Why local bodies are financially starved?

The US Supreme Court Justice Louis Brandeis is often attributed for coining the phrase “race to the bottom” in  Louis K Liggett Co. v. Lee (1933). Brandeis termed the race between the States for watering down rules and regulations to entice industry in their jurisdictions as “one not of diligence but of laxity”. But there is also a race towards the bottom between several Indian States today.

What are the issues?

• This race is to create a mockery of the 73rd and 74th amendments of the Indian Constitution. Next year, India will celebrate the 30th anniversary of the enactment of the these constitutional amendments, cornerstones of decentralisation in India. A lot remains to be done to have truly decentralised local bodies in the country.
• Decentralisation is supposed to stimulate intergovernmental competition for producing maximum social utility. However, the current intergovernmental competition in India is akin to watering down the very basic tenets of decentralisation. Unfortunately, nothing much has changed in the last 30 years.
• Elections in PRIs (Panchayati Raj Institutions) are still irregular. Recently, several states conducted local bodies elections just because the Union Finance Commission recommended grants only for the “duly constituted local governments”.
• There is still prolonged suppression. In many states, there has been no local body for a prolonged period of time.
• There is still inadequate devolution of powers; and
• There is a lack of financial resources. The only respite is that there has been a representation of weaker sections like Scheduled Castes, Scheduled Tribes and women in PRIs. But there is also the perennial problem of Rule by Proxy.

Problem of finance –

• Both rural local bodies (RLBs) and urban local bodies (ULBs) across the country are under financial stress. RLBs are exclusively dependent on grants from State Finance Commissions (SFCs) or Union Finance Commission (UFC) and are rarely able to generate their own revenue.
• It is the responsibility of SFCs to not only devolve resources between the State and the local body but also recommend measures for local bodies to raise their own tax and non-tax revenues. But SFCs in some states are either defunct, or nobody pays any heed to SFCs’ reports.

Issues with State Finance Commission –

• States do not constitute SFCs. Article 243I of the Constitution warrants States to constitute SFCs to review the financial position of RLBs and ULBs and make suggestions to the Governor about: (i) distribution of taxes between State and LBs, (ii) determination of taxes, duties, etc., which may be assigned to or appropriated by LBs, and (iii) grants in aid to LBs by the State.
• As per constitutional provisions, States should have constituted their first SFC by April 1, 1994, and subsequent FCs after expiration of every five years. Simple mathematics would tell us that by 2022, most States should have constituted at least their 5th FC. However, some States have not even constituted their third and fourth SFCs.
• Several states simply do not adhere to the Constitution unless there is a nudge from courts. Kerala’s Finance Minister is correct when he says, “Devolution of resources to States is not a charity but a Constitutional obligation”. But the devolution of resources to local bodies is also not charity but a Constitutional obligation of state governments.
• SFCs work under resource constraints. SFCs are non-permanent bodies. Six to seven months are spent hunting for office space. Later, this is cited as one of the reasons for seeking an extension for submitting the report. 
• The SFCs are not presented with accurate and updated data on the finances of the local bodies. In the absence of data, in a significant number of cases, recommendations by SFCs tend to be the ad-hoc opinion of the chairperson of the SFC, which is not grounded in data. No rigorous fiscal analysis is possible without disaggregated fiscal data for the PRIs and ULBs.
• Once the SFC submits its report, States are constitutionally bound to lay the explanatory memorandum as to the action taken report before the state legislature (Article 243I (4)). There are numerous instances where states have either simply failed in placing ATR before the legislature or taken several years to do so. 
• Unlike the Union Finance Commission, where the Union Government accepts nearly all recommendations, there are instances of States rejecting even basic requests. They are well within their rights to do so. However, once the recommendations are accepted, the States simply fail to implement them. 

Way forward –

Finances at the Union level are always under the democratic gaze. However, some states contravene the Constitutional provisions repeatedly without any repercussions. States should devolve more powers and resources to local bodies. Intergovernmental competition should not just be confined to the race to the bottom but the other way around.

Source – The Hindu Business Line

QUESTION – Local bodies are marred with several problems but the root cause of many of these problems is finance or the lack of it. Comment.