(Wl-4753)-India’s Municipal Finance System At A Crossroads: A Role For The Sixteenth Finance Commission?

Article 280(3)(c) is an important Constitutional provision that requires the Finance Commissions (FC) to recommend measures for augmenting the Consolidated Fund of the State to supplement the resources of the municipalities. FCs have made use of this provision to recommend grants-in-aid for municipalities to take on functions that far exceed their statutorily defined responsibilities, undertake systemic reforms, and establish protocols for ensuring compliance with the recommendations. This paper explores these features of Article 280(3)(c) and takes a close look at the consequential changes in the finances and finance systems of municipalities. The paper demonstrates that notwithstanding the extensive use of this Article entailing a substantial rise in the grants-in-aid, the size of municipal revenues has stayed at about 1 percent of the GNI; per capita own revenues of municipalities are about 40 percent lower than the average of US$ 54 for lower-middle income countries, and property taxes at 0.14-0.15% of GNI even lower compared to an average of 0.30% for emerging economies. The country’s municipal system stands constrained by a lackadaisical response of States to a range of suggestions for broad-basing the revenue base of municipalities and by overlapping and contestable jurisdictions. The question is: what options does the 16th Finance Commission have for addressing the manifold challenges of municipal finance?