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The 13th Finance Commission and the Third Tier

M A Oommen

Evaluating the recommendations of the Thirteenth Finance Commission with reference to panchayati raj institutions and urban local bodies and their implications for genuine fiscal federalism in India, this paper finds data related to local governments across states and over time to be wanting in many respects. Yet, as broad aggregates, they help throw some light on the magnitudes and trends in expenditure and own source revenue of the third tier from 2002-03 to 2007-08. It concludes that the commissions sins aside, it has in some ways departed significantly from the past and made suggestions that could strengthen democratic decentralisation if they are fully implemented.

ocal governments, notably panchayati raj institutions (PRIs), once a neglected appendage of rural development departments, acquired a habitation and a name in the I ndian federal polity after the 73rd and 74th Constitutional Amendments in 1993. It is significant that Article 280 of the Constitution that established the union finance commission (UFC) was altered as part of the two amendments. The addition of subclauses 280(3)(bb) and (c) mandating the UFC to recommend measures needed to augment the consolidated fund of a state to supplement the resources of panchayats and municipalities in the state on the basis of the recommendations made by the finance commission of the State, affirmed the organic link in Indian fiscal federalism. All the UFCs since the two amendments have been required through their terms of reference to make recommendations on these clauses. The Tenth Finance Commission (TFC), although a ppointed before these amendments, became a fait accompli , and on its own recommended some ad hoc grants to local governments. This paper seeks to evaluate the recommendations of the Thirteenth Finance Commission (THFC) with reference to the third tier. Despite its several shortcomings, I try to argue that the THFC has made some significant departures from the past and made recommendations that could help to strengthen the pro cess of democratic decentralisation in the country if they are fully implemented.

Some Magnitudes and Trends

The fiscal data relating to local governments are admittedly very weak. Even after 15 years under the new dispensation of a decentralised regime, reliable and comparable data across states and over time are found wanting. The Eleventh Finance Commission (EFC), the Twelfth Finance Commission (TWFC) and the THFC have gathered data on income and expenditure of rural and u rban local governments through state governments. While the first two presented the data in the text of their reports, the THFC has placed them on its website. But none of the commissions ventured to analyse them though the EFC and the TWFC used them for estimating the revenue efforts of local governments. The THFC data, covering a period of six years from 2002-03 to 2007-08, are probably more reliable because the accounting format prepared by the Comptroller and Auditor General of India (CAG) for local governments, following an EFC recommendation, has been accepted by a large number of states. This, however, does not ensure that the fiscal data provided is beyond reproach and strictly comparable. The THFC does not seem to have precisely defined the terms or concepts used in canvassing the scheduled data from state
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I wish to acknowledge the computational assistance of D Shyjan in the preparation of this paper. I also wish to thank S M Vijayanand for offering some useful comments on an earlier draft of this paper. M A Oommen (maoommen@gmail.com) is at the Institute of Social Sciences, New Delhi.

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governments, which, in turn, did it through a chain of local government functionaries. Even though fully aware of the limitations of the data on the website, in this paper, I have used it to throw some light on the magnitudes and trends in expenditure and own source revenue (OSR) of the third tier (PRIs and urban local bodies, ULBs) from 2002-03 to 2007-08. All-India statistics as well as those of the major 15 states with regard to selected variables are used. These states cover more than 96% of the countrys population. Though not as precise as they could have been, as broad aggregates, the data help to provide some useful magnitudes and insights. The economic significance of local governments in a federal system may be measured by four parameters. One, the share of local government expenditure to total public-sector expenditure (the centre, states and local governments); two, the share of local government expenditure to gross domestic product (GDP); three, the share of local governments OSR to total public-sector OSR; and four, the share of local governments OSR to GDP. Table 1 a ttempts to capture the share of local governments with reference to public-sector expenditure and OSR for six years from 2002-03 to 2007-08.
Table 1: Trend in the Percentage Share of Local Governments in Public-Sector Expenditure, Public-Sector OSR (2002-03 to 2007-08)
Items 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

PRIs Share of public-sector expenditure Share of public-sector OSR ULBs Share of public-sector expenditure Share of public-sector OSR Local governments Share of public-sector expenditure Share of public-sector OSR

