The 15th Finance Commission (FC) Report for 2021-26 recognises urbanisation as an important engine of national economic growth and poverty reduction and emphasises the need for meeting the future challenges of spatial urban expansion into the metropolitan peripheries and in planned new cities. But it is also riddled with serious shortcomings that need to be highlighted.
Of Rs 4,36,361 crore grants recommended for local governments (LBs), Rs 8,000 crore are performance based incubation grants for 8 new cities and Rs 450 crore are for the establishment of municipal shared services centres. In view of the current pandemic, FC has provided Rs 70,051 crore to LBs to strengthen their primary healthcare system. The remaining Rs 3,57,860 crore are to be distributed amongst states using 2011 population and area weightage points. The direct grant recommended for ULBs of Rs 1,21,055 crore is 39% more than the corresponding Rs 87,144 crore provided by the 14th FC. It also works out to be a little higher at 1.17% of the divisible pool than 0.93% allocated by the 14th FC.
Following a city size based differentiated approach, setting up a Metropolitan Challenge Fund (MCF) with Rs 38,196 crore is recommended for category-I 50 million-plus cities (excluding Chandigarh, Delhi and Srinagar). About 32% of MCF is tied for achieving ambient air quality and about 68% is earmarked for meeting service level benchmarks on drinking water supply, rainwater harvesting and water recycling, solid waste management and sanitation.
Rs 82,859 crore are provided for category-II other than million-plus cities, with 40% being untied for locally identified priorities and 60% tied to achieving the national priority goals on drinking water, rainwater harvesting, solid waste management and sanitation. The 62 cantonment boards enumerated in 2011 also qualify to get grants from the category-II cities’ allocation with the same conditions.
The 15th FC has taken several progressive first steps to support the nature of urbanisation taking place in the country: (i) Annually increasing urban share in the total allocations for LBs from 67.5:32.5 in 2020-21 to 65:35 in 2025-26; (ii) while recognising the significance of agglomeration economies of large metropolises following an urban agglomeration centric approach; (iii) distributing each state’s portion of grants for ULBs between million-plus and other cities based on their population and designing different packages of grants for these cities; and (iv) supporting the role of ULBs in combatting health emergency with the provision of additional resources for upgrading their primary health infrastructure and capacity.
On the shortcomings, first the 15th FC’s recommendations using the national average rural-urban population ratio for all states irrespective of their level of urbanisation could lead to a situation where ULBs in more urbanised states will get less and those in less urbanised states will get more funds. For instance, per capita allocation of funds for ULBs in Maharashtra with 45.22 % urban population will be Rs 2,285 and for UP with 22.27% urban population will be Rs 4,367 compared to Rs 2,443 and Rs 2,305 for the 14th FC period respectively. It is not certain if it was an omission or intentional and what purpose it was to serve. Anyhow, such stark disparity is unjust and needs correction.
Second, while similar entry level conditions have been imposed on ULBs since the 13th FC, about 73% of the direct grants being tied for all ULBs and 100% for million-plus cities is a massive increase from 20% tied urban grants recommended by the 14th FC. The effectiveness of such high proportion of conditional grants in improving urban management and service delivery is questionable as it is likely to undermine local government authority and autonomy to prioritise expenditure based on city level needs.
It may turn ULBs into implementing agencies in comparative competition with each other. It will starve ULBs of the funds available to them through the central allocations, which will impact the quality of services provided to urban citizens, particularly the poor and vulnerable. Weaker ULBs may lose out more on the central grant that will further impact their revenue generation capacity adversely. Hence, incrementally increasing the proportion of tied grants over 10-15 years will be a more viable approach.
Third, regarding tied grants relating to water supply and sewerage, why penalise ULBs by cutting down their funding in cities where this service is being provided by a state department or parastatal agency? Fourth, category-II cities stand to gain in case of non-performance of category-I metropolises as 50% of undisbursed MCF amount is to be given to category-II performing cities. In addition, 8 category-I cities with better AQ can use the entire amount for achieving service level benchmarks and the unutilised amount will also be distributed to category-II cities in proportion of their population by the respective state governments.
Fifth, making one ULB the nodal agency for disbursement of the MCF in category-I urban agglomerations is not a feasible paradigm shift in metropolitan governance keeping in mind the prevailing highly complex and fragmented institutional arrangement. Sixth, no provision has been made for compensating ULBs for the loss of revenues due to several taxes subsumed in GST. The assumption that improved collection from property tax and service charge on water supply and sanitation will adequately compensate is debatable.
With due appreciation of the noble intent of the 15th FC to promote urban management reforms through performance-linked tied central grants that was possible within its mandate and the ambit of the existing constitutional and legislative stipulations pertaining to ULBs, is it possible to immediately address the flaws in its urban recommendations?
Views expressed above are the author’s own.
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