Grants to the Rural Local Bodies

In News 

• Centre has released over 2,221 crore rupees to Bihar, Karnataka, and West Bengal for providing grants to the Rural Local Bodies.
  • This Grant-in-aid is the 2nd instalment of Tied grants to the State of Bihar and Untied grant to the States of Karnataka and West Bengal of the year 2021-22.

What Is a Grant?

• It is a financial award given by a federal, state, or local government authority for a beneficial project. 
• It is effectively a transfer payment. A grant does not include technical assistance or other financial assistance, such as a loan or loan guarantee, an interest rate subsidy, direct appropriation, or revenue sharing.
•  The grantee is not expected to repay the money but is expected to use the funds from the grant for their stated purpose, which typically serves some larger good.

Types of Grants

• The constitution of India provides for mainly two types of grants-in-aid viz. statutory grants and discretionary grants.
• Statutory grants:
  • Article 275 of the Constitution makes provisions for statutory grants to needy states.
    • It provides for the payment of such sums as Parliament may by law provide as grants-in-aid to States.
      • These are charged on the Consolidated Fund of India.
      •  Such grants also include specific grants for promoting the welfare of the scheduled tribes in a state or for raising the level of administration of the scheduled areas in a state. 

• Discretionary grants:
  • Article 282 enables the Union (as well as the states) to make discretionary grants, even beyond their respective legislative competences, for any ‘public purpose’.

About the Finance Commission

• It is constituted by the President under article 280 of the Constitution, mainly to give its recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves. 
• Two distinctive features of the Commission’s work involve redressing the vertical imbalances between the taxation powers and expenditure responsibilities of the centre and the States respectively and equalisation of all public services across the States.
• The First Finance Commission was constituted under the chairmanship of Shri K.C. Neogy on 6th April, 1952.  
  • Fifteenth Finance Commissions have been Constituted so far at intervals of every five years
• Functions: 
  • It is the duty of the Commission to make recommendations to the President as to—  
    • The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds.
    • The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
    • The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State.
    • The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
    • Any other matter referred to the Commission by the President in the interests of sound finance.

Fifteenth Finance Commission

• The Fifteenth Finance Commission was constituted in November 2017.
• Purpose: 
  • The Terms of Reference of the current Commission have some distinctive features, including recommending monitorable performance criteria for important national flagship programmes and examining the possibility of setting up a permanent non lapsable funding for India’s defence needs.
  • FC-XV was additionally tasked with reviewing the design of fiscal principles for various grants that are typically provided alongside revenue shares.
    •  It was also asked to consider performance-based incentives to support and motivate the efforts of State and/or local governments.
      • Another unique mandate given to it included recommending funding mechanisms for defence and  internal security.

Recommendation of FC-XV

• Vertical Transfer:
  • The constitution has assigned higher and more buoyant taxation and resource raising powers to the Union Government whereas higher responsibilities for incurring expenditure have been assigned to the States.
    • This imbalance between revenues and expenditure responsibilities forms the basis of a fair vertical devolution.
  • The Commission has recommended that 41 per cent of the net proceeds of Union  taxes should be shared with the States as against the present 42%. 
    • The Commission  felt that financial resources equivalent to 1% of the net proceeds of Union taxes should be retained with the Central Government for financing the requirements of the  newly formed Union Territories of Jammu & Kashmir and Ladakh.

• Horizontal distribution:
  • Horizontal devolution of taxes is mainly driven by considerations of need, equity and performance.
  • FC-XV has given the criterion for horizontal distribution of taxes which is shown in the table.
    • Population, area and forest ecology represents the need-based principle, while income distance criterion represents an equity-based principle.
    • Tax and fiscal efforts and demographic performance have been used as a performance criterion.

• Grants-in-aid:
  • The Commission has recommended Grants-in-aid of revenues of States for revenue  deficit, local bodies, disaster management, sector-specific and certain state specific  under Art 275 of the Constitution. 

Image Courtesy:FM

• Tied and Untied grants :
  • 15th Finance Commission(FC-XV) recommended Tied grants are released to Rural Local Bodies (RLBs) on the recommendations of the Department of Drinking Water & Sanitation for making improvements on two critical services namely 
    • Sanitation and maintenance of open-defecation free (ODF) status
    • Supply of drinking water, rain water harvesting and water recycling. 
  • Untied grants are released to Rural Local Bodies(RLBs) on the recommendations of the Ministry of Panchayati Raj after satisfying the conditions stipulated by the 15th Finance Commission (FC-XV).
    • Out of the total Grant-in-aid earmarked for Panchayati Raj institutions, 60 percent is earmarked for national priorities like drinking water supply, rainwater harvesting and sanitation (referred as tied grants), while 40 percent is untied and is to be utilised at the discretion of the Panchayati Raj institutions for location specific felt needs.
    • To receive both tied and untied grants, it is mandatory to prepare and make available online, in the public domain by at least 25 percent of the local bodies, both provisional accounts of the previous year and the audited accounts of the year before previous year.  
• Other Sector-specific and State-specific Grants
  • The Commission has also recommended performance-based grants and incentives for sectors like health, education, agriculture, PMGSY roads, judiciary, statistics and aspirational districts and blocks.

Source:AIR