CHAPTER 1

I N T R O D U C T I O N

BABABABABACKGROUNDCKGROUNDCKGROUNDCKGROUNDCKGROUND

1.1 Kera la has been fo l lowing a unique t ra jec tory of

decentralisation by devolving substantial development funds

to Loca l Se l f Government Ins t i tut ions (LSGIs) for the

preparat ion and implementat ion of loca l ly appropr ia te

development projects and programmes. The People’s Planning

Campaign has attempted to use planning as the entry point to

achieve a high degree of democratic decentralisation, ultimately

moving towards the realization, in letter and spirit, of the

Const i tut ional goal of “genuine inst i tut ions of local se l f

government” as set forth by the 73rd and 74th Amendments.

The Campaign has succeeded to a large extent in setting the

agenda of decentra l i sa t ion and pushing i t s pace . The

decentra l i sa t ion e f for t s o f Kera la have moved f rom the

experimentation phase through a corrective phase into the

institutionalization phase. This is the background against

which the Second State Finance Commission (SFC) has been

set up. Thus the Second SFC has a critical role to play in the

consolidation of the gains of the decentralisation experience

and in laying a firm foundation for its institutionalization.

APPOINTMENT OF STAPPOINTMENT OF STAPPOINTMENT OF STAPPOINTMENT OF STAPPOINTMENT OF STAAAAATE FINANCE COMMISSIONTE FINANCE COMMISSIONTE FINANCE COMMISSIONTE FINANCE COMMISSIONTE FINANCE COMMISSION

1.2 The First State Finance Commission for Kerala as envisaged

in Article 243 –I and 243 -Y of the Constitution of India and

as provided in Section 186 of the Kerala Panchayat Raj Act

1994 and Section 205 of the Kerala Municipality Act 1994

was appointed on 23rd April 1994. The Commission gave its

final report to Government in February 1996. The Second SFC

was appointed by Notification No.33384/SFC.A1/99/Fin on

the 23rd of June 1999, (Annexure 1.1) initially for a period of

one year which was later extended by one more year by

Notification No. 48596/Admn/A1/2000/Fin dated 26-7-2000

(Annexure 1.2).

1.3 As in the case of the First Finance Commission this is also a

three member Commission whose members are:

DrDrDrDrDr. P. P. P. P. Prabhat Prabhat Prabhat Prabhat Prabhat Patnaik,atnaik,atnaik,atnaik,atnaik, Chairperson

Professor, Jawaharlal Nehru University,

New Delhi.

DrDrDrDrDr. K.M. Abraham,. K.M. Abraham,. K.M. Abraham,. K.M. Abraham,. K.M. Abraham, Member

Secretary to Government,

Finance (Resources) Department,

Government of Kerala.

Shri S.M.VShri S.M.VShri S.M.VShri S.M.VShri S.M.Vijayanand,ijayanand,ijayanand,ijayanand,ijayanand, Member

Secretary to Government,

Local Administration Department,

(Now renamed as Local Self Government Dept.),

Government of Kerala.

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TERMS OF REFERENCETERMS OF REFERENCETERMS OF REFERENCETERMS OF REFERENCETERMS OF REFERENCE

1.4 The Terms of Reference of the Commission as given in the

notification are extracted below:

“The Finance Commission shall review the financial positionof the Panchayats and the Municipalities and makerecommendations as to –

(a) The principles which should govern, -

(i) the distribution between the State, Panchayats andMunicipalities of the net proceeds of the taxes,duties, tolls and fees leviable by the State, whichmay be divided between them under Part IX and PartIX-A of the Constitution and the allocation betweenthe Panchayats at all levels and the Municipalities oftheir respective shares of such proceeds;

(ii) the determination of the taxes, duties, tolls and feeswhich may be assigned to or appropriated by, thePanchayats and the Municipalities;

(iii) the grants- in-a id to the Panchayats and theMunicipalities from the Consolidated fund of theState.

(b) The measures needed to improve the financial position ofthe Panchayats and the Municipalities with reference to,-

(i) the scope for local bodies to raise institutional

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finance, and suggest a framework for local self-governments to take recourse to such sources alongwith procedures to be fol lowed and l imits, ifnecessary, to raising such resources;

(ii) need for sharing the cost of maintenance of assetsand inst itut ions transferred to loca l se lf-governments, and evolving criteria for it, with dueregard to the fiscal position of the State Governmentand the local self-governments;

(iii) steps necessary for efficient financial managementwith particular reference to efficiency in resourcemobilization and economy in expenditure;

(iv) settlement of claims and dues of Panchayats andMunicipalities vis-à-vis Government and Governmentalagencies;

(v) Procedures to be followed for smooth flow of fundsto local self-governments and for ensuring properfinancial accountability.”

1.5 Government have gone beyond the Terms of Reference given

to the First SFC, and broadened the scope of the Commission’s

work by expanding the second port ion of the Terms of

Reference dealing with the measures needed to improve the

financial position of LSGIs by clearly stating five specific items.

Thus, the Second SFC, besides suggesting devolution of funds

and their distribution among LSGIs has to go into the question

of financial management including raising of resources, availing

4

of loans, economy in spending and settlement of debts and

dues . Also the Second SFC has been g iven the task of

suggesting procedural refinements to ensure a smooth flow of

funds from Government to local governments and for ensuring

proper financial accountability.

METHODOLOGMETHODOLOGMETHODOLOGMETHODOLOGMETHODOLOGY FOLLOWED BY FOLLOWED BY FOLLOWED BY FOLLOWED BY FOLLOWED BY THE COMMISSIONY THE COMMISSIONY THE COMMISSIONY THE COMMISSIONY THE COMMISSION

1.6 The Commission has followed a methodology appropriate to

the comprehensive task entrusted to it as per the Terms of

Reference. Some of the salient features of the methodology

adopted by the Commission are outlined below:

(1) The Commission directly studied the functioning of eachof the five types of local government with specialreference to financial matters viz., Village Panchayat,Block Panchayat, District Panchayat, Municipality andCorporation by visiting one representative of each type.(Annexure 1.3)

(2) The Commission held consultations with representativesof local government associations viz., PanchayatAssociation, Block Panchayat Association and theMunicipal Chairmen’s Chamber. These consultationsbrought to the fore various issues relating to thefinances of these local governments as recognized andfelt by the elected representatives. (Annexure 1.4)

(3) Detailed discussions were held with the Secretaries andHeads of Department involved in decentralisation.(Annexure 1.5).

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(4) The Commission had a special meeting with the FinanceMinister and the Finance Secretary.

(5) There was an exchange of views with the State PlanningBoard with particular focus on decentralised planpreparation and implementation.

(6) The Commission conducted a detailed analysis of theReport of the First Finance Commission and the follow-up action on it and Annexure IV of the State Budgetssince the year 1996-97.

(7) The services of one Consultant each were utilized bythe Commiss ion in respect of Panchayats andMunicipalities.

(8) The Commission has entrusted the Institute of PublicAuditors of India (IPAI) with the task of doing athorough study of the budgeting, accounting and auditsystems in both the rural and urban local governmentsso that these can be simplified and modernised. TheIPAI is expected to produce detailed manuals onbudgeting, accounting and auditing, incorporating thebest practices from within and outside the country.

(9) The Commiss ion has co l lected data from loca lgovernments through a detailed questionnaire. Thesequestionnaires which were in two parts for the UrbanLocal Bodies (ULBs) and Village Panchayats and in onepart for the other local governments were filled up andreturned by all the local governments except 14 Village

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Panchayats which could not fill up the first part of thequestionnaire relating to own income and non plangrants.

SUBMISSION OF THE REPORSUBMISSION OF THE REPORSUBMISSION OF THE REPORSUBMISSION OF THE REPORSUBMISSION OF THE REPORTTTTT

1.7 The Commission intends to submit its Report in two parts.

This Report deals with the first part of the Terms of Reference

relating to devolution and a portion of the second part of the

Terms of Reference dealing with maintenance needs and the

funds required for meeting them and with procedures related

to the flow of funds. The second part of the Report which is

expected to be submitted in May 2001 would deal with the

remaining items of the Terms of Reference. It would also give

further suggestions for increasing local resource mobilization

which would be generated after close interaction with the

newly e lec ted LSGIs whose tenure these Reports would

basically cover.

STRUCTURE OF THE FIRST REPORSTRUCTURE OF THE FIRST REPORSTRUCTURE OF THE FIRST REPORSTRUCTURE OF THE FIRST REPORSTRUCTURE OF THE FIRST REPORTTTTT

1.8 The First Report is structured in eight Sections with twelve

Chapters and a summary of the recommendations. The first

Section has an introductory Chapter on the constitution of

the Second Finance Commission, its Terms of Reference and

the Methodology adopted by it and the second Chapter outlines

the approach of the Commiss ion to the major Terms of

Reference. The second Section has two descriptive Chapters –

one giving an overview of local government finances and other

summarizing the decentralisation process in Kerala. Section

III has just one Chapter analyzing the recommendations of

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the Fi r s t SFC, wi th re ference to the i r present s ta tus of

operationalisation. Those recommendations, which need to be

followed up further are identified in this Chapter. Section IV

deals with devolution of funds from the State Government to

the LSGIs. This theme is presented in three Chapters – one

dealing with devolution of Plan funds, the next dealing with

devolution of funds exclusively for maintenance and the last

one in the Section dealing with devolution of General Purpose

Grant in lieu of the existing Assigned and Shared Taxes and

Non-plan grants-in-aid. The fifth Section has the Chapter on

enhancing the own revenues of LSGIs.

1.9 Section VI has a Chapter on State Government Finances and

another Chapter giving the observations of this Commission

on certain issues raised by the 11th Finance Commission.

Section VII consists of the Chapter outlining the Procedural

Safeguards, including legislative changes, which are required

for a proper implementation of the recommendations of this

Commiss ion. And the l a s t Sect ion summarizes the

recommendations.

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CHAPTER 2

OUR APPROACH

FINANCIAL DEVFINANCIAL DEVFINANCIAL DEVFINANCIAL DEVFINANCIAL DEVOLOLOLOLOLUTIONUTIONUTIONUTIONUTION

2.1 The Sta te Finance Commiss ion i s concerned with thedevolution of funds from the state government to the LSGIsin its entirety, and not merely with one particular part of thetotal devolut ion. There has unfortunately been a generaltendency to t rea t the jur i sd ic t ion of the Sta te FinanceCommission as being confined to the devolution of non-planfunds, the matter of Plan funds being considered a prerogativeof the s ta te government . Even the Fi s t Sta te FinanceCommiss ion of Kera la had only a few recommendat ionsconcerning the Plan, and did not go into the question ofdevolution of Plan funds. This tendency echoes the practicethat has got established at the central level, where successiveCentra l Finance Commiss ions have ad judicated over theallocation of only one part of the total devolution from theUnion to the state governments, leaving the decision regardingthe remaining, more substantial, part to the purview of bodiesbelonging to the central government itself, such as the PlanningCommission or the Ministry of Finance. This tendency howevercannot be defended on the grounds either of reasonablenessor of conformity to the letter and spirit of the 73rd and 74th

Amendments to the Constitution on whose basis State FinanceCommissions are formed.

2.2 Such a separation, and corresponding attenuation of the roleof the Finance Commission, is unreasonable on two counts.

Firs t , d i f ferent categor ies of devolut ion are intr ins ica l lyinterrelated. If more funds are devolved to LSGIs for planprojects, then correspondingly larger provisions have to bemade for them for the maintenance and operation of the assetscreated through such projects. Two separate bodies thereforecannot in any meaningful sense (i.e. without one of thembecoming a mere rubber stamp) decide on these two kinds ofdevolution. The inseparability of the two kinds of devolutionnecessitates that they fall under the jurisdiction of one body,which can only be the Finance Commission. Secondly, the 73rd

and 74th Constitutional Amendments provide for a statutorybody to adjudicate on financial matters, namely the StateFinance Commiss ion. The sp i r i t o f those Amendmentstherefore requires that the jurisdiction of that statutory bodybe as comprehens ive as poss ib le . The le t ter o f thoseAmendments too is in conformity with this. The State FinanceCommission’s task is to “review the financial position” of localbodies. Since any such review can only be in relation to thefunctional responsibilities of the LSGIs, and these include theresponsibilities vested in them for “the preparation of plansfor economic development and social justice”, it follows thateven the letter of those Amendments enjoins upon the SFC aconcern with the total financial requirement, both plan andnon-plan, of the LSGIs. Our Commission accordingly proposesto take a comprehensive view of financial devolution from thestate government to the LSGIs and not confine itself only tonon-plan devolution.