2.5 0.4 3.0 3.2 5.5 3.6

2.9 0.4 2.2 3.1 5.1 3.5

3.1 0.4 2.5 2.9 5.6 3.3

3.7 0.4 2.7 2.9 6.4 3.3

3.9 0.3 2.8 2.7 6.7 3.0

3.7 0.3 3.0 2.5 6.7 2.8

counter to the avowed mandate of the Constitution to create institutions of self-government. Appendix A (p 97) shows the percentage of central transfers to PRIs, including UFC transfers (as r eported in the THFC local data set), to total receipts and total expenditures of PRIs. It may be noted that the all-state average of central transfers, including that of the EFC and the TWFC, to total revenue and total expenditure have increased during the six-year period from 2002-03 to 2007-08 and the percentage of transfers with regard to expenditure goes as high as 31.1% in 2007-08 while it is only 19.5% in 2002-03. The magnitude and trend of the percentage of central transfers to expenditure shows a disturbing picture in 2007-08 for Andhra Pradesh (51.8%), Assam (87%), B ihar (90.7%), Madhya Pradesh (65%), Orissa (71.6%), Tamil Nadu (39.4%), West Bengal (47.8%), and so on. What autonomous space can you expect of a state like Bihar where nearly 91% of the expenditure of rural local governments is met by transfers from the central government?1 The second is the poor level of OSR and its declining trend, and in some cases, even zero revenue collection. This indicates the fragile autonomous space of the local governments, notably PRIs. The share of local governments in the total public-sector OSR dec lined from 3.6% in 2002-03 to 2.8% in 2007-08 (Table 1). Nearly 90% of the OSR share is accounted for by ULBs. The most striking aspect is the extremely poor OSR share of PRIs in the total OSR base of the public sector. Moreover, it declined from 0.4% in 2002-03 to 0.3% in 2007-08. That this works out only to a negligible 0.08% of GDP in 2002-03 and a still lower 0.06% in 2007-08 is surely not promising. The trend of declining OSR and growing expenditure indicates a clear dependency syndrome. Figure 1
Figure 1: Trends in Local Governments Share of Public-Sector Expenditure and OSR
7.0 6.0 5.0 4.0 3.0 LGs Share in Public Sector OSR 2.0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 LGs Share in Public Sector Expenditure

Source: Calculations based on THFC website data; Government of India, Economic Survey for the relevant years and Reserve Bank of India, State Finances: A Study of Budgets for the relevant years.

It is significant that the share of local governments expenditure in the total public-sector expenditure has increased almost steadily from 5.5% in 2002-03 to 6.7% in 2007-08. Equally i mportant is the visible growth of the share of PRIs, which rose from 2.5% to 3.7% during this period. But the share of ULBs stagnated around 3% and even declined in some years. However, the local government share in public-sector expenditure is small compared to the Organisation for Economic Co-operation and Development (OECD) countries where it broadly ranges from 20% to 35%. As a share of GDP, the local government share of expenditure shows an increasing trend from 2.13% in 2002-03 to 2.42% in 2007-08, but it falls way below the corresponding share of nearly 14% of GDP for OECD countries and 10.8% for China.

Two Qualifications
This increasing trend has to be understood subject to two important qualifications. The first is that this increase is presumably due to an expansion in agency functions with several centralsponsored schemes and state-sponsored programmes being routed through PRIs and ULBs in recent years. Indeed this goes
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graphically illustrates this yawning gap. The Y axis represents both the expenditure and OSR of local governments as a percentage of public-sector expenditure and OSR and the X axis the sixyear period, beginning with 2002-03. While the share of local governments in the total public sector expenditure has improved, the share of OSR has declined, signalling a narrowing of the autonomous space of these institutions. However, it is to be noted that the relative decline in the revenue share of local bodies may also be due to the very buoyant and faster growth of both central and state revenues in recent years vis--vis local revenues. The unfortunate part of the fiscal reform processes of the last two decades has been that they are concentrated only at central and state level. Table 2 (p 94) presents the state-wise distribution of per capita tax, per capita OSR and per capita expenditure of PRIs. I have left out ULBs, though the emerging scenario could be disturbing in their case as well, because they have a better revenue base and a

