Memorandum submitted to Hon. Dr. Arvind Panagariya,Chairman of the 16th Finance Commission of India.

Dr. Vijay Kalantri – President, All India Association of Industries (AIAI) and Chairman MVIRDC World Trade Centre Mumbai submitted its suggestion/Recommendations for 16th Finance Commission on behalf of the All India Association of Industries (AIAI) to Hon. Dr. Arvind Panagariya, Chairman of the 16th Finance Commission of India, New Delhi at the Sahyadri Guest House, Mumbai on Thursday, May 08, 2025 at the 16th Finance Commission meeting with Trade and Industry Association.

Recommendations for 16th Finance Commission

The vision of Viksit Bharat can be attained only if all the state governments have enough resources for implementing economic and social development projects. Also, all the municipalities and Panchayats should be empowered to provide water, sanitation, education and healthcare infrastructure, besides facilitating economic development in their local communities.

Municipal bodies and Panchayats have a major role in improving standard of living, ease of doing business, and enhancing the effectiveness of government’s welfare expenditure and thereby attain overall sustainable development goals.

The 16th Finance Commission has been tasked with recommending distribution of central tax revenue between the central government and states and also among state governments. A healthy centre-state relation is essential for the smooth functioning of the federal structure. All state governments should be provided with enough resources to meet the development needs of various regions, support backward districts and address regional disparities.

It is also important to increase flow of funds to the local bodies such as municipalities and panchayats, while building their capacities for executing development projects.

16th Finance Commission should address following challenges:

• Need for greater involvement of States

Central government should involve with state governments while designing central sector schemes so that these schemes can be tailor made to the actual requirements of individual states

• Capacity Building for states and local bodies

Many a times, municipal bodies are unable to fulfil the conditions for receiving grants. As a result, they are unable to benefit from the grants recommended by the previous Finance Commissions

• Delay in establishing State Finance Commissions

Many states fail to establish State Finance Commissions on time, which hampers realistic assessment of fiscal position of local government bodies.

 In order to facilitate a healthy centre-state relationship, ensure balanced regional development and build capacity of local administration, the 16th Finance Commission may consider the following recommendations:

Increase allocation to states: A large part of the development expenditure is undertaken at the state level. Around 60% of the overall government expenditure is incurred by state governments. But state governments suffer from resource constraints as they have limited avenues to raise tax revenue. Currently, 41% of the central government’s tax revenue (from the divisible pool) is allocated to states.

In order to augment their revenues, the Finance Commission may recommend increase in states’ share to 50% in the divisible pool of the central tax revenue.

Use surcharge and cess revenue for states’ development: Central government has been adding new cess and surcharge in the last several years. These surcharges and cess are not part of the divisible pool of the central tax revenue and hence they are not shared with the states. The share of surcharge and cess in the gross tax revenue has risen from 12.8% in 2011 to 22.8% in 2022-23. While the revenue from surcharge and cess has been growing in recent years, this is not shared with state governments for meeting development expenditure. The Finance Commission may recommend sharing of the surcharge and cess revenue for the development expenses of state governments.

Measures to augment municipal revenue: Municipal bodies need funds for undertaking urban development projects such as stormwater drains, roads, schools, healthcare centres and sanitation infrastructure. Reports suggest that the revenue of municipal governments have not grown beyond 1% of GDP despite increase in the development needs of urban local bodies. The 16th Finance Commission may consider measures to augment the revenue of municipal governments and Panchayats to meet the ever expanding development needs of local administrative bodies.

Augment Own Revenue of Panchayats: Village Panchayats have to rely mostly on central and state governments to meet their development expenditure. These Panchayats generate hardly 1.1% of their total revenue by themselves through land revenue, taxes, fees and other levies, while another 3.3% of income is generated from non-tax avenues such as interest earnings. Other than this, these Panchayats have to depend on central and state government funds to meet their administrative and development expenditure.

Around 95% of the revenues of Panchayats is in the form of grants from the central and their respective state governments, which restricts their ability to spend according to their discretion.

The 16th Finance Commission may make recommendations to augment the revenue of these Panchayats so that they can meet their development expenditure.