2.3 Given this perspective, and the fact of the inseparability ofdifferent kinds of devolution, a tempting idea is to earmark acertain f ixed proportion, say 20 percent, of the total taxrevenue of the state government for devolution to LSGIs forboth plan and non-plan use. The inter se distribution of thisamount among the LSGIs could then be determined by somespecific criteria, and individual LSGIs could, within limits, be

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left free to allocate the funds at their disposal in any mannerthey choose. This solution is tempting for a number of reasons.First, it is simple and appears more in keeping with the ideaof genuine decentralisation which gives freedom of resourceuse to LSGIs. Secondly, it has intellectual pedigree, havingbeen mooted by some of the first SFCs (including the SFC ofWest Bengal headed by Dr.Satyabrata Sen). Thirdly, it is inconformity with the trend being init iated by the CentralFinance Commission itself . Fourthly, i t apparently entai lsequitable sharing between the state government and the LSGIs:they evenly partake of affluence and penury, without eitherone of them squeezing the other in any obvious manner. Andfinally it would seem to be more appropriate in the Keralacontext, where, the upkeep of the good infrastructure facilitiesbeing very important, the LSGIs should not be constrainedby the plan – non-plan distinction. In these respects it wouldeven appear to have an edge over the current practice in Kerala,fo l lowing the Peoples ’ Plan Campaign, of giv ing a f ixedpercentage of plan funds (35 to 40 percent) to the LSGIs.

2.4 There are two obvious problems potentially associated withthe current practice. The first arises from the fact that theLSGIs’ requirement of non-plan funds, as already mentioned,is itself linked to the amount of plan funds made available tothem. Ensuring that a certain percentage of plan funds is putat their disposal is therefore not enough; an appropriateamount of non-plan funds must also be made available to themfor meeting the current operational costs and the maintenancerequirements of the plan assets. A system in which a certainoverall share of tax revenue of the state government is passedon to LSGIs, and the latter have a degree of flexibility indeciding how to deploy their share, would be better able toavoid any potential disproportionality between asset creationon the one hand and asset maintenance and operation on theother. The second problem associated with the current practice

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arises from the fact that a relative or even an absolute declinein the size of the state’s plan outlay leads ipso facto to a similardecline in the magnitude of devolution of plan funds to LSGIsand hence in the size of the LSGI plans. This means that asudden draft on the state government’s resources on the non-plan side, or plain non-plan profligacy on the part of the stategovernment, or niggardliness on the part of the PlanningCommission, or a financial squeeze imposed by the centralgovernment, all of these would invariably impinge on the sizeof the LSGI plans. If we are concerned that the size of theseplans, which cater to the basic requirements of the mass of thepeople , should be kept insu la ted f rom such ext r ins icdevelopments, then a devolution formula which gives LSGIs ashare of the state revenue as opposed to one which gives thema share of the plan outlay appears preferable. (To be sure, evenwith revenue sharing, LSGI plans would still be vulnerable tothe profligacy, on the non-plan side, of the LSGIs themselves;but more d i rec t ly exer ted popular pressure , throughinstitutions such as Grama Sabhas and Ward Sabhas togetherwith the imposit ion of some pre-determined expenditure“norms”, could take care of it).

2.5 The fear that a plan-outlay-sharing system makes LSGI plansvulnerable to a whole range of extrinsic developmentsincluding a f inancia l squeeze emanating from the centralgovernment via cuts in grants-in-aid, is not an idle one. Theadditional fiscal burden imposed on the state government onaccount of the implementation of the recommendations of thePay Commission, together with the fact that grants-in-aid fromthe Central government have tended to stagnate, has had animpact on the growth of the state’s plan outlay in 1999-2000(RE) and 2000-01 (BE), and correspondingly on the growthof plan transfers to the LSGIs, even though the absoluteamounts of such transfers remain impressive. The total plan

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and non-plan transfers1 to PRIs as a proportion of the totaltax revenue of the state government, which amounted to 7.2percent in 1996-7, increased to 20.8 percent in 1997-8 whenthe Peoples’ Plan Campaign took effect. The ratio was 19.5percent in 1998-9, but appears to have declined somewhatthereafter: to 16 percent in 1999-2000 (RE) and 14.1 percentin 2000-01 (BE). Since the proportion of non-plan transfersto the total tax revenue of the state government has remainedmore or less unchanged, amounting during these five years(in percentages) to 2.07, 2.15, 2.61, 2.2, and 2.61 respectively,it is the ratio of plan transfers to total revenue that appears tohave been affected. To be sure, these figures do not tell thewhole story, since they exclude the transfers by way of salariesto state personnel who have been assigned toLSGIs; besides,the period is too short, and, for the later years, we are noteven talking about Actuals but only about Revised and Budgetestimates. Nonetheless, the possibility in the coming years, ifthe fiscal problems of the central government get compounded,of these problems getting “exported” to the state level, andfrom there further downwards until they impinge on LSGIplans (or of an exactly similar denouement arising from aworsening of the s ta te government ’ s f i sca l pos i t ion forindependent reasons), is to be reckoned with.

2.6 Though the above discussion constitutes a strong case formoving to a general revenue sharing arrangement between thestate government and the local governments, the Commissionfeels that there are a number of weighty counter argumentswhich cannot also be ignored. These are summarized below.

1 The term “non-plan transfers” here refers exclusively to thetransfers which figure in the Appendix IV of the Budget, i.e. it doesnot include the transfer of the proceeds of the shared and assignedtaxes, to which the LSGIs are entitled or transfers in the form ofpayments of salaries and operational expenses on transferred schemes.

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2.7 Any general sharing of revenue implies that there is a cleardemarcation of responsibilities between the state governmentand the local governments. But actually this is an evolutionaryprocess. Though Kerala has gone beyond any other state insharing responsibilities with local governments there are areaslike the productive sector where only over a period of timecan the functional domains be defined with reasonable clarity.Indeed, the local governments which have been initiated intothe planning process are themselves just coming to grips withthe developmental needs and solutions within their functionaldomain, and would also require more time for working outthe financial needs of various aspects of the responsibilitiestransferred to them.

2.8 Besides, the allocation of 35-40 percent of the Plan funds tothe local governments also has a symbolic significance, since itis this move which really gave the big push to decentralisation.Participatory planning has been used as the entry point to makedecentralisation genuine. Therefore it is necessary to continuethe practice, of sharing Plan funds in this ratio, for some moretime, until the institutions of local government have struckfirmer roots.

2.9 There is a further consideration of some importance. A blanketrevenue-sharing arrangement would even suggest a transferof all obligations of meeting the current expenditure in LSGI-run institutions to the LSGIs themselves. It could for instanceimply a transfer of the obligation to pay salaries to the largenumber of state employees, currently working in LSGI-runins t i tut ions but drawing the i r sa lar ies f rom the s ta tegovernment, to the LSGIs themselves. These state governmentemployees would overnight become LSGI employees. A blanketrevenue-sharing arrangement would also transfer the task ofpurchas ing suppl ies for LSGI-run ins t i tut ions , such asmedic ines for hospi ta l s , and books and consumables for

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schools, to the LSGIs themselves. All this would entail, firstof all, an enormous and unmanageable administrative burdenon the LSGIs. They would have to manage the payroll of alarge number of personnel who would now constitute theirdirect employees. They would have to arrange supplies for theday-to-day running of a host of institutions. These tasks areas onerous as they are unnecessary for LSGIs to perform. Adis t inct ion must be drawn between decentra l i sa t ion ofadminis t rat ive burdens and decentra l i sa t ion of dec i s ion-making. The former is not only not a pre-condition of thelatter but may even thwart the latter. Proper sequencing isvery important in the decentral isation process. An LSGIsystem which has not stabilised would be put to severe stressif it takes on the burden of administration in full. For examplewhile it must be the LSGIs which should control officers placedunder them, ass ign them tasks , and ensure the i r properperformance, this does not necessarily imply that they shouldbear the burden of recruitment, payment of salaries and dealingwith service matters. These tasks consume a lot of time andenergy and could detract from LSGI efficiency in carrying outtheir essential responsibilities. To be sure, there is an obviouscontradiction in having personnel who are recruited by oneagency but are answerable to another, a contradiction referredto by the Committee on Decentralisation of Powers as “dualcontrol”. But a forcible resolution of this contradiction bys imply e l iminat ing one of i t s po les , e i ther throughcentra l i sa t ion as ex i s ted ear l i e r or through completedecentralisation entailing the parcelling out of administration,is no answer to the problem.

2.10 Even from a financial point of view, making LSGIs responsiblefor meeting the entire current expenditure obligations inLSGI-run institutions would make l itt le sense. The stategovernment has many more financial options than the LSGIshave. It can borrow. It can introduce new, innovative taxes;

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and so on. In the event of an increase in the cos t o fadminis t ra t ion, for example a r i se in sa lar ie s , the s ta tegovernment can absorb the increase far more easily than theLSGIs in case they are asked to bear the cost of administrationunder a new dispensation. It was mentioned above that underthe current practice of plan-outlay-devolution a sudden needon the part of the state government to spend more on the non-p lan s ide would squeeze LSGIs ’ p lans , and that th i sstrengthened the case for revenue-sharing between the stategovernment and the LSGIs. This argument clearly lacks generalva l id i ty. I t ho lds on ly when the increase in the s ta tegovernment’s non-plan expenditure need is of a kind thatLSGIs would not face when expenditure obl igat ions aretransferred to them along with a share of revenue. But if theyhave to face the same non-plan expenditure need as the stategovernment, they would be worse off in a regime of revenue-sharing. For example if they had to implement Pay Commissionrecommendat ions out of their own funds in a regime ofrevenue-sharing, they would have ended up being worse offthan they have actually been under the current dispensation.Of course it may be argued that additional financial optionswhich the state government has, such as borrowing, shouldbe made available to the LSGIs too. We examine this issuelater, but, should this be done indiscriminately, then very sharpinequalities could emerge among LSGIs, forcing the backwardones to go under, which would defeat the whole purpose ofdecentralisation.

2.11 Enough has been said to show that any simple rule stipulatingthe transfer of a certain fixed proportion of total tax revenuefrom the higher to the lower level, would be inappropriate inthe present Kera la context . Accordingly, we re jec t th i sapproach. The approach we do adopt instead on the questionof devolution has six main features which are given below.

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2.12 First, for reasons discussed in Chapter 6, we are of the viewthat the current practice of making 35-40 percent of the planoutlay available to the LSGIs to spend on plan projects oftheir choice should be continued: our precise recommendationis that not less than one-third of total plan outlay (excludingstate-sponsored schemes from the numerator) should be givento LSGIs. A feeling has been conveyed to us that the transferof such substantial amounts of plan funds to the LSGIs hasbeen accompanied by a corresponding slackening of revenueeffort by the LSGIs themselves. This feel ing is pervasive,though the empirical support adduced in its favour is not verypersuasive. But irrespective of whether larger devolution hasactually caused a slackening of revenue effort, any slacknessin such effort is per se unwarranted. Stimulating revenue efforttherefore is a must; and we do so by incorporating revenueeffort explicit ly into the formula determining the inter sedistribution of plan resources.

2.13 Secondly, the question of maintenance of the assets newlycreated by the LSGIs from the enhanced devolution of planfunds under the Peoples’ Plan Campaign, not to mention theassets transferred to them under the Government Order ofSeptember 1995, is going to become exceedingly important inthe coming years. The resources required for the maintenanceof both these types of assets would have to be provided by thestate government, even though the maintenance work i sactually carried out under the aegis of the LSGIs. In otherwords, in addition to the devolution of plan funds, the stategovernment has to make available to the LSGIs an amountthat would cover the maintenance expenditure on both typesof as se t s . The reasoning behind th i s i s obvious: i f thetransferred assets had not been transferred to the LSGIs, thenthe state government would have paid for their maintenance;since they have been transferred the requisite sum should behanded over to the LSGIs to whom these assets have been

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transferred. Likewise, if the increased devolution of plan fundshad not taken place, the state government would have usedthese plan funds through its various departments, and wouldhave paid for the maintenance of the assets created throughthe use of these plan funds. The fact that this devolution hasoccurred simply means that these assets are now under thejurisdiction of the LSGIs; the state government’s obligationto pay for the maintenance of these newly-created assets (andthose continuously being created) is not removed thereby. Ofcourse if the transferred or newly-created assets were run oncommercial lines, then the expenditure on maintenance couldcome from their own revenue, exonerating the governmentfrom the obligation to provide for their maintenance. But sincethe bulk of these assets are not commercially operated, andare not meant to be, the obligation on the state governmentremains . Fina l ly, there are the as se t s which are ne i thertransferred under the September 1995 Government Order, nornewly constructed out of the higher devolution of plan fundsfollowing the People’s Plan Campaign. An important segmentof this third category is constituted by assets which the LSGIsalready owned prior to September 1995. The maintenanceexpenditure on these assets has come partly from the LSGIs’own funds, including what comes to them as Vehicle TaxCompensation, and to a limited extent from such non-plan,non-statutory grants of the state government as the VillageRoad Maintenance Grant (when it existed). But the actualmaintenance expenditure on these assets has in practice beenrather meagre. Adequate expenditure on the maintenance ofthese as se t s , g iven the i r non-commerc ia l nature , wouldnecessarily require additional financial support from the stategovernment.