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different story to tell. I think that despite the many lapses and p ossible omissions in the basic data, the major findings from T able 2 are broadly relevant and reportable. One, all the three variables present an extremely uneven and disturbing scenario. In 2002-03, four states report no PRI tax revenue. For the others, per capita tax ranges from Re 1 in Uttar Pradesh to Rs 64 in Maharashtra, and an all-state average of Rs 11. Assam, Bihar, Orissa and Rajasthan continue to report zero taxing and in 2007-08, the per capita tax for the other states ranges from Re 1 in Uttar Pradesh to Rs 88 in Karnataka. Two, with the exception of Bihar, the per capita OSR, which includes non-tax revenue, shows a slightly altered picture. In 2002-03, the per capita OSR of PRIs ranges from Rs 3 in Orissa and Rajasthan to Rs 86 in Kerala, with an all-state average of Rs 24. In 2007-08, it ranges from Re 1 in Bihar to Rs 180 in Haryana, with an all-state average of Rs 37. Three, the per capita expenditure trend is certainly encouraging with the all-state PRI expenditure increasing at 16.9% per a nnum. In 2002-03, it ranges from Rs 18 in Bihar to Rs 1,364 in Maharashtra, with an all-state average of Rs 356 and the m inimum-maximum ratio works out to 75.7. There is a steady increase in expenditure in all the states. In 2007-08, the per capita e xpenditure ranges from Rs 48 in Bihar to Rs 2,967 in Karnataka, with an all-state average of Rs 779 and a minimum-maximum ratio of 61.8. It appears that the 73rd Amendment has had no n otable impact in Bihar and the situations in Rajasthan, Punjab and Uttar Pradesh are also no better. This means that more than 32 crore people or 30% of the population of the country, who live in these states, have nothing tangible to report as a result of d ecentralised governance. Figure 2 shows the widening trend in per capita expenditure of all states on the one hand, and tells a depressing story of per c apita OSR and per capita tax on the other. The magnitude of e xpenditure of PRIs in absolute terms has increased, and as a p ercentage of GDP gone up from 1.17% to 1.36% in 2006-07
Table 2: Per Capita Own Tax, Per Capita OSR and Per Capita Expenditure of PRIs (in Rs)
States PCOT 2002-03 PCOSR PCEX PCOT 2003-04 PCOSR PCEX PCOT

a lthough it slightly declined to 1.33% in 2007-08. As can be seen in Appendix B (p 97), at the state level in 2007-08, the percentage of PRI expenditure to gross state domestic product (GSDP) ranges from 0.15% in Punjab to 4.34% in Karnataka, with Madhya Pradesh, Assam, Maharashtra and Gujarat falling in the 2.14% to
Figure 2: Per Capita Own Tax, Per Capita Own Source Revenue and Per Capita Expenditure of PRIs (All States)
800 700 600 500 400 300 200 Per capita own source revenue 100 0 2002-03 2003-04 2004-05 2005-06 Per capita own tax Per capita expenditure

2006-07

2007-08

3.59% range. It is only reasonable to infer that the growing expenditure may have generated a multiplier income effect in those states that have a critical level of per capita expenditure. As long as l ocal public goods and services are almost fully financed by grants from higher governments, it creates a fiscal illusion among the local people about the cost of such services and this has to be addressed as a problem. The THFC failed to examine this problem of a fiscal illusion and its possible implications. The union g overnment may do well to appoint a local government taxation enquiry commission to examine this phenomenon and make s uitable r ecommendations.