Establish State Finance Commissions: The 16th Finance Commission may recommend all states to mandatorily establish State Finance Commissions to decide the optimal distribution of funds between state governments and their municipalities and panchayats. Despite making this recommendation in the past, many state governments have not established State Finance Commissions. According to reports, hardly 15 states have established 6th State Finance Commission and many have not even surpassed more than four SFCs. Therefore, the 16th Finance Commission should recommend all states to establish Finance Commissions regularly to decide on the optimal distribution of fiscal resources between states and local government bodies.

Capacity Building of Municipal bodies: India needs to empower local administration such as municipal bodies by devolving adequate powers, responsibilities and finances so that they can prepare their development plans and execute them according to their local needs. Many local government bodies are unable to fulfil basic performance criteria such as release of audited financial statements, which are pre-requisites for receiving central government grants.

There is a need to introduce capacity building programs for municipal governments to adopt professional accounting practices and digitise their accounts to promote transparency and accountability. A transparent accounting system will also help municipal governments raise capital from bond market for spending on development projects.

There is a need to introduce a digital platform for disclosing the annual budgets, audited financial statements, status of contractor payments of various municipal bodies. Municipal bodies should also disclose the outlay for various projects in the previous year and the outcome against these outlays to track the impact of expenditure.

Even though the earlier Finance Commissions have recommended grants tied to reforms or performance criteria, for states and local administrations, state governments could not receive some of these grants because of failure to meet some of the reforms or conditionalities.

Many local government bodies are struggling to improve their own revenues and receive performance grants because of their failure to maintain audited accounts and disclose several service-level benchmarks as mandated by the 14th Finance Commission. This Commission recommended release of 20% of its allocations to local government bodies subject to their fulfilment of performance criteria such as audited accounts.

According to reports, state governments failed to receive around Rs 65,000 crore of the central government grants because of their inability to meet relevant conditionalities or performance benchmarks. Some of the central government grants were tied to conditionalities such as holding regular elections at the local administration level, conducting audit of accounts and measures to increase own revenues of local government bodies.

Commenting on the prospects of a comprehensive free trade agreement between India and Australia, she said, “Since the implementation of ECTA, bilateral trade has witnessed remarkable progress. There is great enthusiasm within the business communities of both countries regarding the strengthening of India-Australia relations. India and Australia are natural allies with strong complementarities. A comprehensive free trade agreement is a vital tool to fully harness these complementarities, and it remains one of our key priorities.” She also emphasized that the ECTA is only the second such agreement India has signed with a developed country in decades, underlining its strategic significance.

Grant for Reviving State Finance Corporations: The 16th Finance Commission may recommend grant for reviving State Finance Corporations to promote flow of credit to MSME sector. India should revive state finance corporations to promote long term capital for MSMEs and also for large industries. State and central governments may provide equity capital and debt funding to revive defunct state finance corporations to cater to the growing credit needs of small scale sector.

In recent years, many state finance corporations have scaled back their operations because of financial challenges which needs to be addressed on priority basis

Increase allocation and Ensure fund utilisation at municipal bodies: The previous Finance Commission recommended allocation of 4.15% of the divisible tax revenue pool to local governments, of which 35% was earmarked for municipal bodies. The 16th Finance Commission may increase this allocation to 5.0% and it should also recommend full utilisation of the allocated fund.

The 16th Finance Commission may recommend state governments to handhold municipal bodies on timely execution of projects and full utilisation of allocated funds. Many a times, municipal bodies are unable to utilise the allocated funds fully because of inadequate execution capability.

Municipal governments need guidance and capacity building in effective planning and execution of urban infrastructure projects, right from conceptualising, preparing blueprint, tendering, selecting contractors and completing the projects on time.

We are confident that these suggestions will improve the capacity of municipal bodies and Panchayats to execute public projects and ensure effective implementation of welfare schemes for the benefit of citizens.

India aims to become a Developed Nation by attaining USD 40 trillion economy by 2047. This mammoth vision requires overall development in terms of social inclusion, improving human resource development and enhancing infrastructure. India’s overall progress depends on efficient functioning of local governments. Local administration plays an important role in ensuring education and quality healthcare service to all the citizens. They are also important in enhancing quality of life in cities, towns and villages by implementing basic infrastructure projects such as water supply, sanitation and waste management.

Cities can also play an essential role in catalyzing economic growth by establishing support infrastructure such as roads, bridges, power supply, logistics infrastructure and housing facilities for workers.