2.14 We suggest that this additional amount, together with therequisite amounts for the first two categories of assets, shouldbe provided by the state government. In other words, the state

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government should provide the entire maintenance expenditureon the pre-ex i s t ing asse t s o f the LSGIs , on the asse t stransferred to them after September 1995 and on assets newly-constructed by them out of plan assistance in the period since1997-8. I t need not , however, make any Vehic les TaxCompensation available to the LSGIs. Our approach is to getthe state government to transfer a certain total amount forthe maintenance of assets to the LSGIs as a whole, amongwhom it is to be distributed according to certain criteriareflecting maintenance needs. It is essential of course that theLSGIs in turn should not use the amount, handed to them forthe maintenance of assets, for all sorts of other purposes; wewish to put this amount beyond their reach for expenditureother than on approved uses.

2.15 Thirdly, there are a host of payments made by the LSGIs tomeet soc ia l ob l igat ions , such as pens ion schemes ,unemployment al lowance, scholorships etc., for which thefunds are provided by the state government. These are groupedtogether under “Non-Plan” expenditures in the Appendix IVof the state government’s budget. The state government shouldcontinue to make appropriate transfers to the LSGIs underthis head for them to meet all such obligations.

2.16 Fourthly, there is the question of operating costs on transferredassets, as distinct from maintenance. These are of two kinds:salaries of personnel and operating costs on account of currentinputs, e.g. medicines for hospitals, books and consumablesfor schools. The state government is a lready meeting theoperat ing cost s o f the t rans ferred asse t s and should , inprinciple, continue to do so. A reasoning analogous to that inparagraph 2.13 would suggest that even on assets newly createdby the LSGIs after the higher devolution of plan funds, theoperating costs would have to be met by the state government,unless o f course these as se t s themse lves happen to be

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commercially viable. In practice, however, any system wherecosts are met by one agency while decisions regarding theirsize are taken by another, runs the risk of profligacy (even ifthese decisions have to be formally approved by the f irstagency). This problem has reportedly become quite acutethrough pressure for the creation of new posts, by the LSGI.It would become even more acute in the coming years unlesssomething is done about it immediately.

2.17 An immediate response to the problem may be to say that allnew posts at the LSGI level should have to be financed out oftheir own funds (even as the state government meets the salarycomponent on account of the transferred posts). This howevercould well lead to a diversion of funds earmarked for plan ormaintenance purposes towards meeting a burgeoning salarybill. Even if safeguards against such diversions are provided,i t would not be appropr ia te to take such a dras t i c s tepimmediately. This can be considered as a possible long-termmeasure and deserves further discussion. Meanwhile to curbprof l igacy under the ex i s t ing arrangement we make thefollowing specific suggestion. For the creation of any new postat the LSGI level, no matter who is financing it, there has tobe a process of consultation between the state government andthe LSGI(s) concerned. After such consultations and beforethe proposal comes before the cabinet, clearance must beobtained from an Expenditure Watchdog body. We do notpropose the setting up of a new Watchdog body. We recommendinstead that the existing institution of Ombudsman should beused for the purpose. Technical and other help should be madeavailable to the Ombudsman so that they can also take on thisadditional role.

2.18 Apart f rom th i s new arrangement we propose , ourrecommendations regarding operating costs of LSGI assetshave four elements: first, all existing salary commitments on

20

transferred schemes, including wages to temporary employees,must continue to be paid by the state government. Secondly,the current practice of state government funding of medicinesand books should be continued exactly as it is, but in all othersec tors , the s ta te government should be f reed f rom i t sobligation of having to meet operating costs. And even in theeducation and health sectors, all other operating costs, suchas rents on buildings, electricity and vehicle running charges,telephone expenses etc. should be met by the LSGIs from theirown funds including general purpose grants and upto 10% ofmaintenance grants. Thirdly, the LSGIs, apart from meetingall these operating costs, should have the freedom to undertakeextra expenditure at the margin in the education and healthsectors, over and above what the state government provides.And fourthly, to enable them to do so, they should be allowedto spend up to 10 percent of the Maintenance Transfer, whichis being made available to them, for meeting operating costs.

2.19 Fi f th ly, in addi t ion to the devolut ion under the above-mentioned heads, there are the transfers on account of taxesand certain non-plan grants from the state government to theLSGIs. There are three broad categories within this head:assigned taxes which are collected by the government to behanded over to the LSGIs (which in the case of PRIs includeBasic Tax and Surcharge on Duty on Transfer of Property andfor Urban Local Bodies (ULBs) only the latter); shared tax(which is the Motor Vehicle Tax); and a few grants. A plethoraof grants makes the system cumbersome and opaque. Likewiseeven the system of earmarking particular tax revenues fordistribution to LSGIs has little to recommend it. Our approachis to do away with this entire cumbersome system and tostipulate that a certain fixed proportion of the tax revenue ofthe state government is to be handed each year to the LSGIs.The state government in turn can retain the proceeds of the

21

taxes, which were either “assigned” or shared till now, for itsown use. For determining the exact share which is to be sodistributed among the LSGIs and also the inter se distributionof the amount among the various tiers of LSGIs, we make useof the observed historical shares in the recent past.

2.20 We are aware that in recommending a shift away from thesystem of assigning and sharing specific taxes, we are makinga radical departure, since local government finances all overthe world have traditionally been based on such a system.While this departure per se may not cause control, their maybe legitimate grounds for serious misgivings on the followingscore: tax assignment conferse a right on LSGIs which a systemof sharing the over all tax revenue appears not to do; it appearsto be in the nature of a grant that is open to withdrawal bythe State Government at its will. We wish to remove thesemisgivings by emphasising that the tax share proposed by usshould be deemed a matter of right by the LSGIs, sanctionedby appropriate legislation.

2.21 Finally, a consideration which we hold to be important andwhich has informed our entire approach in this report is thatthe system of transfers from the state government to the LSGIsshould be made as simple as possible. Likewise, the formulaefor inter se distribution of funds should be made as simple aspossible.

2.22 To sum up, our Commiss ion’ s approach i s to take thedevolut ion of funds in i t s ent i re ty and to makerecommendat ions regard ing both p lan and non-p landevolutions rather than confining ourselves only to the non-plan side, as has become customary at the Centre and in manystates. Though we look at devolution in a comprehensivemanner, we reject nonetheless the rather tempting idea of a

22

blanket d iv i s ion of the s ta te government ’ s tax revenuegoverning devolution. This idea entails fixing a particular shareof the total tax revenue of the state government that is madeavailable to the LSGIs as a whole; the amount is distributedamong the LSGIs according to some formula and they are thenleft more or less free to spend their amounts as they like. Thisidea, notwithstanding its simplicity and appeal, is unworkablein the context of Kerala which has pursued its own uniquetrajectory of decentralisation, a pursuit that has to be takenby us as a historical datum. Our approach is to stipulate ashare of plan outlay that must be handed over to the LSGIs,as is the current practice, and a share of tax revenue to begiven as non-plan statutory transfer in l ieu of the currentcomplex and cumbersome system of tax-assignments and tax-sharing. In addition to these plan and non-plan transfers, thestate government has to keep meet ing the sa lar ies of a l lpersonnel on the transferred assets, to keep making appropriatetransfers to the LSGIs’ for meeting a host of social obligations(non-plan payments under Appendix IV of the budget), andto keep defraying the costs of medicines in hospitals and booksand consumables in educational inst itutions under LSGI-jurisdiction. It also has to transfer a certain amount every yearfor the purpose of meeting the maintenance requirements onLSGI assets. In arriving at the magnitudes of these transfersand their inter se distribution among the LSGIs, our objectivehas been to simplify the system as far as possible, so that themystery and opaqueness governing the devolution of fundsfrom the state government to the LSGIs get minimised.

RESOURRESOURRESOURRESOURRESOURCE MOBILISCE MOBILISCE MOBILISCE MOBILISCE MOBILISAAAAATION BTION BTION BTION BTION BY LSGIY LSGIY LSGIY LSGIY LSGIsssss

2.23 The increased p lan a l locat ion to LSGIs has generated aeuphoria among them regarding availability of funds. Thereis in fact a pervasive feeling that LSGIs are flush with funds.There are however clear parameters within which such funds

23

can be spent; they are meant for new development ventures,and, implicitly, for such development ventures as would giveadequate returns, both social and economic. It is importantto note that local governments have traditional obligatoryfunct ions and are of ten judged on the qua l i ty of the i rperformance of these functions, which relate to public healthand sanitation, maintenance of infrastructure, and the exerciseof regulatory civic functions to ensure good quality of life forthe citizens. Now that a lot of new assets have been transferredto the LSGIs and the flow of maintenance funds from the stategovernment cannot but be l imi ted on any reasonableexpectations, the need for mobilizing resources becomes verycritical. If LSGIs can raise more funds by themselves they candramatically improve the upkeep of assets transferred to them.An analysis of the resource inflows of LSGIs shows that inthe case of Village Panchayats the proportion was broadly3:2:11 respectively for own funds, non-plan grant-in-aid fromthe state government including assigned and share taxes, andplan grant - in-a id . The corresponding proport ion forMunicipalities as well as Corporations was 3:1:2. Own fundstherefore constitute a significant amount. The very fact thatLSGIs can ra i se resources inc luding taxes i s a symbol ica f f i rmat ion of the i r s ta tus as ins t i tut ions of loca l se l fgovernment. The right to fix the rates for taxes and otherrevenues and collect them gives authority and importance tothe LSGIs. On the other hand it also demands a considerabledegree of responsibility from them, since the tax payers arenot only very close to the collection point but are also witnessesto the mode of utilization of the taxes collected. This opensup the possibility of spontaneous tax-compliance as well as ofcommunity pressure to pay dues to LSGIs, provided theservices of the local governments are perceived to be usefuland relevant.

2.24 There are however cer ta in problems wi th regard to the

24

mobi l iza t ion of revenue by LSGIs . The most importantproblem relates to the tax base, which is rather inelastic andcannot be widened very easily. Moreover, the minimum andthe maximum rates for the taxes and most of the non-taxrevenues are fixed at present by the state government. In thecase of many of the non-tax sources the amounts are fixed bythe government through rules, and these, for a variety ofreasons, do not get revised in tandem with the rate of inflation.A serious additional problem relating to taxation at the locallevel is the fact of gross under-assessment. Our interactionswith representatives of LSGIs suggest that the present demandis on ly about ha l f o f what can rea l ly be co l l ec ted . Theassessment is done in a rather primitive fashion and the processof assessment often tends to be very subjective. To compoundthis problem the collection efficiency is also low. The traditionalmode of collecting from the doorstep is still being resortedto. The enforcement provisions are rarely used.

2.25 The Commission believes that the tax base can be expandedinter alia through the introduction of Service Tax. Also somenon-tax revenue sources can be fur ther tapped. TheCommission strongly endorses the view that only the floorrates and amounts need to be fixed by the government. Thiswould a l low greater autonomy to the ef f ic ient LSGIs tomobilize more local resources. In addition there is urgent needto index the rates to changes in money value. Tax assessmentmethods can be rationalised essentially by reducing discretionand moving on to a transparent normative basis, like plintharea in the case of buildings, seating capacity in the case ofcinemas, presumptive taxes for certain professions and so on.In this respect, some of the recommendations of the firstFinance Commission are very pertinent. Collection efficiencyis also very crucial, though the drive to collect larger revenueshas to come from the LSGIs themselves. To be sure, trainingand motivating the collecting personnel would help, as would

25

externa l incent ives of the sor t we have prov ided, byincorporating the revenue effort criterion into the inter sedistribution of plan funds. But there is no escape from thefact that the LSGIs themselves must internalize the urgencyof the need to garner larger revenue.

2.26 Though there are provisions in the Kerala Panchayat Raj Act,the Kerala Municipality Act and the Local Authorities LoansAct for borrowing by LSGIs, these provisions are not fullyutilized. The Commission believes that as more and more re-sponsibilities get transferred to LSGIs, they have to supple-ment their own resources and grants-in-aid with borrowings,mainly for schemes which would generate a revenue streamthat can help repayment, and for socially relevant schemes forwhich local surcharges can help in repayment. The question ofborrowing and the safeguards required would be dealt within the second part of the Report.

2.27 Raising resources alone is not enough. It is equally importantto spend them prudently. For this, there has to be properfinancial management. This can be achieved to some extentthrough improved managerial practices, enshrined in rulesregarding the assessment of taxes, the preparation of budgetsand the regulation of expenditure. There seems to be a tendencyon the part of LSGIs to overspend on items like inaugurationceremonies and to be liberal with the distribution of funds.These need to be curbed through mutually agreed guidelines.The Commission would dwell on these issues in its secondreport.