Recommendations and Local Governments: A Critique

Unlike its predecessors, the THFC upheld the view that local governments should be supported through a predictable and buoyant source of revenue substantially higher than in the past

2004-05 PCOSR PCEX PCOT

2005-06 PCOSR PCEX PCOT

2006-07 PCOSR PCEX PCOT

2007-08 PCOSR PCEX

Andhra Pradesh Assam Bihar Gujarat Haryana Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal All States

20 0 0 7 3 19 49 5 64 0 2 0 14 1 2 11

51 4 0 22 74 19 86 11 85 3 77 3 65 5 7 24

187 272 18 1,342 177 1,199 351 77 1,364 268 175 50 686 93 181 356

22 0 0 7 1 33 48 6 106 0 2 0 22 1 3 15

52 4 0 22 73 33 94 12 127 3 70 3 55 5 9 28

192 489 18 1,387 201 1,335 600 69 1,531 295 193 51 715 129 209 406

25 0 0 14 5 24 52 7 85 0 11 0 24 1 2 14

60 4 0 39 134 24 107 13 109 3 95 4 65 6 12 31

216 555 1 1,507 234 1,409 674 341 1,687 291 235 81 828 146 254 466

28 0 0 7 4 36 66 7 70 0 11 1 27 1 3 15

66 4 0 27 173 36 127 15 96 3 95 3 70 7 13 33

263 863 44 1,718 451 2,057 760 468 1,872 326 267 90 838 169 267 564

31 0 0 12 4 46 66 3 73 0 12 1 29 1 4 15

70 6 1 34 187 46 133 11 103 3 111 4 78 6 17 36

281 1,257 45 2,013 469 2,391 820 868 2,067 568 520 84 979 196 433 692

33 0 0 26 4 88 63 3 80 0 8 0 34 1 0 18

89 7 1 45 180 88 112 13 114 3 29 3 74 7 0 37

371 866 48 2,080 637 2,967 874 1,153 2,268 576 136 75 1,229 186 581 779

PCOT: Per capita own tax; PCOSR: Per capita own source revenue; PCEX: Per capita expenditure. State-wise rural populations as per 2001 census are used for per capita computation. No projection is made. Source: The THFC website.

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( Report of the THFC 2010-2015: 174; subsequently Report). The strategic recognition that larger fiscal transfers to the local bodies to encourage speedier implementation of the 73rd and 74th Constitutional Amendments regarding the transfer of functions and functionaries in consonance with the subsidiarity principle to improve the productivity of public expenditure (Report: 26) is a big step forward towards meaningful decentralised governance. Indeed, the most important recommendation of the THFC is its decision to relate grants to local governments to a share in the divisible pool of the union tax revenue. In its words,
Taking into account the demand of local bodies that they be allowed to benefit from the buoyancy of central taxes and the Constitutional design of supplementing the resources of panchayats and municipalities through grants-in-aid, we recommend that local bodies be transferred a percentage of the divisible pool of taxes (over and above the share of the states), as stipulated by us, after converting this share to grant-inaid under Article 275 (Report: 174).

laggard states can now piggyback on UFC grants, which can have an adverse impact on genuine fiscal d ecentralisation and good local governance.

Performance Grant
It is important that the THFC goes beyond the usual official pontifications to carry the decentralisation process forward. The local grant recommended by the THFC has two components, a basic component and a performance-based component. The basic grant is equivalent to 1.5% of the previous years (t-1) divisible tax revenue to be further adjusted when the final accounts are available. All states will have access to this grant for all the five years (2010-15). A small portion of this grant is earmarked to special areas such as those covered by Schedule V and Schedule VI. S ixteen states stand to benefit from this and the estimated total for the award period works out to only Rs 1,357 crore or just 2.3% of the total basic grant. The performance grant, effective from 2011-12, will be 0.5% for 2011-12 and 1% after that, up to 2014-15. The performance grant allocated to each state is subject to them fulfilling a nine-point conditionality package. This should help promote results-based accountability. All of them are important and desirable measures to incentivise the states to carry on and make decentralised governance durable. For example, making devolution to the various tiers a part of the state budget under separate major and minor heads can prevent needless interference by various departments. It also e nsures greater autonomy and predictability if the allocations are done for each local government by name, as has been the practice in Annexure IV of Keralas state budgets since 1996. This is a m ajor step towards building a stable and autonomous thirdtier system. Similarly, the requirements of a standardised audit s ystem; an ombudsman for local governments (which inter alia helps local governments preserve their autonomy, prevent needless state intervention and enforce the rules of decentralised governance); the electronic transfer of central grants to local governments (which indirectly means putting in place a networking system) in five days of receipts (not very practicable given present-day red-tapism); legally prescribing the qualifications of state finance commission (SFC) members; the compulsory levy of property tax (by creating a Property Tax Board at the state level that will assist all ULBs to put in place an independent procedure for assessing property tax and reduce endemic corruption); e nsuring a minimum standard of public services; and putting into action a fire hazard prevention mechanism in all municipal corporations are definitely welcome conditionalities. I think a large chunk of the performance grant, estimated to be Rs 29,826 crore, remaining unutilised by 2015 is a distinct possibility despite provisions for redistribution of unused funds among the general and performing local governments. If state governments do not take necessary legal and administrative action, everything will remain in cold storage. This is because you can only lead a horse to the water, but cannot make it drink unless it chooses to do so. Probably beginning with a minimum of four or five conditions in the second year (2011-12) and a graduated progression to the final year would have been a more feasible proposition.

