The Central Finance Commission is a constitutionally mandated commission that has the key function of recommending how financial resources will be shared between the central governments and state governments, and between individual state governments. It is constituted every five years, generally for a two year term, and is also required to make recommendations on strengthening financial resources of panchayats and municipalities (also known as urban local bodies).
The Finance Commission’s terms of reference are drawn up by the central government, but its report is required to be tabled in Parliament.
Generally the Finance Commission submits a single report sometime during Oct-Dec for five financial years, commencing on 1 April of the following financial year. However the XV Finance Commission has submitted a report for FY 2020-21, as it received a year’s extension and is scheduled to now submit its final report in October 2020 for FY 2021-22 to FY 2025-26. The central government has tabled an explanatory memorandum in Parliament on the action taken on these recommendations.
The Finance Commission’s recommendations have over the years not just resulted in significant grants to urban local bodies (ULBs), but have also catalysed far-reaching reforms in respect of financial accountability. The XV Finance Commission has carried forward the tradition, but with its own distinct emphasis in three significant ways:
1) It has increased the total wallet share of local bodies (from 3.5% to 4.3% of resources being divided by the XV FC, referred to as the divisible pool), and within that, the share of urban local bodies (from 30% to 40% by end of XV FC’s period), setting the stage for significantly higher resources for urban local bodies.
2) It has moved away from a one-size-fits-all approach and raised the stakes for larger cities, by increasing their fund allocation but holding them to a higher bar of performance (only tied grants, no untied grants), AND by recognising the metropolitan character (as against municipal character) of these cities
3) Finally by treating audited accounts as an entry criterion, i.e. without which no grants would be awarded to any urban local body, the Commission has sought to take close to two decades of emphasis on financial management reforms to a logical culmination. It has also set an ambitious agenda for integrating accounting systems across levels of government, besides calling for a national online platform for municipal accounts.
Key Highlights of XV Finance Commission recommendations
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For more details on eligibility and allocation of grants to urban local bodies, check this document.