2.28 With so much of public funds being handled by the LSGIs,the need for enforcing a degree of accountability upon themincreases. Of course, since they are close to the people there issome contro l f rom be low, espec ia l ly through var ious

26

participatory mechanisms, which have already been adoptedby the state government. Nevertheless, financial accountabilitythrough certain f iscal responsibi l i ty provisions as wel l asthrough improved maintenance of accounts is very essential.Similarly the presentation of accounts to the public to facilitatesocial audit also needs special attention. The current procedureby which LSGI accounts are audited leaves much to be desired.There is invariably considerable delay, and the quality of audittoo is not particularly good. It is a very routine form of auditand its contribution towards system improvement or towardsenabling penal action has been very limited. These need to betotally revamped. The Commission is getting a study done onthe maintenance of accounts as well as on the procedures ofauditing by the Institute of Public Auditors of India and thesecond par t o f the Report would carry deta i l edrecommendations on the subject.

PROCEDURPROCEDURPROCEDURPROCEDURPROCEDURAL SAFEGUAL SAFEGUAL SAFEGUAL SAFEGUAL SAFEGUARDSARDSARDSARDSARDS

2.29 In order to ensure that the recommendat ions of theCommission are properly implemented, certain proceduralsafeguards have to be put in p lace . The most importantsafeguard i s to give legis lat ive sanct ion to the proposeddevolution, by incorporating the share of taxes due to localgovernments in the Kerala Panchayat Raj Act and the KeralaMunicipality Act. These devolved funds would be in threecategor ies : P lan Grant , Maintenance Grant and Genera lPurpose Grant. Each grant would have clear conditions foruse which should be issued in the form of Rules.

2.30 On the part of the state government it is very important toensure a smooth flow of funds. The Commission feels thatthere should be automatic crediting of funds to LSGIs, butthese have to be combined with reasonable restrictions on

27

withdrawal, linking such withdrawals to actual expenditure.Similarly, the funds have to be devolved according to fair andtransparent formulae. This is particularly true of the devolutionof the maintenance grant, for which a scientific assessment ofthe maintenance needs has to be made and the results thenused for an equitable inter se distribution of the funds.

2.31 At the local government level there is need for a maintenanceplan to be prepared. Also the present tendency to divert funds,earmarked for some particular purpose, towards an altogetherdifferent use, needs to be curbed, with penal provisions forsuch diversion. There should be no diversion whatsoever fromPlan Grants or Maintenance Grants.

2.32 Simple f inanc ia l dev ices can be t r ied out to improveaccountability. For example, by creating a single account towhich all the different streams of own income of the LSGIsare credited, one can get a good idea of the actual income forthe year. Similarly by limiting the period of validity of chequesto one f inancial year, the tendency to inf late expenditurethrough the issue of pre-dated cheques can be contained. TheCommission recommends both these procedures, and wouldbe recommending several others of this sort.

2.33 It has been noted that there is a considerable time lag inoperationalising the recommendations of the State FinanceCommiss ion even a f ter they are accepted by the s ta tegovernment. Several departments have to take follow up action,and since amendment to Acts and Rules are required in manycases, progress naturally tends to slow down. But this defeatsthe very purpose of the Commission’s recommendations. SinceFinance Commissions come only once in five years, any delayin implementing the recommendations of the Commissionreduces their effectiveness. There is need therefore for quick

28

follow-up action on Finance Commission’s recommendations,for which an empowered Committee is necessary.

CERCERCERCERCERTTTTTAIN OTHER ISSUESAIN OTHER ISSUESAIN OTHER ISSUESAIN OTHER ISSUESAIN OTHER ISSUES

2.34 Unlike the Central Finance Commissions, there is greater needfor continuity in the case of State Finance Commissions. Asthe local government system is evolving in the country, thereis greater need to link up with the recommendations of theprevious Finance Commissions. Another factor is that severalrecommendations are slow to get implemented and in suchcases there would be a need for reiteration. This Commissionhas gone into the recommendat ions of the First FinanceCommission in detai l and has studied the status of theirimplementat ion. Since i t i s fe l t that the implementat ionwithout delay of many of those recommendations is of criticalimportance, they are being reiterated in this Report.

2.35 The recently submitted report of the Eleventh Central FinanceCommission raises a number of important issues that call fora reaction from our Commission. At least three issues arepertinent here, two of which relate to principles, while thethird relates to practice. These issues and our response to eachof them are listed below seriatim. First, the CFC feels the needfor introducing Constitutional amendments in at least threeareas : for empower ing Par l iament to rev i se the ra tes ofProfession Tax without having to introduce a Constitutionalamendment on each occasion; for making it possible to bringforward the dates of se t t ing up of the Sta te FinanceCommissions, so that these could be appropriately synchronisedwith the date of institution of the CFC and their reports couldgenuinely provide the basis for the recommendations of theCFC; and for removing the provision which makes it obligatoryfor the CFC to take the SFC reports as the basis for making

29

its own recommendations. We are in agreement with both thespirit and the letter of the first suggestion. We are in agreementwith the spirit, though not the letter, of the second suggestion,since we feel that a carte blanche to state governments to setup Finance Commissions when they like may be open to misuse;our own phrasing of the required Constitutional amendment(given in Chapter 11) attempts to overcome this potentialproblem. On the third of the CFC’s Constitutional suggestionshowever we have differences of both letter and spirit. Thoughwe understand the circumstances (relating to delays or non-compliance with SFC recommendations by state governments)which make the CFC wish to get rid of this albatross roundits neck of having to base its own recommendations on thoseof the SFCs, abandoning this clause altogether would in ourview be potentially detrimental to the smooth functioning ofour federa l sys tem. Our sugges t ion on the requiredConstitutional amendment attempts to meet the problemwithout going to such extremes.

2.36 The second issue of principle raised by the CFC is one wherewe have a basic disagreement, and it relates to their refusal totake any explicit cognisance of the devolution of Plan fundsto LSGIs. (Indeed their non-recognition of the worth of theKerala experiment in democrat ic decentra l i sat ion springsessentially from this fact). We are of the view that FinanceCommissions should have comprehensive jurisdiction coveringboth plan and non-plan devolution. It follows from this thatif a particular State Finance Commission has interpreted itsjur i sd ic t ion narrowly and re f ra ined f rom making anyrecommendations covering plan funds, then the fact that thestate government goes beyond these recommendations todevolve substantial plan funds to LSGIs should be deservingof apprec ia t ion ra ther than unconcern. The index ofdecentralisation cannot in other words be confined to criteriathat stress only conformity to SFC recommendations (which

30

does not of course mean that such conformity should be giventhe go by); they have to be more inclusive.

2.37 The third issue, one of practice, relates to the task given to usby the CFC to suggest criteria for the inter se distribution ofRs.65.92 crores for PRIs, and Rs.15.05 crores for ULBs,which constitute Kerala’s share of the total amount (Rs.1600crores for PRIs and Rs.400 crores for ULBs) made availableby it as a special grant for the improvement in civic services.Our recommendat ion i s that these amounts should bedistributed on the basis of the population criterion. Theyshould not be counted as a part of plan funds (either in thenumerator or in the denominator) in determining the size ofthe plan grant to LSGIs.

2.38 The present state of monitoring of local government financesis very weak. The required data are not available and the qualityof data is also very bad. In a situation where substantial fundsare being devolved and spent at the level of LSGIs, i t isnecessary to have regular feed back about the finances of localgovernments. Much more is required than the mere collectionof data in a routine manner; they have to be appropriatelyinterpreted. For this a permanent system has to be developedutilizing the experience of Finance and Local Self GovernmentDepartments as a l so the expert serv ices of the Stat i s t icsDepartment.

31

CHAPTER 3

AN OVERVIEW OF LOCALGOVERNMENT FINANCES

3.13.13.13.13.1 INTRODUCTION

3.1.1 Kerala has 990 Village Panchayats, 152 Block Panchayats and14 District Panchayats; in the urban areas it has 53 Munici-palities and 5 Corporations. Since the First SFC, the follow-ing changes have taken place.

(1) The former Mattannur Panchayat has been converted intoa Municipality with effect from 14-11-1996.

(2) Thiruvananthapuram Corporation has been expandedwith the addi t ion of Nemom, Thiruva l lom,Kadakampally, Ulloor and Attipra Grama Panchayats.

(3) Two new Corporations viz. Kollam and Thrissur havebeen created by adding the following GramaPanchayats.

Kollam Corporation Thrissur Corporation

1. Kilikollur Grama Panchayat 1. Ollukkara Grama Panchayat

2. Sakthikulangara Grama Panchayat 2. Vilvattom Grama Panchayat

3. Eravipuram Grama Panchayat 3. Ayyanthol Grama Panchayat

4. Vadakkevila Grama Panchayat 4. Koorkancherry Grama Panchayat5. Ollur Grama Panchayat6. Nadathara Grama Panchayat

(Part)

(4) Two municipalities namely Kalpetta and Koyilandi havebeen expanded by including wards as shown below fromthe adjoining panchayats.

Kalpetta - Ward 11 and 12 of Meppadi panchayat

Koyilandi – 3 wards in Arikkulam panchayat

(5) Five Munic ipa l i t i e s v iz . , Neyyat t inkara , Ponnani ,Thalasserry, Taliparamba and Kunnamkulam, have beenexpanded by adding panchayats, as shown below:

Neyyattinkara Municipality Perumpazhuthoor Grama Panchayat

Ponnani Municipality Ezhuvathuruthy Grama Panchayat

Taliparamba Municipality Anthoor Grama Panchayat

Kunnamkulam Municipality Arthat Grama Panchayat (full), PorkulamGrama Panchayat (part) and ChovannurGrama Panchayat (part)

Thalasserry Municipality Kodiyeri ( Full)

(6) While 19 Village Panchayats have been merged with ur-ban local bodies 20 new Village Panchayats have beencreated due to the b i furcat ion of 20 la rge Vi l l agePanchayats having a population of more than 50,000.

3.1.2 Except item No.1, all the changes were brought into effect inSeptember 2000, with the general elections to LSGIs. Withthis reorganisation of urban and rural local governments, theshare of the urban population in the State with reference to1991 census has gone up to 16.87% from 14.22%. Kerala hasfairly big Village Panchayats, the biggest in the country. It hasrelatively small towns. In fact, other than the five cities it has

33

only three Municipalities having a population of more thanone lakh.

3.1.3 The distribution of population among the Village Panchayatsis given in Table 3.1

Table 3.1.

Village Panchayats.

Range of population No. of Village Panchayats

Below 10,000 16

Between 10,000 and 20,000 287

Between 20,000 and 30,000 426

Between 30,000 and 40,000 181

Between 40,000 and 50,000 59

Above 50,000 21

3.1.4 The distribution of population among Municipalities is shownin Table 3.2.

Table 3.2

Municipalities

Range of population No. of Municipalities

Below 25,000 6

Between 25,000 and 40,000 18

Between 40,000 and 50,000 10

Between 50,000 and 60,000 6

Between 60,000 and 75,000 9

Between 75,000 and 1,00,000 1

Above 1,00,000 3

34

3.1.5 The populat ion of the f ive Corporat ions may be seen inTable3.3.

Table 3.3.

Corporations

Thiruvananthapuram 7,04,375

Kollam 3,49,348

Kochi 5,64,589

Thrissur 2,99,042

Kozhikode 4,19,831

3.1.6 It would be interesting to compare the distribution of VillagePanchayats and ULBs according to area as well. As is evidentfrom Table 3.4, there is much similarity in size between VillagePanchayats and ULBs.

Table 3.4

Area Village Municipalities CorporationsPanchayats

Below 5 Sq. KM 6 Nil Nil

Between 5 - 10 Sq.KM 66 4 Nil

Between 10 - 15 Sq.KM 127 10 Nil

Between 15 - 20 Sq.KM 202 11 Nil

Between 20 - 30 Sq. KM 278 13 Nil

Between 30 - 40 Sq.KM 124 10 Nil

Between 40 - 50 Sq.KM 56 2 1

Between 50 - 75 Sq.KM 49 3 Nil

Between 75 - 100 Sq.KM 31 Nil Nil

Between 100 - 150 Sq.KM 26 Nil 2

Between 150 - 200 Sq.KM 9 Nil 1

Above 200 Sq.KM 16 Nil 1

35

3.1.7 Kera la has a long sea-coas t . 89 Vi l l age Panchayats , 13Municipalities and 4 Corporations face the sea.

3.1.8 The Village Panchayats were graded in 1983 based on theirannual natural income i.e. income excluding all grants-in-aid,contributions and debt heads. The grading at that point oftime may be seen in Table 3.5.

Table 3.5

Classification of Village Panchayats as per extant incomenorms.

Annual income Grade No.