In this way, the THFC has made local governments an integral part of the public finance of the country. They are now recognised as entities that are linked to the union tax revenue pool a lmost like the state governments. Not just that, in absolute as well as in relative terms, the local government grant recommended by the THFC could be considered substantial, as is shown in Table 3. However, the local bodies will be beneficiaries of this recommendation only if its implementation is based on actual revenues of the central government instead of what has been p rojected in the THFC ReTable 3: Grant Allocation of Different Commissions to Local Governments port. The prospect of cenCommission Total Grant % to Divisible tral revenues growing at a (Rs in crore) Pool faster rate appears bright TFC (1995-2000) 5,380.93 1.38 with the introduction of the EFC (2000-2005) 10,000 0.78 goods and services tax TWFC (2005-2010) 25,000 1.24 (GST) and further reforms THFC (2010-2015) 87,519 2.28* *De facto only 1.93%. in direct and indirect taxes. Source: THFC Report: 151, 174. A part of that benefit will go to local governments only if the percentage of grants to them is worked out on the basis of actual revenues. Then the actual devolution as a p er centage of GDP may even be much higher than what is projected in Table 3. The increase from the TWFC s Rs 25,000 crore to the THFC s Rs 87,519 crore is more than 3.5 times. Since the projection of union tax revenue by the THFC is quite conservative, the estimate may easily go up to Rs 1,00,000 crore. The total demands made by the Ministry of Panchayati Raj, Ministry of Urban Development and the Ministry of Rural Developments department of drinking water and sanitation alone add up to a huge sum of Rs 2,96,998 crore.2 Reckoned in terms of the projected need, the grant may be a small amount, but relatively speaking, it is substantial. I think the real danger lies elsewhere. In the words of the THFC, We have not imposed any stipulation that state governments maintain their present level of transfers such that FC transfers become an additionality (Report: 183). This goes counter to the letter and spirit of Article 280(3)(bb) and (c) that requires UFC transfers to augment the consolidated fund of a state to supplement the resources of panchayats and municipalities. The
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Distribution Criteria: A Critique

Once the size of vertical transfers is fixed, an equally important task before a finance commission is determining the horizontal share on the basis of relevant criteria. Here the choice of criteria is very crucial. On general grounds, I think at least three criteria are basic along with some of the conventional ones. Being a grant for local governments, that too in circumstances where much has to be done for them to achieve functional, financial and administrative autonomy, the first priority is to arrive at a relevant decentralisation index (a wrong choice of the variables of this measure can be misleading, as happened in the case of the EFC). Second comes tax effort. Tax compliance may be treated as a form of citizens participation. Citizen resistance is much less when it comes to the payment of non-tax revenues such as fees, charges, licence costs, and the like, where some quid pro quo is involved. There are states in India where PRIs do not impose any tax (Table 2). Some states with high local non-tax revenue (for instance, Haryana, Punjab and Himachal Pradesh) have even abolished major sources of local tax revenue such as property and profession taxes. Studies have shown that individuals trusting a government, particularly a local government, have a higher tax morale than those who do not trust it. Against this background, the case for tax effort as a criterion becomes important. Third, the states and the local governments have a bounden responsibility to fully utilise all grants received. So a grant utilisation index becomes relevant. The procedural formalities and preconditions required for spending the amount by the local governments must be well laid down by the state governments
Table 4: Criteria and Weights Allotted for Grants to Local Governments
Criterion PRIs Weights Allotted % ULBs

