum improvement, and urban poverty alleviation.
- 12.
Inter-governmental Transfers:
- 13.
- Central Finance Commission (CFC) Grants: Recommendations for grants to states, which then devolve funds to ULBs.
- 14.
- State Finance Commission (SFC) Recommendations: Devolution of state's own taxes, duties, tolls, and fees to ULBs; grants-in-aid from the Consolidated Fund of the State.
- 15.
- Centrally Sponsored Schemes: Funds for specific schemes (e.g., Smart Cities, AMRUT) flow from Centre to States and then to ULBs.
- 16.
Challenges:
- 17.
- Vertical imbalance (revenue sources vs. expenditure responsibilities), horizontal imbalance (disparities among ULBs), political interference in fund allocation, lack of financial autonomy, and weak own-revenue generation.
Visual Insights
Fiscal Federalism and Local Finance
Illustrates the key aspects of fiscal federalism, focusing on local finance and resource allocation.
Fiscal Federalism & Local Finance
- ●Constitutional Provisions
- ●Revenue Sources for ULBs
- ●Expenditure Responsibilities
- ●Challenges & Reforms
Recent Developments
5 developmentsIncreased grants to ULBs recommended by recent Central Finance Commissions (e.g., 15th Finance Commission) to strengthen local governance.
Focus on performance-based grants and incentivizing own-revenue generation by ULBs to enhance financial sustainability.
Debates on strengthening the autonomy and capacity of State Finance Commissions to ensure effective devolution of funds.
Impact of GST on ULB finances (loss of octroi, entertainment tax, etc., often compensated by state grants).
Emphasis on improving municipal bond markets for ULBs to raise funds independently for infrastructure projects.