1. Rs.1.75 lakhs and above Special Grade 350

2. Rs. one lakh and above but below Rs.1.75 lakhs First Grade 435

3. Rs.50,000/- and above but below Rs. one lakh. Second Grade 202

4. Below Rs. 50,000/- Third Grade 14

Total 1001

3.1.9 The grading using the same norms by the First SFC showed979 Village Panchayats as Special Grade and the remainingfour Panchayats as First Grade and Second Grade (two each)on the basis of the data on 987 Village Panchayats availablewith them.

3.1.10 Simi lar ly Munic ipa l Counci l s were graded in 1993. Theclassification of the Municipal Councils may be seen in Table3.6.

36

Table 3.6.

Classification of Municipalities as per extant income norms.

Annual income Grade No.

1. Rs. 70 lakhs and above First Grade 14

2. Rs. 40 lakhs and above

but below Rs.70 lakhs Second Grade 21

3. Below Rs. 40 lakhs. Third Grade 19

Total: 54

Subsequently Mattannur was constituted as a Municipality in1996 and Perinthalmanna was upgraded to the status of aGrade II Municipality in 1999.

3.1.11 A few interesting statistical highlights regarding LSGIs aregiven below:

(1) Largest Village Panchayat(area)

(2) Largest Village Panchayat(population)

(3) Smallest VillagePanchayat (area)

(4) Smallest VillagePanchayat (population)

(5) Largest Block Panchayat(area)

Kumili – 795.28 Sq.KM.

Munnar Grama Panchayat –70,343

Valapattanam GramaPanchayat –2.04 Sq. KM.

Vattavade GramaPanchayat – 4,588

Azhutha Block Panchayat–1062.23 Sq.KM.

37

Kuttippuram BlockPanchayat – 17,03,643

Kulanada Block Panchayat –21.50 Sq.KM.

Kattappana Block Panchayat– 15,594

Idukki District Panchayat –5090.59 Sq.KM.

Malappuram DistrictPanchayat – 28,13,880

Alapuzha District Panchayat– 1250.88 Sq.KM

Wayanad District Panchayat– 6,54,881

Payyannur –54.63 sq.km.

Alappuzha – 1,74,666

Guruvayoor –6.49sq.km.

Guruvayoor-20,216

(6) Largest Block Panchayat(population)

(7) Smallest BlockPanchayat (area)

(8) Smallest BlockPanchayat (population)

(9) Largest DistrictPanchayat (area)

(10) Largest DistrictPanchayat (population)

(11) Smallest DistrictPanchayat (area)

(12) Smallest DistrictPanchayat (population)

(13) Largest Municipality(area)

(14) Largest Municipality(population)

(15) Smallest Municipality(area)

(16) Smallest Municipality(population)

38

FINANCIAL POSITION OF LOCALGOVERNMENTS

INCOME OF LINCOME OF LINCOME OF LINCOME OF LINCOME OF LOCAL GOOCAL GOOCAL GOOCAL GOOCAL GOVERNMENTSVERNMENTSVERNMENTSVERNMENTSVERNMENTS

3.2 For the purposes of this Report, income of local governmentsis discussed in two parts, the first part covering the traditionalsources of income, which existed before 1994, and the secondpart covering the grant-in-aid given by Government to coverthe expenditure on additional responsibilities transferred tolocal governments through the legislative changes made in1994.

TRADITIONAL SOURCES OF INCOME

3.3 These are available only to the Village Panchayats and ULBs.They could be classified into the following categories.

(1) Tax Revenue

(2) Non-tax Revenue

(3) Grants-in-aid

(4) Loans

TAX REVENUE

3.4A3.4A3.4A3.4A3.4A Tax Revenue could be further divided into three.

(a) Own Taxes

(b) Assigned Taxes

(c) Shared Taxes

39

3.4A.13.4A.13.4A.13.4A.13.4A.1 OWN TAXESOWN TAXESOWN TAXESOWN TAXESOWN TAXES

These are taxes directly demanded and collected by VillagePanchayats, Municipalities and Corporations.

(i)(i)(i)(i)(i) PROPERTY TAX. Property Tax constitutes the major itemof revenue for the Village Panchayats, Municipalities andCorporat ions , which have a per capi ta co l l ec t ion ofRs.12.39, Rs.77.62 and Rs. 151.30 respectively. Thoughamendments have been brought about in the Kera laPanchayat Raj Act and the Kerala Municipality Act in 1999to introduce plinth area based assessment of Property Taxfor both residential and non-residential buildings includ-ing commercial buildings, rules and operational instruc-tions have not yet been issued. Therefore, Property Taxcontinues to be assessed as per the old system based onrental value. In anticipation of switching over to the newmethod of assessment Village Panchayats have not had anygeneral revision of Property Tax since 1993 and in thecase of ULBs where the general revision varies from oneMunicipality to another there has not been any such revi-sion after 1998. This has prevented the usual periodic in-crease in Property Tax, which normally works out to be25% at the time of each general revision.

In the case of Village Panchayats, Property Tax is assessedas per ru les i s sued under Sect ion 203 of the Kera laPanchayat Raj Act. The rate is fixed as between 6 to 10%of the annual rental value in the rules. (This has not beenamended in consonance with the Act)

The rates fixed as per the amended Section 233 of theKerala Municipality Act are given in Table 3.7.

3.4A.1.1

3.4A.1.2

3.4A.1.3

40

TABLE 3.7.

PROPERTY TAX RATES IN ULBs.

Minimum rates

Town Municipality CorporationPanchayat

(i) Tax for general purposes 4% 5% 6%

(ii) for lighting 1% 2% 2%

(iii) for drainage .. .. 2%

(iv) for water supply .. .. 1%

(v) Tax for sanitation 1% 2% 2%

Total 6% 9% 13%

The maximum rate is 20% for Town Panchayats, 25% forMunicipalities and Corporations.

3.4A.1.4 Property Tax constitutes 15 percent of the tax and non-taxrevenues of Village Panchayats; the figure for Municipalitiesis 21.39 and for Corporations, it is 35.32. Property Tax hasgrown by 40.34% over a period of six years in the case ofVi l lage Panchayats . The increase for Munic ipal i t ies andCorporations is 66.27% and 76.33% respectively.

3.4A.1.5 It is interesting to note that the LSGIs tend to levy lower taxeven when they have a range to choose from. The First SFChas g iven the deta i l s re la t ing to Vi l lage Panchayats andMunicipalities, which can be seen in Tables 3.8 and 3.9.

41

TABLE 3.8.

Rate of Building Tax in 1985 and 1995 in Village Panchayats.

Rate at which Building No. of Panchayats No. of PanchayatsTax is levied in 1985 in 1995

6% 703 5467% 94 120

7.5% 4 Nil8% 155 2179% 12 4210% 33 45

Total: 1001 970*

* Data from 21 Panchayats have not been received.

TABLE 3.9.

Rate of Property Tax in 1995 in Urban Local Governments.

Rate at which No. of Corporations No. of MunicipalitiesBuilding Tax is levied in 1995 in 1995

10% .. 2212% .. 9

12.5% .. 113% .. 314% .. 515% 1 7

15.5% .. 116% .. 1

16.5% .. 117% .. 2

17.5% .. 118% 1 ..21% .. 1

21.25% 1 ..

Total: 3 54

42

(ii)(ii)(ii)(ii)(ii) PROFESSION TAXPROFESSION TAXPROFESSION TAXPROFESSION TAXPROFESSION TAX. Profession Tax is levied from in-dividuals and companies by virtue of Section 204 of theKera la Panchayat Ra j Act in the case of Vi l l agePanchayats and Section 245 of the Kerala MunicipalityAct in the case of Municipalities and Corporations. Allcompanies and individuals transacting business or en-gaged in a profession for at least 60 days in a half yearare bound to pay the tax at such rates as are fixed by theconcerned local government subject to the maximumrates prescribed by Government. However, Article 276(2) of the Indian Constitution has fixed the maximumtax leviable per year at Rs.2500/-. Now the 11th FinanceCommission has recommended that this provision betaken out of the Constitution and be made part of aCentral Act so that its amendment could be easily made.

Based on the report of the First SFC, Profession Taxhas been revised in Village Panchayats, (TABLE 3.10).But in the case of ULBs the revision is yet to be carriedout. The old rates are stil l followed, (TABLE 3.11).However, Dearness Allowance is also now included inthe calculation of income for assessment of ProfessionTax in ULBs as suggested by First SFC.

3.4A.2

3.4A.2.1

TABLE 3.10

RATES OF PROFESSION TAX IN VILLAGE PANCHAYATS

Class Half-yearly income Maximumhalf-yearly tax

I Between Rs.12,000 and 17,999 Rs.120II Between Rs.18,000 and 29,999 Rs.180III Between Rs.30,000 and 44,999 Rs.300IV Between Rs.45,000 and 59,999 Rs.450V Between Rs.60,000 and 74,999 Rs.600VI Between Rs.75,000 and 99,999 Rs.750VII Between Rs,1,00,000 and 1,24,999 Rs.1,000VIII Above Rs.1,25,000 Rs.1,250

43

II More than Rs.5,400 but not more than 7,800 Rs.15

III More than 7,800 but not more than 10,800 Rs.24

IV More than 10,800 but not more than 14,400 Rs.37

V More than 14,400 but not more than 18,000 Rs.50

VI More than 18,000 but not more than 24,000 Rs.75

VII More than 24,000 but not more than 30,000 Rs.100

VIII More than 30,000 but not more than 36,000 Rs.125

IX More than 36,000 but not more than 42,000 Rs.175

X More than 42,000 but not more than 48,000 Rs.250

XI More than 48,000 but not more than 72,000 Rs.500

XII More than 72,000 but not more than1,02,000 Rs.750

XIII More than 1,02,000 but not more than1,26,000 Rs.1,000

XIV More than 1,26,000 Rs.1,250

TABLE 3.11

RATES OF PROFESSION TAX IN ULBs

Class Half-yearly income Maximum(Rs) half-yearly

tax

I More than 3,600 but not more than 5,400 Rs.9

44

3.4A.2.2 Profession Tax constitutes the second largest source of ownincome for the Village Panchayats and has the 5th posi-tion for the Urban Local Bodies. During the last six yearsthe tax has grown by 101.6%, 110.49%, and 180.26% inVillage Panchayats, Municipalities and Corporations respec-tively. This has been mainly due to the steep increase insalary due to the Pay Commission Recommendations anddue to the inclusion of DA in the calculation of income inULBs.

3.4A.33.4A.33.4A.33.4A.33.4A.3 (iii)(iii)(iii)(iii)(iii) ENTERENTERENTERENTERENTERTTTTTAINMENT TAXAINMENT TAXAINMENT TAXAINMENT TAXAINMENT TAX::::: Entertainment Tax is the thirdlargest source of income for Village Panchayats and the sec-ond largest source of income for Municipalities and Cor-porations. In fact in the case of 21 Municipalities, Enter-tainment Tax constitutes the single largest source of ownrevenue (Annexure 3.1)

3.4A.3.1 Entertainment Tax is an own tax of local governments inKerala and is collected according to the provisions of Sec-tion 3 of the Local Authorities Entertainment Tax Act. Con-sequent on the recommendations of the first SFC, Addi-tional Tax on Entertainment has been merged with Enter-tainment Tax and the Kerala Additional Tax on Entertain-ment and Surcharge on Show Tax Act 1963 has been re-pealed. Now, as per the unified Act, Entertainment Tax isfixed between 24 to 48% of the price of admission.

3.4A.3.2 Though Entertainment Tax constitutes a significant localgovernment income it is to be noted that there are no the-a t res e i ther temporary or permanent in 331 Vi l l agePanchayats. Although Entertainment Tax has grown by48.98% in Village Panchayats, 54.95% in Municipalities,and 44.21% in Corporations over the last six years, it isseen that gross collection of Entertainment Tax declined

45

both in Village Panchayats and Municipalities during theyear 1998-99 in comparison with the previous year.

3.4A.3.3 There appears to be considerable ‘escaped’ tax in this item.This issue was considered in detail by the First SFC whichrecalled that both the earlier Municipal Finance Commis-sions viz., the Naha Commission 1985 and the MohandasCommission 1993 had recommended that the collection ofthe Entertainment Tax be based on gross seating capacityand recommended optional switchover to taxation basedon seating capacity. Analysis of figures given to SFC bythe LSGIs shows that the average collection in VillagePanchayats is equivalent to the average occupancy of 9.5%;the average occupancy for Municipalities and Corporationsworks out to 33% and 35% respectively. In spite of cin-emas facing competition from Cable TV, it is felt that theoccupancy would have been much higher.

3.4A.3.4 Though Entertainment Tax Act has been amended and anenabling provision introduced to tax on the basis of seat-ing capacity the rules have not yet been framed. Also cer-tain issues like general exemptions given to dramatic per-formances and circus shows, provision for blanket exemp-t ions f rom tax e tc . need a re look in the context ofdecentralisation.