recall that in the criteria and weights used in the sharing of union tax revenue, the THFC has given only a low weightage of 25% to population against a weightage of 47.5% to fiscal capacity distance and 17.5% to fiscal discipline, making a total weight of 65% for fiscally relevant criteria (see Report, Table 8.1: 122). The logic of these criteria and the weights assigned are legitimate in Indias fiscal federalism that avowedly seeks to reduce fiscal disparities and promote fiscal efficiency. However, this type of emphasis is not seen when it comes to l ocal grants and weights allotted to the index of devolution (ideally it should have been a decentralisation index) for local governments. The THFC has not only given a lower weight to the devolution index, but also the components chosen to build it leave many things to be desired. In the devolution index relating to PRIs, Karnataka tops the list of allocations with a 20.93% share, followed by Maharashtra, Andhra Pradesh and Uttar Pradesh. Karnataka, however, has made only schematic transfers (which are an enemy of genuine decentralisation) and that too only to district panchayats while only a fixed amount of Rs 5 lakh is allotted to each gram panchayat. On the other hand, Kerala, which has devolved untied grants (this admittedly is a strong indicator of decentralisation) to local governments on the basis of a transparent formula with 70% of PRI grants allotted to gram panchayats that are at the cutting-edge level, and has already implemented most of the recommended performancebased grant conditionalities, gets only a low rank and therefore a lower share.

Unfair Measures
The THFC has dispensed with the tax or revenue effort criterion with regard to local grants on the plea that credible data are not available. The EFC and the TWFC used revenue effort as a criterion, based on the local fiscal data they had collected. The THFC had data for six years and it could have obtained better outcomes by using the tax or revenue effort criterion. The THFC criteria are really unfair. For example, the horizontal formula with 50% weight for population and 10% weight for area shifts the scale in favour of Uttar Pradesh, Bihar and so on against states like K erala, which has imposed five taxes and has very high per capita tax revenue (Table 2). The population weight, including SC/ST population (here using the 2001 Census), and area for Uttar Pradesh works out to 39.83% and 19.07% for Bihar against 5.67%

Population Area Distance from highest per capita sectoral income Index of devolution SC/ST proportion in population FC local government grant utilisation index Total
Source: THFC Report: 177.

50 10 10 15 10 5 100

50 10 20 15 5 100

concerned. Thus the accountability of both the state and local governments will be at stake. Among conventional criteria, population and area are relevant candidates. Population (could include vulnerable categories such as scheduled castes and tribes separately) and area could be included as surrogates for need, but surely with a relatively lower weightage. Table 4 gives the criteria and weights allotted for local government grants by the THFC. It is clear from Table 4 that population is accorded the highest weightage (50%) by the THFC. If we include the SC/ST population, the aggregate weight of population in the case of PRIs rises to 60%. The THFC gives only a smaller weightage of 15% to the index of devolution and a still smaller weightage of 5% to the FC grant utilisation index. As I have already noted, given the extremely poor and uneven progress in implementing the 73rd and 74th constitutional amendments, a larger weightage to the devolution or decentralisation index is justifiable. It is important to

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for Kerala. These are not strictly relevant for gauging devolution or decentralisation. A wrong choice of criteria can lead to very unfair results. What then are some of the best candidates one would propose for a rational and equitable horizontal distribution of local grants to states? Besides some of the criteria that we have already discussed, the following seem to be relevant as they are important measures of decentralised governance. They could be considered among the possible parameters of any valid decentralisation index. (1) Untied investible funds devolved as a percentage of state e xpenditure. (2) The OSR of local governments as a percentage of the states own revenue. (3) The number of employees under local governments as a p ercentage of state employees. (4) The percentage of PRI expenditure as a proportion of SDP. (5) The progress in building an online data base. All UFCs in recent times, including the TFC, EFC, TWFC and THFC, have a common mandate in their terms of reference, which says that they shall adopt the population figures of 1971 in all cases where population is regarded as a factor for determination of devolution of taxes and duties and grants-in-aid. The failure to follow the 1971 population figures affects states that have implemented the population policy of the Government of India. For e xample, Keralas decadal growth rate was 0.91% per annum d uring 1991-2001. The current total fertility rate is 1.6, way below the replacement rate. Keralas population share in Indias total population in 1971 was 3.93%, whereas in 2001, it was only 3.18%. Use of the 2001 Census can also adversely affect states such as Tamil Nadu, which have followed family planning policies.

