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| Money for the third tier | | It pays off to devolve funds and tasks to local bodies |
| Business Standard / New Delhi Aug 18, 2009, 00:18 IST |
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Most public goods in India are provided by the second and third tiers of government — states and local bodies — but fiscal decentralisation has made slow progress. While states have made some gains through federalism, they have been loath to pass on these gains to local bodies. This is despite the clear evidence that states which decentralise more tend to benefit more than others.
As one of the tasks of the 13th Finance Commission (its recommendations run for five years from next April) is to outline the measures needed to help states garner more resources, which they can then pass on to the local bodies, a study by experts at the development research group of the Reserve Bank of India has come up with some well thought out recommendations which the Finance Commission could chew on. The weakest link in the chain is that a state is to be guided in passing on resources to the local bodies by the recommendations of its own finance commission. Most states have been cavalier about this. State finance commissions are often set up mechanically, many of their recommendations are not accepted, and even those which are accepted ‘in principle’ are implemented without conviction.
To correct this, the RBI group has proposed that the Finance Commission create a template which it can recommend to state governments for setting up their finance commissions. The Finance Commission can set up a pool of experts and make it incumbent on a state to have at least one of them as a member of its finance commission. It can also create a time line for release of a state’s share of central taxes according to the progress the state makes on its own finance commission. All this will encourage the latter to do its job seriously and come up with reports which the Finance Commission can use. As collection of data at the district and sub-district level is critical to determine the extent of backwardness and help needed, incentives can also be created for states to develop data warehouses.
The Finance Commission needs to encourage states to decentralise more by transferring more taxation powers to local bodies because the study has found that states which have decentralised more have been blessed with greater tax buoyancy. States like Kerala, Karnataka, Madhya Pradesh, Maharashtra and Goa have benefited from this virtuous cycle while others like Haryana, Orissa, West Bengal, Rajasthan and Uttar Pradesh score low on both tax buoyancy and decentralisation.
Local bodies need both the resources and the capacity to deliver in areas like water, education and roads. A local body with a strong financial position will be able to access the capital market for additional resources. The study proposes that the Finance Commission create a Rs 6,000 crore fund to provide seed money for projects, which will then be in a better position to access other sources of finance. The study emphasises that not only must states fully pass on the local taxes collected by them to the local bodies, the latter must mandatorily levy land revenue and property taxes for which specific floors should be created.
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