3.4A.43.4A.43.4A.43.4A.43.4A.4 (iv)(iv)(iv)(iv)(iv) ADADADADADVERVERVERVERVERTISEMENT TAXTISEMENT TAXTISEMENT TAXTISEMENT TAXTISEMENT TAX. Advertisement Tax has relativelygood potential in a consumerist state like Kerala. But therealization of revenue under this head has been quite low.It is seen that only 121 Village Panchayats are collectingAdvertisement Tax. It constitutes only 0.34.% of own rev-enue in Municipalities and 0.62% in Corporations; in thecase of Village Panchayats its share is a paltry 0.04%

Advertisement Tax is collected as per the provisions of Sec-

46

tion 209 of the Kerala Panchayat Raj Act and 271 of theKerala Municipality Act. The tax is collected based on bye-laws framed by the Village Panchayats and ULBs. Thereare no rules issued by the Government regarding minimumrates or the mode of collection.

3.4A.53.4A.53.4A.53.4A.53.4A.5 (v)(v)(v)(v)(v) SERSERSERSERSERVICE TAXVICE TAXVICE TAXVICE TAXVICE TAX: This tax exists only in Village Panchayats.In ULBs it is an inbuilt component of Property Tax. It isprovided for in Section 200 of the Kerala Panchayat RajAct as per which Government is authorised to fix the mini-mum rates. The revised rules are under examination by theSubject Committee of the Legislature and are expected tobe issued soon. The accepted recommendation of the FirstSFC to have an independent Service Tax has not yet beenoperationalised. The total collection of Service Tax in allthe 976 Village Panchayats for which the data is availablecomes to Rs.1.89 crores or 0.7% of the own revenue.

3.4A.63.4A.63.4A.63.4A.63.4A.6 (vi)(vi)(vi)(vi)(vi) SHOW TAX INCLSHOW TAX INCLSHOW TAX INCLSHOW TAX INCLSHOW TAX INCLUDING SURUDING SURUDING SURUDING SURUDING SURCHARGECHARGECHARGECHARGECHARGE::::: This tax islevied as per Section 200 of the Kerala Panchayat Raj Actand Section 269 of the Kerala Municipality Act, which em-power the local governments to levy and collect Show Taxon every show which includes any entertainment, exhibi-tion, performance, amusement game, sport or race, that isperformed in their territory. The Surcharge was collectedas per the Additional Entertainment Act and Surcharge onShow Tax Act 1963. Now with the repeal of this Act, Sur-charge cannot be realized. But steps to increase the exist-ing rate by 25% have not yet been taken.

The present rates of Show Tax are indicated in Table 3.12.

47

The rates for Village Panchayats have not yet been revised inaccordance with the recommendations of the First SFC.

The collection figures of Show Tax including surcharge for theVillage Panchayats and for the Municipalities and Corporationsare shown in Table 3.13.

TABLE 3.12.

RATES OF SHOW TAX.

a) Panchayats

Rate of Tax per show

1) Regular cinematograph exhibitions at licenced theatres Rupees Two

2) Other cinematograph exhibitions Rupees Ten

3) Regular shows other than cinemas Rupees Five

4) Other exhibitions Rupees Thirty

b) Municipalities

Rate of Tax per show

1) Regular cinematograph exhibitions at licenced theatres Rupees Ten

2) Other cinematograph exhibitions Rupees Twenty

3) Regular shows other than cinematograph exhibitions conducted at the same place daily. Rupees Twenty

4) Other shows Rupees Fifty

48

TABLE 3.13.

Receipts from Show Tax & Surcharge on Show Tax.

(Rs. in lakhs)

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Panchayats 26.6 33.76 31.41 46.52 34.08 38.32

Municipalities 8.22 8.37 9.61 9.62 9.75 9.15

Corporations 5.21 3.41 3.77 3.37 5.09 3.89

3.4A.73.4A.73.4A.73.4A.73.4A.7 (vii)(vii)(vii)(vii)(vii) CESS ON CONVERSION OF LCESS ON CONVERSION OF LCESS ON CONVERSION OF LCESS ON CONVERSION OF LCESS ON CONVERSION OF LAND USEAND USEAND USEAND USEAND USE: This is a cesswhich can be levied by local governments for conversionof land use from paddy field, marshy land, pond or waterbody into garden or building site subject to the provisionsof Kerala Land Utilisation Order 1967 issued under theEssential Commodities Act. Since there are severe restric-tions on conversion of land use in Kerala, the collectionhas been naturally low. In Village Panchayats it was only ameagre sum of Rs.0.64 lakh in 1998-99; in the case ofMunicipalities and Corporations it was just Rs.5.53 lakhduring the same period.

3.4A.83.4A.83.4A.83.4A.83.4A.8 (viii)(viii)(viii)(viii)(viii)TAX ON ANIMALS, VESSELS AND VEHICLESTAX ON ANIMALS, VESSELS AND VEHICLESTAX ON ANIMALS, VESSELS AND VEHICLESTAX ON ANIMALS, VESSELS AND VEHICLESTAX ON ANIMALS, VESSELS AND VEHICLES: Thisis applicable only to ULBs and is levied as per Section 260of the Kerala Municipality Act 1994 which al lows theMunicipal Council to levy, based on its resolution, tax ondomestic animals etc. This is a very insignificant item andthe total collection for Municipalities and Corporationsduring 1998-99 amounted to Rs.2000/- only.

3.4A.93.4A.93.4A.93.4A.93.4A.9 (ix)(ix)(ix)(ix)(ix) TAX ON TIMBERTAX ON TIMBERTAX ON TIMBERTAX ON TIMBERTAX ON TIMBER: : : : : This again is a tax applicable only toULBs. It is collected as per Section 277 of the Kerala Mu-

49

nicipality Act which allows the Council to collect in themanner decided by it a tax on timber brought into theMunicipality at the rate of Rs.24/- per tonne. This hasalso fallen into disuse and only Kozhikode Corporationwhich has the traditional timber yard of Kallai within itsarea is realizing this tax which fetched it a revenue ofRs.97,000/- during 1998-99. This item of revenue hasbeen declining year after year.

3.4A.103.4A.103.4A.103.4A.103.4A.10 (x)(x)(x)(x)(x) SURSURSURSURSURCHARGESCHARGESCHARGESCHARGESCHARGES: Both the Village Panchayats (as per Sec-tion 208 of the Kerala Panchayat Raj Act) and ULBs (asper Section 230 of the Kerala Municipality Act) are em-powered to l evy Surcharges . In the case of Vi l l agePanchayats up to 5% Surcharge can be levied on the Prop-erty Tax subject to a maximum of two Surcharges and inthe case of ULBs a Surcharge not exceeding 10% can belevied on any Tax other than Profession Tax. This Sur-charge is to be levied for providing for any specific ser-vices or amenity in the case of ULBs and for meeting anyextraordinary expenditure by way of implementation of ascheme, plan or project in the case of Village Panchayats.This item has not been tapped in any of the ULBs. ForVillage Panchayats the total collection during 1998-99 wasRs.5.29 lakh, which works out to just 0.15 % of the Prop-erty Tax collected during the same year. It is noteworthythat even with specific quid pro quo, LSGIs have been re-luctant to impose Surcharges.

50

3.4B3.4B3.4B3.4B3.4B ASSIGNED TAXESASSIGNED TAXESASSIGNED TAXESASSIGNED TAXESASSIGNED TAXES

These taxes are collected by the Government but the entirerevenue is assigned to local governments.

3.4B.13.4B.13.4B.13.4B.13.4B.1 (i)(i)(i)(i)(i) BASIC TAXBASIC TAXBASIC TAXBASIC TAXBASIC TAX. . . . . Kerala does not have a traditional system ofland revenue. Instead it has a general tax on land knownas the Basic Tax. The rates of Basic Tax are given in Table3.14

TABLE 3.14.

RATES OF BASIC TAX

Local Body Rate

Panchayat area Re. 1/- (if the aggregate extent of landheld by a land holder does not exceed20 ares Ps. 50 per are)

Town Panchayat / Municipality. Rs. 2/- (if the aggregate extent of landheld by a land holder does not exceed 6ares Re. 1/- per are)

Municipal Corporation area Rs. 4/- (if the aggregate extent of landheld by a land holder does not exceed 2ares Rs.2/- per are)

3.4B.1.1 The entire collection is given to the rural LSGIs after deductinga collection charge of 3%. 3/8th of the Basic Tax is given to theVillage Panchayats, 3/10th to the Block Panchayats, and 1/5th tothe District Panchayats. The remaining 1/8th is credited to theRural Pool. Except in the case of Rural Pool, the distribution isas per the area of the concerned Panchayat. Though Govern-ment had accepted the recommendation of the First SFC to givea share of Basic Tax to the ULBs this has not been operationalisedso far.

51

3.4B.1.2 The Basic Tax collected and distributed during the last fiveyears is shown in Table 3.15.

TABLE 3.15.

DETAILS OF BASIC TAX GRANT

(Rs. in crores)

YEAR AMOUNT COLLECTED AMOUNT DISTRIBUTED*

1995-96 13.27 5.25

1996-97 13.57 14.18

1997-98 13.52 11.64

1998-99 21.41 15.39

1999-2000 22.46 6.98

* Includes three instalments of old arrears distributed at Rs.8.41 Crore perinstalment

3.4B.23.4B.23.4B.23.4B.23.4B.2 (ii)(ii)(ii)(ii)(ii) SURSURSURSURSURCHARGE ON STCHARGE ON STCHARGE ON STCHARGE ON STCHARGE ON STAMP DUTYAMP DUTYAMP DUTYAMP DUTYAMP DUTY::::: Under the provisionsof the Kerala Stamp Act 1959, for every transaction relat-ing to land, Stamp Duty and Registration fee are levied.As per Section 206 of the Kerala Panchayat Raj Act andSect ion 270 of the Kera la Munic ipa l i ty Act , Vi l l agePanchayats and ULBs are entitled to levy 5% of the amountof the value of the property transacted. But in practiceonly the pre 1994 rates of Surcharge i.e. 4% for VillagePanchayats and Municipalities and 5% for Corporations islevied.

3.4B.2.1 The earlier and the present rates are given in Table 3.16.

52

TABLE 3.16.

Rate of Stamp Duty and Surcharge underthe 1960 and 1994 Acts

Stamp Surcharge Registration Totalduty fee*

Under 1960 Acts

Panchayats 6% 4% 2% 12%

Municipalities 8.5% 4% 2% 14.5%

Corporations 8.5% 5% 2% 15.5%

The above rates were introduced from 1-4-1971

Under 1994 Acts

Panchayats 6% 5%** 2% 13%

Municipalities 8.5% 5% 2% 15.5%

Corporations 8.5% 5% 2% 15.5%

* Registration fee is collected by State Government and is not shared withLocal Bodies.

** 5% is the maximum rate permitted. At the time of the Report the rate col-lected remains at 4%

3.4B.2.2 In accordance with the recommendations of the First SFC,Government have introduced a system whereby the receiptsare shown in the Budget under the Head of Account“0030-Stamps and Registration – 02 Stamps non-judicial901 – Deduct payment to Local Bodies of net proceeds ofDuty on Transfer of Properties” which enables direct pay-ments to local governments of the amounts collected dur-ing the financial year. The amount collected and distrib-uted during the last five years is shown in Table 3.17.

53

TABLE 3.17.

DISTRIBUTION OF SURCHARGE ON STAMP DUTY

(Rs. in lakhs)

Year Name of Local Collected DistributedGovernment

1995-96 Village Panchayats 7144.53 3779.20

Municipalities 1256.65 899.46

Corporations 1413.07 1570.96

1996-97 Village Panchayats 7045.83 5450.90

Municipalities 1328.50 1367.76

Corporations 1124.57 811.05

1997-98 Village Panchayats 6093.36 6889.22

Municipalities 1105.29 1217.68

Corporations 732.00 862.08

1998-99 Village Panchayats 5398.32 9258.22

Municipalities 1070.85 1496.66

Corporations 1112.43 1500.19

1999-2000 Village Panchayats 8199.47 9941.86

Municipalities 1111.65 1347.87

Corporations 997.86 1209.91

NOTE:- There are time lags between collection and distribution.

3.4B.2.3 As per G.O. (Ms) 118/94/LAD dated 02.08.1994 the In-spector General of Registration is empowered to deductdues to Kerala Water Authority from Village Panchayats,Municipalities and Corporations from the Surcharge on

54

Stamp Duty and pay them directly to the Kerala WaterAuthority (KWA). The amounts thus deducted and givento the Water Authority in the last five years are indicatedin Table 3.18.

