Notes

Polity Feb 2025 DUMP (TODO - MOVE)

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16th Finance Commission

  • constituted by PRe every 5 years Art 280
    • term: specified by prez
    • reappointment: YES
  • Composition: chairman + 4 members
  • report submitted to president
  • recommendations advisory

What all covered?

  • vertical devolution of net union tax proceeds (divisible pool)
  • horizontal interstate distribution
  • grant in aid
  • local bodies funds
  • any other financial matter referred by the President

Resource sharing

3 main channels to flow money from union to states

  1. Divisible Pool
    • Art 270(1): union tax revenue excl. cess, surcharge, UT tax, cost of collection are to be shared with states based on FC recc
  2. Grant in aid Article 275(1)
  3. Discretionary Grants Art 282 (mainly thru centrally sponsored schemes)

Limitations of FC

  • data gap (old data, unreliable, incomplete, outdated, inconsistent)
  • political pressure to align with government vision
  • GST Council overlap (tax decisions by GST council affect FC divisible pool)
  • question of centralization & federalism
  • limited control over third tier of government
  • non binding

Recommendation of 16th Finance Commission

for the 5 year period b/w 2026-31

Key Recommendations

  • 41% vertical devolution (same as earlier)
  • changed criteria for horizontal devolution
    • income distance (based on per capita GSDP)
    • population 2011 census
    • demograpic prformance (population growth from 1971 to 2011)
      • replaced TFR metric of 15th FC
    • Forest: total forest + increase in 2015-23
    • contribution to GDP
      • replacing “tax efforts”

Grant in Aid

  • only 2 grant in aid suggested:
    • Rural/urban local body grants
    • disaster management grants
  • total grant 9.47 Lakh Crore
  • other grants discontinued: revenue deficit, sector specific, state specific

Local Body Grants

  • 45% grant (earlier 36%) for urban local body
  • 50% grant tied to sanitation, waste management, water mgmt
  • Special ULB grants for wastewater management infrastructure
  • Urbanization Premium: one time grant for merging peri urban villages and formulating rural to urban transition policy

Disaster Management Grants

  • corpus: 2 lakh crore for SDRF & SDMF
  • cost sharing: 90:10 for NE/Himalayan; 75:25 otherwise
  • New disasters: heatwave, lightning recommended
  • NDMIS to be upgraded

Four reforms for sound public finance

  • prudent fiscal management
    • center: reduce fiscal deficit to 3.5% of GDP by 2030-31
    • states: cap fiscal deficit at 3% of GSDP
  • power sector: actively privatize electricity DISCOMS
  • Subsidy rationalization
    • retain only those schemes which effectively target the poor
  • PSE reforms
    • review & close 308 inactive state PSE
    • formulate state level disinvestment policy

Urbanization in India

Issues with Indian Urbanization

  • Urban Paradox: Economic Survey 2026 - population scale has not resulted in proportional global economic influence or libeability because infra investment has lagged behind growth
    • potential benefits of density are diluted by congestion, economic stress, informalization
  • expansion of existing cities into nearby towns causing divergence with official policy understanding
  • poor urban mobility, focusing on vehicles over people
  • poor waste and cleanliness standards
  • artificial land scarcity due to low floor space index (FSI) norms
  • informality in indian cities - slums, informal labour, unregistered enterprises
  • fragmentede governangce
  • weak mayoral authority
  • ULB financially dependent on state

Measures to improve urbanization

  • infra led growth
  • improve mobility, public transportation
    • eg. Namo Bharat RRTS
  • integration of informality: design public spaces to incorporate the informal economy eg. streets designed to have space for formal vending
  • establish unified authority for metropolitan governance
  • unconditional transfer of funds, functions and functionaries (3F) as per 74th Amendment
  • implement self updating property taxes, user charges, and access capital market (municipal bonds) for fiscal autonomy
  • create specialized municipal cadres
  • urban design should act as behavioural instrument - legible streets with clear marking, signage, segregated lanes etc to reduce ambiguity
    • citizens are more willing to comply when they see tangible returns on their taxes through improved services
  • Nature based solutions eg. mandate rainwater harvesting

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