several expert bodies, is far better than the one made by the EFC to drop the clause on the basis of the recommendations of the finance commission of the State altogether. That was a retrograde step because it failed to appreciate the spirit of the clause that envisages an organic link in Indian fiscal federalism.
Appendix A: State-wise Percentage Shares of Central Transfers (Transfers from Central Government + Transfers from EFC/TWFC) to Revenue and Expenditure of PRIs
State Item 2002- 2003- 2004- 2005- 2006- 2007- 03 04 05 06 07 08

1 Andhra Pradesh % to total revenue 2 Assam 3 Bihar 4 Gujarat 5 Haryana 6 Karnataka 7 Kerala 9 Maharashtra 10 Orissa 11 Punjab 12 Rajasthan 13 Tamil Nadu 14 Uttar Pradesh 15 West Bengal All States % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure % to total revenue % to total expenditure

25.5 32.2 30.9 34.9 35.3 41.7 30.5 43.9 41.8 46.8 42.7 51.8 84.2 86.6 88.8 90.5 90.9 89.4 81.3 84.6 87.2 88.5 89.4 87.0 77.6 78.3 40.7 98.5 97.0 90.7 77.6 78.3 40.7 98.5 97.0 90.7 4.5 4.5 4.4 4.4 4.2 4.4 6.0 6.4 5.7 5.9 6.1 6.3

45.2 43.6 33.4 30.1 31.6 22.6 36.7 32.9 32.0 27.2 30.3 21.9 14.7 14.0 11.4 12.6 16.2 13.9 15.6 14.8 12.1 13.3 17.2 14.7 15.9 14.0 14.6 17.5 16.0 16.9 28.6 18.5 19.7 24.4 22.8 24.7 35.3 41.6 68.2 75.8 89.2 89.0 29.7 33.4 35.9 46.7 67.4 65.0 3.1 3.3 3.2 3.4 6.7 6.9 6.7 7.1 9.2 13.1 9.5 13.5

8 Madhya Pradesh % to total revenue

53.3 49.8 57.3 67.4 73.3 71.6 53.3 49.8 57.3 67.4 73.3 71.6 4.0 5.6 1.8 30.1 1.9 35.6 0.0 0.0 5.6 14.0 7.7 14.8

45.2 44.2 63.9 63.1 61.2 44.7 45.2 44.2 63.9 63.1 61.2 44.7 23.0 31.7 37.6 34.9 40.6 39.4 23.0 31.7 37.6 34.9 40.6 39.4 59.5 61.4 56.6 60.9 36.4 30.9 69.0 68.6 62.7 82.1 30.5 32.5 52.5 49.9 50.7 53.8 50.2 50.8 41.3 37.4 40.2 69.8 41.8 47.8 18.5 20.4 23.6 26.7 29.7 30.0 19.5 21.2 24.1 28.8 30.7 31.1

General Observations
The THFC Report says the quality of SFC reports continues to be patchy, but it is silent on where and how they continue to be so. Actually the THFC is only reiterating the sweeping, general comments against SFCs made by the EFC and the TWFC. Presumably the THFC could have contributed substantially had it critically studied the state- and sub-state-level transfer arrangements r ecommended by the SFCs of the past or at least the third generation set and pointed out where exactly each SFC had failed in h onouring its constitutional and historical responsibilities. In that way, it could have contributed more significantly to drawing up a better road map towards what it calls accelerated decentralised governance. However, two significant recommendations of the THFC r equire special mention. One is the template prepared by it with the help of an expert committee to help future SFCs in preparing their reports. Although no SFC with a mind of its own will m echanically follow the template, this is a big step towards streamlining SFC reports in the future. The other is the recommendation to amend Article 280(3)(bb) and (c) of the Constitution so that the words on the basis of the recommendations of the finance commission of the State are changed to after taking into consideration the recommendations of the finance commission of the State. This recommendation, already approved by
Economic & Political Weekly EPW november 27, 2010 vol xlv no 48

For Bihar, Orissa, Rajasthan and Tamil Nadu, the given data on revenue and expenditure are the same.

