Context:

The 16th Finance Commission (FC) has started its work, tasked with a critical mission to determine the devolution of resources from the central government's consolidated fund.

Key Highlights: 

• According to the Article 280 of the Indian Constitution, the 16th Finance Commission (FC) has begun its work with a primary focus on devolving the consolidated fund.
• Since the 73rd and 74th constitutional amendments, local bodies have gained substantial recognition in the federal system. 
• Articles 280(3) (bb) and (c) sub-clauses of the Constitution specifically emphasize the need for measures to strengthen state consolidated funds, thereby enhancing the financial capacity of local bodies.     

Finance Commission 

• Established under Article 280 of the Constitution.
• Its main role is to recommend fair distribution of tax revenue between the central and state govt and among the states.

Major Concerns:

Urban challenge

• Cities, recognized as engines of national growth, face significant economic challenges despite their immense contribution. 
• They generate an estimated 66% of India's GDP and 90% of government revenues. 
• However, their ability to meet the demands of a growing population is hampered by insufficient financial resources. The World Bank estimates a requirement of $840 billion for basic urban infrastructure in the next decade. 
• However, financial devolution to cities remains inadequate, affecting municipal fiscal health, city productivity, and overall quality of life.
• Financial devolution to Urban Local Bodies (ULBs) in India is limited to about 0.5% of GDP, significantly lower than other developing nations like South Africa, Mexico, the Philippines, and Brazil. 

Issues with Intergovernmental Transfers:

• Issues persist regarding the predictability of Intergovernmental Transfers (IGTs), earmarking for vulnerable groups, and horizontal equity, despite IGTs constituting about 40% of ULBs’ total revenue. 
• The introduction of the Goods and Service Tax (GST) has further reduced ULBs’ tax revenue, underscoring the need to increase IGTs as a percentage of GDP to support ULBs, as envisioned by the 74th constitutional amendment.

Impact of Parallel Agencies and Census Data

• The 13th Finance Commission highlighted the disruptive impact of parallel agencies on the financial and operational autonomy of local governments. 
• Furthermore, the continued reliance on 2011 census data poses challenges for evidence-based planning, particularly considering the significant population shift towards Tier-2 and 3 cities.

Recommendations  for the 16th Finance Commission

• Strengthen Property Tax and Accountability: The 16th FC should review its guiding principles to strengthen property tax collection alongside State GST and enhance accountability in fund management. 
• Resource Allocation for Crucial Services: The Commission should allocate resources for pollution control and prioritize critical services such as primary healthcare, solid waste management, and drinking water facilities.