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Finance Commission UPSC NOTE


  • Despite the efforts of five commissions since the 11th Finance Commission, financial devolution to cities remain inadequate. 

  • The fiscal health of municipalities is poor, affecting both city productivity and quality of life. 

  • Rapid urbanisation without appropriate fiscal action has adverse effects on development. 

How do other countries devolve funds to their local governments?

  • Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs) in India are about 0.5% of GDP, much lower than the 2-5% typical of other developing nations. 

  • For instance, South Africa allocates 2.6%, Mexico 1.6%, the Philippines 2.5%, and Brazil 5.1% of their GDPs to their cities. 

  • Although IGTs make up about 40% of ULBs’ total revenue, issues persist regarding their predictability, earmarking for vulnerable groups, and horizontal equity

  • IGTs are crucial for ULBs, given their financial state and the need for stable support until their own revenues improve.

Why is the Census significant? 

  • In the absence of the 2021 Census, reliance on 2011 data is inadequate for evidence-based fiscal devolution. 

  • India has approximately 4,000 statutory towns and an equal number of Census towns, with an estimated 23,000 villages, all of which are effectively urban. 

  • These figures must be captured by the 16th FC, including the significant migration to Tier-2 and 3 cities.

  • Thus, the 15th FC’s nine guiding principles require a revisit. 

  • The 16th FC must consider India’s urbanisation dynamism and ensure IGTs to urban areas are at least doubled.



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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Finance Commission UPSC NOTE
Finance Commission UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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