[Urbanstudy] Fiscal Omen of Local Democracy

[Vinay Baindur]

http://www.newindianexpress.com/columns/Fiscal-Omen-of-Local-Democracy/2015/03/23/article2725347.ece






Fiscal Omen of Local Democracy

By M A Oommen

Published: 23rd March 2015 06:00 AM

Last Updated: 22nd March 2015 11:05 PM

The Fourteenth Finance Commission (FFC) has attracted accolades for raising
the share of divisible pool to the states to 42% and for further expanding
the fiscal space to sub-national governments. It has also given the
refreshing title, local governments, as against local bodies used by the
previous commissions to the chapter dealing with the grants to the third
tier of government. Even so, the recommendations relating to panchayati raj
institutions (PRIs) and urban local governments of the FFC appear to be
retrograde.

Equity should be the primary rationale underlying any intergovernmental
transfer in a federal polity. The criteria for inter se distribution of
transfers are thus very important in determining the share of each state.
Generally, they are governed by the objectives of the transfers. For inter
se distribution of local government grants to states, FFC uses 2011
population with weight of 90% and area 10%. The undue weightage given to
population is iniquitous especially because of the use of 2011 Census
figures. The deliberate omission of other relevant criteria only helps put
democratic decentralisation on the backburner. Clause 7 of FFC’s Terms of
Reference (ToR) reads:

In making its recommendations on various matters, the Commission shall
generally take the base of population figures as of 1971 in all cases where
population is a factor for determination of devolution of taxes and duties
and grants-in-aid; however, the Commission may also take into account the
demographic changes that have taken place subsequent to 1971. (Report, p3)

The decision to use 1971 figures followed from the days of the seventh
panel was taken to avoid bias or disadvantage to any state that may choose
to pursue family planning to contain population, a policy once vigorously
initiated and incentivised by the Centre. The qualification to “take into
account the demographic changes that have taken place subsequent to 1971”
does not necessarily mean 2011 population. That the choice of 2011 figures
has adversely affected states like Kerala, Tamil Nadu, West Bengal and
Andhra Pradesh is clear from the fact that the population share of Kerala
in 1971 was 3.931%, Tamil Nadu 7.586%, West Bengal 8.159% and AP 5.098%
while the share in 2011 is 2.8% for Kerala, 6.06% for Tamil Nadu, 7.66% for
West Bengal and 4.14% for AP. In sharp contrast, the share of Bihar,
Gujarat, Haryana, Rajasthan, UP and many others have increased in 2011. The
inter se share for states worked out by FFC after adjusting for rural and
urban population ratio and area works out to 2.673% for Kerala, and 5.918%
for Tamil Nadu to mention the most conspicuous cases. A finance commission
constituted after the historic 73rd/74th Constitutional Amendments has a
moral, if not legal, responsibility to respect the letter and spirit of
parts IX and IXA of the Constitution which demand a vibrant and viable
local democracy. In fact all the previous commissions used criteria
relating to devolution and decentralisation for inter se distribution. Here
it is instructive to listen to FFC which says:

“In our view, neither the ToR nor the Constitution permits the Finance
Commission to play any role in the devolution of powers to panchayats and
municipalities or to promote a particular model of decentralization.
Therefore, we considered it appropriate not to use an index or indices of
devolution or decentralization for the purpose of transfer of resources to
states for panchayats and municipalities.” (p111, emphasis as in original).

However, the Constitution mandates the creation of gram sabha, people’s
participation, five-yearly elections, reservation of seats for women and
backward communities, creation of “institutions of self-government” at the
panchayat and municipality levels, tasked to prepare plans for “economic
development and social justice”, establishment of the District Planning
Committee and prepare “a draft development plan for the district as a
whole” and the like that proclaim a sui generis model of decentralisation.
Of course, no central finance commission can ignore state finance
commissions, because Article 280(3) establishing the Union Finance
Commission was amended as part of the 73rd/74th Constitutional Amendments,
adding sub-clauses (bb) and (c) to 280(3) requiring to supplement the
consolidated fund of a state through appropriate steps. The ToR No.4
sub-clause (iii) of FFC is derived directly from these clauses. The
condition “on the basis of the recommendations made by the Finance
Commission of the state” is not to be treated as a needless irritant. It is
a firm acknowledgment of the organic link between Union and state finance
commissions as part of our fiscal federalism. Also, the language of the two
finance panels with reference to their tasks doesn’t differ substantially
except that the former is designed to rectify the fiscal imbalances at the
Centre-state level and the latter at the state-sub-state level. In this
situation staying neutral is improper for a commission expected to play a
decisive role in shaping India’s federal fiscal architecture, more so when
we witness wilful negligence by several states in honouring constitutional
obligations.

That states in general have been reluctant to part with power, functions
and funds to local governments and failed to set up institutional
frameworks mandated by the Constitution is well-known. The effort of the
13th finance commission to divide local government grants into basic
unconditional grants and conditional performance grants was meant to
incentivise the “laggards”. To avail of performance grants the PRIs had to
fulfill six conditionalities and urban local bodies nine. The FFC not only
reduced the share of performance grants from 34 to 10% of the previous
panel but also made the conditionalities stipulated less demanding. To be
eligible for performance grants the gram panchayats will have to submit
audited accounts that relate to a year not earlier than two years preceding
the year in which they claim the grant. It will also “have to show an
increase in the own revenues”. These are tepid conditions. To show an
increase in own revenue—it could mean even one rupee hike—is different from
insisting on a specific jump above an allowance for normal buoyancy. That
Kerala has followed an accrual-based double entry accounting system from
2011-12 for panchayats and municipalities is an example to be incentivised
because accounting reforms have been underway with the CAG’s help since the
days of the 11th panel. That Budget 2015-16 cut allocations to the
panchayati raj ministry to Rs 95 crore from Rs 3401 crore has to be seen as
an ominous portent of the future of our local democracy.

*The writer is honorary professor, Centre for Development Studies (CDS),
Thiruvananthapuram. Email: maoommen09 at gmail.com <maoommen09 at gmail.com>*
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://mail.mail.sarai.net/pipermail/urbanstudygroup_mail.sarai.net/attachments/20150327/27cdd4df/attachment-0001.html>