15th Finance Commission report: City kitty, bang-bang

By Mohak Mathur

It’s that time of the year (again) when we are all waiting with bated breath to see what we ‘get’ from the finance minister in her Budget come February 1. Every year without exception, as average citizens, we want, rather hope, that somehow our government gives us some relief or benefit which increases our ‘take-home’ and we are able to spend more on making our lives better.

While the Union Budget is likely to hog all our attention and conversations in the first week of February, another very important report will also be tabled in Parliament on the same day, which, although it deeply affects and impacts our lives and lives of millions of people living in nearly 4,500 Indian cities, is likely to get relatively little attention. We are talking about the 15th Finance Commission (FC) report.

The FC is an independent constitutional body set up for a period of five years. It assesses the fiscal position and needs of each state, and recommends the formula for sharing the divisible pool of (central) tax revenues between the Centre, states, and local self-government bodies (for example municipalities for cities and gram sabhas for villages). The (current) 15th FC, constituted in November 2017 under the chairmanship of NK Singh, came out with its interim report last year for 2020-21. The report made landmark recommendations for urban local bodies (ULBs) directly implying more funding support for India’s cities as well as ushering in unprecedented governance reforms that could improve the quality of lives in India’s cities in the long term.

The 15th FC’s interim report for 2020-21 has recommended a higher share of the total divisible tax pool for local bodies, from 3.54% in 2019-20 to 4.31% in 2020-21, and for cities specifically it has recommended that the share for urban versus rural should gradually increase to 40% (from 30%) over the medium term, recognising key urbanisation trends and challenges. For 2020-21, the overall grant allocation for local bodies was Rs 90,000 crore, of which the FC recommended cities get 32.5%, which totalled Rs 29,250 crore. To put this in context, the entire allocation as per the (previous) 14th FC for ULBs for the five years (i.e. 2015-16 to 2019-20) was approximately Rs 87,000 crore.

The stage is now set for the final 15th FC report for the next five years (i.e. 2021-22 to 2025-26), which is expected to be tabled in Parliament on February 1, along with the Union Budget. If the 15th FC’s interim report is anything to go by, the total fund allocation for ULBs for the next five years could well be in the vicinity of Rs 2 lakh crore, which would be unprecedented and a watershed moment for financial governance of India’s municipalities.

With India urbanising so rapidly, and urban (city) population expected to grow from about 400 million currently to over 600 million by 2030 and over 800 million by 2050, there are urgent demands for developing and upgrading urban infrastructure services such as roads, sewerage, street lights, waste management & treatment facilities and water bodies, among others. The overall investment required for the same for 2011-2031 is estimated at Rs 39.2 lakh crore. However, ULBs that bear a large percentage of this expenditure obligation currently do not generate sufficient own revenues—such as property tax and user charges—to finance this expenditure, even after considering fiscal transfers and various forms of assistance from central and state governments. Greater fund allocations from the 15th FC, therefore, become very important as they will have significant fiscal impact on city finances, especially for India’s smaller cities, where a substantial portion of ULBs’ receipts (in some cases as high as 90%) still comes from grants.

Besides increased fund allocation to cities (ULBs), the 15th FC is also paving the way for bold, data-driven governance reforms for India’s municipalities, foremost of which are the two entry conditions for every municipality to be able to access the 15th FC grants, which include: the publication of audited annual accounts; and notification of floor rates for property tax. Taken together, these two basic yet crucial reform conditions could lay a strong foundation for both own revenue enhancement of municipalities as well as their financial accountability. They will also likely drive more informed policy-making and improved relationship (for municipalities) with key external stakeholders including multilateral financial institutions, credit rating agencies and large infrastructure investors (especially for future fund raising including municipal bond issuances). Other data-related recommendations of the 15th FC interim report, such as publishing of service-level benchmarks and the creation of a national municipal information system (online platform for publication of ULB accounts) will also go a long way in strengthening transparency within Indian municipalities and will drive them towards better service delivery and ensure improved quality of life for urban citizens.

Convinced that larger cities will have a tendency to grow faster with the agglomeration effect, the third big policy reform that the 15th FC’s interim report has catalysed is the special focus and recognition of metropolitan governance for the first time in India. While the 74th Constitutional Amendment refers to metropolitan areas (i.e. area having a population of 1 million or more) and metropolitan planning committees, the 15th FC for the first time has recognised and brought to the centre stage the metropolitan governance footprint, which is a welcome step and is essential to meeting the challenges of bad ambient air quality, ground water depletion, sanitation, drinking water and solid waste management.

There is no doubt that the 15th FC’s interim report has marked a new phase of sustained focus on the agenda of urban governance reforms in India; however, it will be interesting to see what the FC recommends in its final report next week. Nonetheless, let’s hope the day is not far when ‘Finance Commission’ becomes a more relatable topic for us (urban citizens), and we discuss the impact of the FC on our city wallets with as much passion as we discuss impact of the Union Budget on our personal wallets.

The author is head, Municipal Finance Reforms, Janaagraha Centre for Citizenship and Democracy