State Finances And Local Finances


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State finances

The constitution (73rd and 74th) Amendment Acts, 1992 and Article 280 (3) (c) have altered the erstwhile fiscal devolution system and framework between the states and local governments. Under the new fiscal devolution system every state government is required to constitute, once in five years, a Finance Commission under articles 243 (I) and entrust it with the task of reviewing the financial position of local government and making recommendations as to the principles that should govern.

  • The distribution between the state and the local governments of the net proceeds of the taxes, duties, tolls and fees leviable by the state.
  • The determination of the taxes, duties, tolls and fees that may be assigned to or appropriated by the local government.
  • The grant-in-aid to local government from the consolidate fund of the state.

A state legislature has a provide by law, for the composition of the SFC, the qualification which shall be requisite for appointment as members thereof, and the manners in which they shall be selected. The existing constitutional provisions also provide that the Commission shall determine their procedure and shall have such powers in the performance of their functions as the legislature of the state. The Governor shall cause every recommendation made by the commission with the explanatory memorandum as to the action taken to be laid before the legislature of the state. In regard to the maintenance of the accounts by the panchayats and their auditing, Article 243-J provides that "the legislature of a state may, be law, make provisions with respect to the maintenance of accounts by Panchyats and the auditing of such account.”

The 74th amendment of the constitution which is addressed to the municipal institutions had added one more mandatory provision. In the form of district planning committees to the domain of Pachayats. However, the crucial is a devolution of functional responsibilities, authority, power and financial resources on the panchayats which have been made discretionary for the state. Therefore, each state usually practice its own scheme of devolution, and in the process, the pattern and degree of devolution on panchayats significantly vary across the states, depending upon the functional canvas of the panchayats. Central Finance Commissions and State Finance Commission in context of local finance issues. Under Article, 280 of the Constitution, Central Finance Commission is constituted to make recommendations on sharing of union tax revenues, revenue deficit grant, grant-in-aid to local bodies, calamity relief and for up-gradation of standards of administration and special problems. Whereas the State Fiancé Commission is to mediate between the state and the local governments under Article 243 1 and 243 Y.


Local finances

Revenues and Taxation

The dissimilar nature of rural and urban governments is apparent from their differing revenue structures: in the former about 89 per cent of revenues are derived from the states, while in the latter about 81 per cent of revenues are internally generated, with local taxation claiming about 55 per cent and nontax revenues about 27 per cent in 1976-77. By 1986-87 the dependence of urban local govern ments on external assistance had increased from 19 per cent to 23 per cent. This was related to the declining share of nontax revenues trend which is likely to continue. On the other hand, substantial reduction of external dependence in the revenue structure of rural governments must await radical restructuring of their tax compe tence, mainly through the assignment of land revenues. Until this happens, rural local government will not develop its own personality, while urban local governments will continue to be marginalised in generally unified Soviet-type fiscal arrangement.

state-wise breakdown of local government revenues indicates that three states (Maharashtra, Gujarat, and West Bengal) account for about two-thirds of rural government revenue, while among urban authorities the situation is more variegated, with only one state (Maharashtra) claiming disproportionate share of 39 per cent . This is mainly due to the importance of octroi in internal revenue (Maharashtra and Uttar Pradesh) and larger external assistance (Maharashtra, Madhya Pradesh, and West Bengal). In Madhya Pradesh the urban authorities claim more external assistance (43 percent) due to their share of compensation for the state entry tax. Maharashtra's dominant reliance on internal revenue for both tax and nontax sources (86 per cent both rural and urban) also is striking. The internal revenue mobilization picture of local authorities is diverse: among rural governments the best performers are Kerala and Uttar Pradesh (61 percent each), followed by Himachal Pradesh (53 percent), while among urban governments the highest ratings belong to Haiyana (99 per cent), Karnataka (95 percent), and Punjab (92 %) The worst states in terms of rural government revenue mobilization are West Bengal and Orissa (3 per cent each), followed by Bihar (8 percent); in urban government the worst state is again Bihar (less than 40 per cent), while others are way above.

Per-capita revenues of the various tiers of rural government and types of urban government show their relative fiscal resilience: the village and area authorities are more effective in rural government, while the municipal corporations and councils are effective in urban government. The town and notified authorities are shade better than the village councils in terms of revenue performance. On an overall basis, there seems to be need to enhance minimum revenues of rural authorities substantially (at least five-fold), while the urban authorities need minimum of half of this level of reve nues. This would imply increased tax devolution to the rural authori ties and increased assistance for the urban authorities. detailed look at the revenue competence of rural authorities shows the need for strengthening their compulsory taxation capabilities through assignment of land revenue and devolution of land cess.


Local functions are usually divided into obligatory and discretionaiy categories, but such distinction is only notional in the absence of any quantitative specifications. Urban authorities are reported to be equally dividing their expenditures on these two categories. Available data on local government expenditures show similar functional coverage by urban and rural authorities, despite their differences in functional competence. Such similarities also appear in expenditures on civic and social services, although their relative importance varies. Rural authorities spend relatively more on social services due to the greater availability of function-specific grants for education, health, and welfare. Urban authorities, being finan cially self-reliant, spend more on community semces like public health and sanitation. With increased financial strain resulting from rising staff salaries, urban authorities are cutting down their expendi ture on social services and concentrating more on community services and on their core or obligatory services to cope with financial strain. Among rural authorities, the village and area-level authorities are more effective in providing local services than those at the district level.

The search for economy and effectiveness in local government expenditures seems to lie in the direction of obtaining "value for money" through (1) cheaper technology, (2) greater productivity, (3) increased competition, and (4) promotion of joint services. In such effoits, local government manpower issues have critical significance which sometimes takes on political overtones. Yet there are isolated success stories from various local e.-.J.horities in this regard, which need to be collected and widely disseminated for replication elsewhere.



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