TABLE 3.18

STAMP DUTY DEDUCTED AND PAID TO KWA

(Rupees in lakhs)Amount deducted

Year Village Municipalities CorporationsPanchayats

1995-96 755.83 179.79 314.19

1996-97 1362.38 272.54 182.21

1997-98 1078.97 174.60 172.41

1998-99 1851.65 297.86 295.62

1999-2000 1988.38 269.58 241.99

3.4B.2.4 Stamp Duty constitutes an important source of revenue oflocal governments and it constitutes 13.71% of the totalOwn revenue of Village Panchayats, 9.37% of Municipali-ties and 17.5% of Corporations during 1998-1999. Theproceeds are distributed to ULBs according to the placeof registration of the transaction and to Village Panchayatson population basis (other than the 25% credited to theRural Pool).

55

3.4C3.4C3.4C3.4C3.4C SHARED TAXSHARED TAXSHARED TAXSHARED TAXSHARED TAX

3.4C.13.4C.13.4C.13.4C.13.4C.1 MOTOR VEHICLES TAXMOTOR VEHICLES TAXMOTOR VEHICLES TAXMOTOR VEHICLES TAXMOTOR VEHICLES TAX. This is the only shared tax and itis called Vehicle Tax Compensation (VTC) and is given to lo-cal governments as per Section 19 of the Motor Vehicles Taxa-tion Act 1976.

3.4C.1.1 20% of the net collection of Motor Vehicles Tax is distributedamong Village Panchayats and ULBs as per road length ac-cording to the formula based in unit length of roads given inthe Table 3.19.

TABLE 3.19

CALCULATION OF ROAD UNITS FOR DISTRIBUTION OF VTC

Basic Unit = 1 Km. of gravelled road (Unit cost Rs.3000/-)

UNIT VALUE OF OTHER TYPES OF ROADS

Cement Concrete : Double Lane = 1.6 units.

Cement Concrete : Single Lane = 0.8 units

Black topped : Double Lane = 10.6 units

Black topped : Single Lane = 5.3 units

Metalled road : Double Lane = 7.5 units

Metalled road : Double Lane = 3.7 units

Actual collection of Motor Vehicles Tax and the actual distri-bution during the last five years can be seen in Table 3.20.

56

TABLE 3.20

COLLECTION AND DISTRIBUTION OF MVT TO LSGIs

(Rs. in lakhs)

Year Gross Net Amount PercentageCollection Collection distributed

1995-96 21694 21043 2500 11.88

1996-97 22109 21445 4348 20.28

1997-98 27425 26602 5148 19.35

1998-99 29261 28383 4990 17.58

1999-2000 37120 36006 7885 21.90

3.4C.1.2 Over the years there used to be substantial arrears in the pay-ment of Basic Tax, Surcharge on Stamp Duty and Vehicles TaxCompensation. Based on the recommendations of the FirstSFC, Government released Rs.150 crores in three instalmentsas a one-time settlement of dues under Basic Tax, Surchargeon Stamp Duty and VTC.

NON-TAX REVENUE

3.53.53.53.53.5 Non-tax revenue of Village Panchayats, Municipalities and Cor-porations could be classified as follows:

(1) Licence fee

(2) Gate fee

(3) Rent from Property

(4) Income from Property other than rent.

57

(5) Permit fee

(6) Registration fee

(7) Service/User charge

(8) Other sources

3.5.13.5.13.5.13.5.13.5.1 LICENCE FEELICENCE FEELICENCE FEELICENCE FEELICENCE FEE : : : : : This constitutes the most important sourceof non-tax revenue. The following are the important items forwhich licence fees are collected by local governments.

(i) Trade Licences

(ii) Licences under prevention of Food Adulteration Act.

(iii) Licences under the Kerala Cinemas Regulation Act.

(iv) Licencing of Private Slaughter House.

(v) Licencing of Private Markets

(vi) Licences under the Kerala Places of Public ResortsAct

(vii) Licencing of Private Parking and Halting Places

(viii) Licencing of Private Burial and Burning Grounds

(ix) Licencing of Technical Experts

(x) Licencing of Domestic Animals

(xi) Licencing of Animal Stalls kept for commercial purposes.

(xii) Licencing of Special Trades like Butchers, Fishmongers, Poulterers, Commission Agents and Brokers.

58

3.5.23.5.23.5.23.5.23.5.2 GAGAGAGAGATE FEESTE FEESTE FEESTE FEESTE FEES : : : : : These are fees, which are normally farmed outby auction to the highest bidder who is then given the rightto regulate entry based on certain fees. The major sources ofgate fees are –

(1) Public Market

(2) Public Parking and Halting places

(3) Public Slaughter Houses

3.5.33.5.33.5.33.5.33.5.3 INCOME FROM PROPERINCOME FROM PROPERINCOME FROM PROPERINCOME FROM PROPERINCOME FROM PROPERTYTYTYTYTY: R: R: R: R: Rententententent. This is an important itemof non-tax revenue for urban local bodies and urbanized VillagePanchayats. Rents could be classified based on the type ofproperty.

1 . Rent from buildings

2 . Rent from lands

3 . Rent from cloak rooms and comfort stations

3.5.43.5.43.5.43.5.43.5.4 INCOME FROM PROPERINCOME FROM PROPERINCOME FROM PROPERINCOME FROM PROPERINCOME FROM PROPERTY OTHER THAN RENTTY OTHER THAN RENTTY OTHER THAN RENTTY OTHER THAN RENTTY OTHER THAN RENT: Thiscan be classified into three.

(i) Proceeds from sale of right to collect river sand.

(ii) Proceeds from sale of right to fish.

(iii) Proceeds from sale of usufructs.

3.5.53.5.53.5.53.5.53.5.5 PERMIT FEESPERMIT FEESPERMIT FEESPERMIT FEESPERMIT FEES: Permit fees are of two kinds.

(1) Fee for Building permits

59

(2) Fee for permits for the construction, establishmentor installation of factories, workshops or work placeswhere electricity is used.

3.5.63.5.63.5.63.5.63.5.6 REGISTRREGISTRREGISTRREGISTRREGISTRAAAAATION FEESTION FEESTION FEESTION FEESTION FEES: This can be grouped as follows:

1. Registration of Hospital and Para medical institutions.

2. Registration of Tutorials.

3. Registration of Births and Deaths.

4. Registration of Contractors (only in ULBs)

5. Registration of lodgings (only in Malabar area – un-der the Madras Public Health Act).

3.5.73.5.73.5.73.5.73.5.7 SERSERSERSERSERVICE/USER CHARGESVICE/USER CHARGESVICE/USER CHARGESVICE/USER CHARGESVICE/USER CHARGES: These relate to charges collectedfor use of utilities and amenities provided by the LSGIs.

3.5.83.5.83.5.83.5.83.5.8 INCOME FROM FERRIESINCOME FROM FERRIESINCOME FROM FERRIESINCOME FROM FERRIESINCOME FROM FERRIES: As per the Kerala Panchayat RajAct and the Kerala Municipality Act and as per the variousFerries Acts, function of providing ferries has been transferredto the Village Panchayats and ULBs. This income could beeither by auctioning of the right to ply ferries or by chargingfrom users.

3.5.9 FINES AND PENALFINES AND PENALFINES AND PENALFINES AND PENALFINES AND PENALTIESTIESTIESTIESTIES: These are realized by the LSGIswhen there is a contravention of regulations or there are be-lated payments. A study done in Municipalities shows thatthere is serious laxity in the enforcement of penal provisions[Annexure 3.2]

3.5.10 SUNDRSUNDRSUNDRSUNDRSUNDRY ITEMSY ITEMSY ITEMSY ITEMSY ITEMS: These miscellaneous sources of revenuecould be listed as follows:

60

(1) Proceeds from auctioning of meat stalls (done in afew Village Panchayats only).

(2) Interest on deposits.

(3) Endowments.

(4) Return on investments like shares.

(5) Contributions/donations.

(6) Hire charges of vehicles/machinery.

(7) Income from cattle pounds.

(8) Income from Libraries.

(9) Sale of Forms.

(10) Sale of unserviceable articles and fallen trees.

(11) Other items which cannot be classified.

3.5.10.1 The detai ls regarding the rates for each of the importantsources of non-tax revenue are given in the Annexures in Chap-ter IX relating to the existing and suggested rates.

The percentage share of important items of non-tax revenue isgiven in Table 3.21.

61

TABLE 3.21.

SHARE OF IMPORTANT ITEMS OF NON-TAX REVENUE IN TOTALNON-TAX REVENUE.

Item Village Municipality CorporationPanchayat

D & O Licence 4.45 3.32 7.51

PFA License 0.20 0.10 0.26

Cinematograph Licence 0.08 0.04 0.02

P.P.R. Licence 0.03 0.03 0.07

Building Permit fee 1.48 5.73 22.56

Market Fees, for Public Market 3.44 4.44 4.53

Public slaughter house-gate fee 0.20 0.56 0.76

Public Halting place fee 1.09 4.12 2.31

Rent on Buildings 11.03 32.74 29.49

Fines/Penalties 0.26 2.44 1.76

Ferry Service 0.49 0.01 2.05

River sand 33.00 2.75 Nil

Fisheries 1.01 Nil nil

3.5.10.2 Diagramatic depiction of shares of major sources of income inrespect of Village Panchayats, Municipalities and Corporations canbe seen in figures 3.1 to 3.6.

62

Village Panchayat

Figure 3.1

Figure 3.2

Share of items in direct Taxes (Village Panchayats 1998-99)

P roperty Tax48%

Profession tax36%

Ent: & Add: Ent: Tax13%

Other Taxes3%

63

Share of Natural Income (1998-99)

Property Tax16.99%

Profession tax12.78%

Ent: & Add: Ent: Tax4.79%

Other taxes1.25%

Assigned taxes21.97%

Shared taxes17.99%

Licence fees2.36%

Registration fees0.02%

Building permits0.55%

Gate fees1.90%

Usser charges4.22%

Other sources15.19%

M u n i c i p a l i t y

Figure 3.3

Share of items in direct taxes (Municipalities 1998-99)

Others0.97%

Profession tax9.42%

Property & service Tax

44.10%

Ent: & Add: Ent: Tax45.50%

Figure 3.4

Share in Own Revenue (Municipalities 1998-99)

DIRECT TAX47%

SHARED TAX7%

LICENCE FEES4%

ASSIGNED TAX9%

OTHERS33%

64

C o r p o r a t i o n

Figure 3.5

Share of items in direct taxes (Corporations 1998-99)

Property & service Tax

60.80% Profession tax

8.29%

Ent: & Add: Ent: Tax29.67%

Others1.24%

Figure 3.6

Share in Own fund (Corporations)

OTHERS14%

LICENCE FEES6%

SHARED TAX5%

ASSIGNED TAX18%

DIRECT TAX57%

65

TABLE 3.22.

GRANTS-IN-AID FROM THE RURAL POOL

(Rupees in Crores.)

Year 1998-99 1999-2000 2000-2001(Budgeted)

Amount 16.43 29.66 25.5

3.6.2 The grant for Level Crossing is given only to five VillagePanchayats to meet the additional burden on them due to ex-istence of manned Level Crossings whose establishment costsneed to be shared with the Railways.

3.6.3 In the case of ULBs there are two grants – General PurposeGrant and Specific Purpose Grant. General Purpose Grant isa per capita grant calculated as follows:

Corporation @ Rs.2/- per capita.

Major Municipalities @ Rs.2.50 per capita

Minor Municipalities @ Rs.3/- per capita

66

GRANT-IN-AID FROM GOVERNMENT

3.6 In the case of Village Panchayats, now there are only two Non-Plan Grants-in-aid from Government viz., Rural Pool and LevelCrossing grant-in-aid. Rural Pool has been created by poolingthe 14 specific purpose grants-in-aid, which were in vogueearlier, 25% of the surcharge on Stamp Duty and 1/8th of theBasic Tax. The amounts released to Village Panchayats afterthe constitution of Rural Pool are shown in Table 3.22.

TABLE 3.23

DISTRIBUTION OF GENERAL PURPOSE GRANTS

(Rupees in lakhs)

1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

Municipalities 71.31 71.31 64.49 64.42 64.51 64.48

Corporations 30.17 30.17 30.17 30.17 30.17 30.17

3.6.4 Specific Purpose Grant is given for identified purposes likerunning of Maternity and Child Welfare Centres, NurserySchools, Poor Homes, and carrying out Town Planning andTown Survey operations, Anti Mosquito operations etc. Thisis governed by the Specific Purpose Grant-in-aid Rules. Actu-ally it is a commitment by Government to share a portion ofthe running expenses of the selected services mentioned above,at the rate of half for Corporations and Major Municipalitiesand 2/3rd for Minor Municipalities. Actually the amount pro-vided for specific purpose grant is far less than what is re-quired as per rules. Originally the Grant-in-aid was given onlywith the prior approval of the Government. But during thelast few years it is given more or less as a general-purposegrant.