Appendix B: State-wise Distribution of PRIs (all tiers) Expenditure as Percentage of GSDP

State 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Andhra Pradesh Assam Bihar Gujarat Haryana Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal

0.62 1.45 0.21 3.01 0.37 3.46 0.95 0.39 2.54 1.69 0.34 0.25 1.15 0.60 0.62

0.56 2.40 0.21 2.62 0.36 3.56 1.47 0.30 2.51 1.51 0.34 0.20 1.42 0.75 0.64

0.57 2.45 0.01 2.53 0.37 3.15 1.44 1.42 2.44 1.27 0.39 0.30 1.43 0.77 0.70

0.61 3.46 0.42 2.40 0.64 3.90 1.43 1.78 2.38 1.30 0.40 0.30 1.25 0.80 0.67

0.56 4.53 0.34 2.43 0.54 4.05 1.33 2.95 2.27 1.87 0.69 0.24 1.23 0.83 0.94

0.63 2.81 0.31 2.15 0.62 4.34 1.24 3.59 2.14 1.51 0.15 0.19 1.41 0.71 1.09

GSDP data taken from Central Statistical Organisation (CSO) 1999-2000 series at current prices.

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THIRTEENTH FINANCE COMMISSION

The THFC rightly points out that parallel agencies and bodies are emasculating them (local governments) both financially and operationally. Having constitutionally assigned a certain functional domain to local governments, which include planning for economic development and social justice and preparing a draft district development plan, it is for the union and state governments to help this process of decentralised planning and governance with funds, functionaries and technical support. Instead of that what we have witnessed during the last 15 years is a manifold growth of parallel agencies that transgress the functional domain entrusted to local governments and distort their role in the federal structure of India. A classic case is the Member of Parliament Local Area Development Scheme and the Member of Legislative Assembly Local Area Development Scheme. No one, including the Supreme Court of India, which endorsed these activities in a recent judgment, seems to have comprehended the distortions that can take place if all the three million local g overnment representatives ask for local area development shares (which would be more legitimate than the claims of MPs and MLA s). This dangerous temptation to follow higher-level counterparts is already under way in several ULBs of the country. Effective coordination and service delivery in areas such as drinking water, sanitation, solid waste management, slum development, housing, and the like are rendered difficult because of multiple agencies. Ultimately, local democracy suffers grievously.

To conclude, the THFC vis--vis the third tier, despite several sins of commission and omission, seems to have walked somewhat differently from its predecessors. The website data leads to some interesting inferences. The shares of local government e xpenditure in total public expenditure and in GDP have i ncreased, while their shares in total public-sector OSR and GDP have disturbingly declined. This story is more revealing when we examine state-wise PRI per capita expenditure and per capita tax. Future UFCs may have to address the issue of fiscal illusion in financing local services. That local governments are recognised as entities entitled to a share in the union tax pool is something to rejoice about. However, it is somewhat untenable that the THFC has not chosen to treat its grants to local governments as a dditionalities to augment the consolidated fund of a state to supplement the resources of panchayats and municipalities. The criteria chosen for inter se distribution of local grants also leave many things to be desired. The third tier has to be made an integral component of Indias federal public finance and UFCs of the future cannot afford to shirk that responsibility any more.
Notes
1 Because the term central transfers is not defined, there can be serious omissions. This definitely includes all direct transfers to local governments by the central government and may not include all central-sponsored schemes by different ministries. Even so, the data are good enough to highlight the poor autonomous space. 2 This is based on the figures reported in Chapter 10 of the Report of the THFC (2010-15).

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november 27, 2010 vol xlv no 48 EPW Economic & Political Weekly