Daily Answer Writing
19 February 2021

 Q) The root of all ills in the local governance of India is their weak financial status. Give a brief account of the sources of the funds that the local government receive. Suggest measures to strengthen the funding of the local governments.

Source: The IE: The Ideas Page: Building from below

GS 2:  issues & challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

Approach Answer:


Introduction: Professor Raja Chelliah once quoted that "Everyone wants decentralisation, but only until his level." This is the condition of the local governance in India. Over the years greater financial power have been given to the states, but the devolution has not been furthered to the local levels.


Sources of funds of Local government:

               1. Central and State schemes: The Panchayats and municipalities implement various schemes of the central and the state governments; such as Swachh Bharat Abhiyan, Pradhan Mantri Awas Yojana etc.

               2. Central Grant under Finance commission: The Union government provides a fixed basic as well as performance based grant according to the recommendations of the finance commission.

               3. State grants under State finance commission: The State governments are constitutionally mandated to supplement the resources local bodies.

               4. Taxation and fees:

                              a. Assigned Revenue: The local bodies are assigned various taxes by the state, such as Professional taxes, surcharge on stamp duty, entertainment tax, motor vehicle tax.

                              b. Own Tax Revenue: Property tax is the main source of income for urban local bodies, which can be up to 30% of total revenue or even more; apart from this local bodies including Panchayats were assigned tax on local markets and Octroi tax too.

                              c. Own Non-Tax revenue : They also acquire monies from municipal fees and charges, such as charge on application of birth certificate etc.

                              d. Borrowings: Mainly urban local bodies are allowed to issue municipal bonds.

               5. Other receipts: It includes Miscellaneous sales, lapsed deposits, fees and fines etc.


Limitations of the above financial resources.

               1. Tied-funds: local authorities have little freedom to use the scheme related funds independently.

               2. Inefficiency in tax collections:  There is a lot of corruption in the tax collection systems of the local bodies.

               3. Removal of Octroi: After GST the capacity of local bodies to raise certain indirect taxes has been hampered.

               4. Weak financial powers: There are glaring inter-state disparities in terms of devolution of functional and financial powers to the ULBs. Some states have not even allowed the municipalities to levy property taxes.

               5. Weak constitutional Mandate: The 74th amendment leaves it to the discretion of state legislatures to devolve finances so that ULBs can fulfil its functions.

               6. Small grants from the state and centre: States as well as the centre's budget for local bodies is insufficient. The finance commission for example keeps only 90,000 Cr/year for 2.5 Lakh Panchayats and local bodies, which comes out to be Rs 4,36,361 crore from the Union government to local governments for 2021-26.


Measures to be taken to strengthen the financial position of local bodies:

               1. To remove Corruption and inefficiencies: Readily accessible and timely audited accounts.

               2. Legislative Improvements: For timely recommendations of State Finance Commissions and suitable actions thereon.

               3. Property tax performance based grants: For the mobilisation of property tax revenues (especially in ULBs).

               4. Increase in the untied central and state grants: The Central and state government need to increase the expenditure in on the local government. The Finance commission must be assigned greater focus in its term of reference.

               5. Assigning more tax items: The local bodies can be assigned more taxes such as entry taxes.

               6. Smart taxation: With the advent of digital technologies, and digital record of properties, smarter ways of avoiding property tax can be deployed.

               7. Lowering the Costs: The private sector can give good governance cost effectively. The transaction costs would also be higher if initial cohesive development plan for the city is not put in place. Post-growth infrastructure development costs are much higher and at times prohibitive.

               8. Active role of civil society can prevent excessive exploitation of resources and reduce the impact negative externalities associated with rapid urbanisation.


Conclusion: The local government is the panacea for improving ease of living and improving the governance. For this it becomes essential that the financial condition of the local bodies be improved. The Economic survey of India 2016-17 dedicated a study to the revenues of the urban local bodies which concluded the importance of increasing Own-revenue by effectively taxing properties. 

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