The amounts released to Municipalities and Corporations dur-ing the last five years are shown in Table 3.24.

67

It is governed by the General Purpose Grant-in-aid Rules1962. The amounts released under this head during the lastfive years are shown in Table 3.23.

TABLE 3.24.

DISTRIBUTION OF SPECIFIC PURPOSE GRANT-IN-AID

(Rupees in lakhs)

1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000

Municipalities 71.75 64.53 78.27 109.85 98.80 91.85

Corporations 70.82 67.99 88.42 51.04 13.50 46.50

3.6.5 In addition to the above mentioned grants, there are two kindsof special grants given to both Village Panchayats and ULBs.96 Primary Schools and 21 High Schools are run by VillagePanchayats and 3 Primary Schools and 2 High Schools arerun by ULBs. The Education Department gives a grant-in-aidfor running these schools, which are treated as Aided Schoolsas per the Kerala Education Rules.

The amounts given during the last three years are summarizedin the Table 3.25.

TABLE 3.25.

Grant-in-aid given to local governments for running Schools

(Rs. in lakhs)

Year Village Panchayat Municipality Corporation

1996-97 1.36 NIL NIL

1997-98 2.18 NIL 0.63

1998-99 4.16 NIL 0.23

68

Similarly, libraries run by Village Panchayats and ULBs areaffil iated to the Kerala Grandhasala Sangham, which givesgrant-in-aid as per the size of the library. The grant-in-aidgiven during the last three years are noted in Table 3.26.

TABLE 3.26.

Grant-in-aid given to local governments for running Libraries

(Rs. in lakhs)

Year Village Panchayat Municipality Corporation

96-97 5.29 1.94 0.52

97-98 14.99 1.92 0.58

98-99 4.95 2.34 0.73

LOANS

3.7 In the case of Village Panchayats, loans can be taken with priorGovernment permission from the Kerala State Rural Develop-ment Board (RDB) or Commercial Banks.With the acceptanceof the recommendation of the First SFC, Government decidedto restructure RDB. Now it does not give loans and is en-gaged in completing the construction projects taken up ear-lier. However, the Village Panchayats owe Rs.7.98 crores toRDB by way of overdues. In addition in the last two yearsVil lage Panchayats have been taking Housing Loans fromHUDCO and Co-operative Bank, jointly with the Block andDistrict Panchayats. LSGIs in Kollam have borrowed Rs.80crores f rom HUDCO in 2000-2001. S imi lar ly LSGIs inThiruvananthapuram have avai led themselves of Rs.89.62crores from the State Co-operative Bank. These loans are for

69

house construction for families Below the Poverty Line. Theyare guaranteed by the Government and repayment of interestwould be from future Plan funds and repayment of the princi-pal amount is taken care of by fixed deposits which wouldmultiply over a period to the amount needed for repayment.ULBs have also taken these special loans.

3.7.2 In the case of urban local governments the major sources ofloans are the Kerala Urban Development Finance Corporation(KUDFC), HUDCO and Commercial Banks. In addition thereare loans from Government. Institution-wise distribution ofloans taken by ULBs during the last five years is given in Table3.27.

TABLE 3.27.

LOANS AVAILED BY ULBs

Loan released by KUDFC

(Rupees in lakhs)

1995-96 1996-97 1997-98 1998-99 1999-2000

Corporations 2.7 NIL NIL 50.00 16.15

Municipalities 223.37 241.80 115.00 77.03 650.76

Loan released by HUDCO

1995-96 1996-97 1997-98 1998-99 1999-2000

Corporations 81.00 57.74 110.58 23.35 NIL

Municipalities 23.35 451.12 196.29 NIL 67.00

70

Loan Released by Commercial Banks

1995-96 1996-97 1997-98 1998-99 1999-2000

Corporations NIL NIL NIL NIL NILMunicipalities NIL NIL NIL NIL 75.00

FUNDS NOT USFUNDS NOT USFUNDS NOT USFUNDS NOT USFUNDS NOT USABLE FOR ITS ROUTINEABLE FOR ITS ROUTINEABLE FOR ITS ROUTINEABLE FOR ITS ROUTINEABLE FOR ITS ROUTINEFUNCTIONING BFUNCTIONING BFUNCTIONING BFUNCTIONING BFUNCTIONING BY LOCAL GOY LOCAL GOY LOCAL GOY LOCAL GOY LOCAL GOVERNMENTSVERNMENTSVERNMENTSVERNMENTSVERNMENTS

3.83.83.83.83.8 Both Village Panchayats and Municipalities have certain itemsof funds, which cannot be used by them and are kept normallyin the Debt Heads. The major items are, Earnest money De-posit, the Securities, Library Cess, Taxes deducted at source,contributions to Provident and Pension funds (for ULBs), Ad-vances etc.

GOVERNMENT GRANTS-IN-AIDFOR TRANSFERREDRESPONSIBILITIES

3.9 New forms of grant-in-aid are being given to all local govern-ments since 1995 to discharge the new responsibilities trans-ferred to them. These can be grouped into two.

1. General Plan grant-in-aid for local development projects.

2. Specific-purpose grant-in-aid for transferred respon-sibilities – Plan and Non-Plan.

71

3.9.13.9.13.9.13.9.13.9.1 GENERGENERGENERGENERGENERAL PLAL PLAL PLAL PLAL PLAN GRAN GRAN GRAN GRAN GRANTS-IN-AIDANTS-IN-AIDANTS-IN-AIDANTS-IN-AIDANTS-IN-AID. Government havebeen giving Plan Grants-in-aid for preparing local level devel-opment schemes. This is a practically untied grant, with thespecification that at least 40% of the grant-in-aid given toPanchayat Raj Institutions should be spent on the productivesector and not more than 30% can be spent on infrastructure;in the case of ULBs, the figures are 30% and 40% respec-tively. (In addition, for taking up Housing and Water supplySchemes up to 10% can be diverted from the productive sec-tor by any LSGI). The amounts given to various LSGIs dur-ing the last four years are shown in Table 3.28.

TABLE 3.28.

PLAN GRANT-IN-AID DEVOLVED TO LSGIs

(Rupees in crores)

Year District Block Village MunicipalitiesCorporationsPanchayat Panchayat Panchayat

1996-97* 28.00 15.00 100.00 54.00 15.00

1997-98 123.94 108.70 420.49 62.34 33.53

1998-99 142.67 135.02 549.54 81.90 40.87

1999-2000 148.39 144.41 568.81 88.16 44.03

2000-2001 153.06 148.79 579.91 89.56 44.67

* In 1996-97 Plan Grants were called untied Funds

Since 1998-99 the grant-in-aid is devolved as per the for-mula given in table 3.29.

72

TABLE 3.29.

FORMULA FOR DEVOLUTION OF PLAN GRANTS

Weightage (Percentage)

Grama Block District Municipalities/ Indicators Panchayat Panchayat Panchayat Corporations

1. Population (excludingScheduled Castes/Scheduled Tribes) 65 65 55 75

2. Geographical Area(Excluding Area underForests) 5 10 15 5

3. Area Under Paddy 5 — — —

4. Own Income(Grama Panchayats) 10 — — —

5. Composite Index ofAgricultural Labourers,Persons Engaged inLivestock, Fisheries etc.and Marginal Workers 15 25 20 —

6. Composite Index ofBackwardness, Houseswithout Latrines andHouses withoutElectricity. — — 10 20

Total: 100 100 100 100

3.9.23.9.23.9.23.9.23.9.2 S P E C I F I C P U R P O S E G RS P E C I F I C P U R P O S E G RS P E C I F I C P U R P O S E G RS P E C I F I C P U R P O S E G RS P E C I F I C P U R P O S E G RA N T S - I N - A I D F O RA N T S - I N - A I D F O RA N T S - I N - A I D F O RA N T S - I N - A I D F O RA N T S - I N - A I D F O RTRTRTRTRTRANSFERRED RESPONSIBILITIESANSFERRED RESPONSIBILITIESANSFERRED RESPONSIBILITIESANSFERRED RESPONSIBILITIESANSFERRED RESPONSIBILITIES: Kerala has followeda unique system of earmarking funds to various LSGIs as partof the budgetary process by introducing a minor Head ‘191’along with various Heads of Account operated by differentdepartments. Thus a local government entitlement has beencreated. Once the minor Head 191 is shown, the funds are

73

non-divertible by the departments for other purposes. Thesefunds could be broadly classified as follows:i Grant-in-aid for implementing transferred Plan schemes

both State sponsored and Centrally sponsored.

ii. Grant-in-aid for implementing specific programmes un-der non-plan, particularly welfare pensions.

iii. Non-plan grant-in-aid for running/maintaining institu-tions/offices transferred to local governments.

iv. Establishment grants for Block Panchayats and DistrictPanchayats.

3.10 GRGRGRGRGRANTANTANTANTANT-IN-AID FOR ST-IN-AID FOR ST-IN-AID FOR ST-IN-AID FOR ST-IN-AID FOR STAAAAATE AND CENTRTE AND CENTRTE AND CENTRTE AND CENTRTE AND CENTRALLALLALLALLALLY SPON-Y SPON-Y SPON-Y SPON-Y SPON-SORED PLSORED PLSORED PLSORED PLSORED PLAN SCHEMESAN SCHEMESAN SCHEMESAN SCHEMESAN SCHEMES

The State sponsored and Centrally sponsored schemes trans-ferred to various local governments as provided for in theBudget for the year 2000-2001 are summarized in Annexure- 3.3.

3.113.113.113.113.11 GRGRGRGRGRANTANTANTANTANT-IN-AID FOR SPECIFIC PROGR-IN-AID FOR SPECIFIC PROGR-IN-AID FOR SPECIFIC PROGR-IN-AID FOR SPECIFIC PROGR-IN-AID FOR SPECIFIC PROGRAMMES UNDERAMMES UNDERAMMES UNDERAMMES UNDERAMMES UNDERNON-PLNON-PLNON-PLNON-PLNON-PLANANANANAN

The details of non-plan grant-in-aid for specific programmesas given in the Budget for the year 2000-2001 are summa-rized in Annexure - 3.4.

3.123.123.123.123.12 NON-PLNON-PLNON-PLNON-PLNON-PLAN GRAN GRAN GRAN GRAN GRANTANTANTANTANT-IN-AID FOR RUNNING/MAINT-IN-AID FOR RUNNING/MAINT-IN-AID FOR RUNNING/MAINT-IN-AID FOR RUNNING/MAINT-IN-AID FOR RUNNING/MAINTAIN-AIN-AIN-AIN-AIN-ING THE OFFICES/INSTITUTIONS TRING THE OFFICES/INSTITUTIONS TRING THE OFFICES/INSTITUTIONS TRING THE OFFICES/INSTITUTIONS TRING THE OFFICES/INSTITUTIONS TRANSFERRED TOANSFERRED TOANSFERRED TOANSFERRED TOANSFERRED TOLOCAL GOLOCAL GOLOCAL GOLOCAL GOLOCAL GOVERNMENTSVERNMENTSVERNMENTSVERNMENTSVERNMENTS

For the assets and institutions transferred to local governments,Government meets the salary component as well as the opera-

74

tional expenses like supply of medicines in hospitals. How-ever, office expenses and maintenance costs are given as non-plan grants to LSGIs. The comparative figures for the lastfour years for Health, Education and Public Works Depart-ments who have transferred most of their assets to LSGIs canbe seen in Table 3.30.

TABLE 3.30

NON-PLAN GRANT-IN-AID TO LSGIs

(Rupees in lakhs)

Non-Plan Grant-in-aid for all local governments together

Name of Dept. 1996-97 1997-98 1998-99 1999-2000 2000-01

1. Health 2.27 2.59 2.69 3.10 2.78

2. General Education 367.00 481.00 484.00 484.00 536.00

3. PWD 1451.97 1597.17 1756.69 1932.16 2317.99

This clearly shows that the funds given to LSGIs are inadequate vis-à-vis the maintenance requirements. This underlines the need to ra-tionalize allocation of funds for establishment purposes and mainte-nance purposes in respect of the institutions and offices transferredto local governments.

3.133.133.133.133.13 NON-PLNON-PLNON-PLNON-PLNON-PLAN ESTAN ESTAN ESTAN ESTAN ESTABLISHMENT GRABLISHMENT GRABLISHMENT GRABLISHMENT GRABLISHMENT GRANT FOR BLOCK ANDANT FOR BLOCK ANDANT FOR BLOCK ANDANT FOR BLOCK ANDANT FOR BLOCK ANDDISTRICT PANCHADISTRICT PANCHADISTRICT PANCHADISTRICT PANCHADISTRICT PANCHAYYYYYAAAAATSTSTSTSTS

For meeting the establishment costs including salary and relatedexpenses of staff from the Panchayat Department deployed specifi-cally to the Block and District Panchayats, honorarium and travel

75

expenses of elected members and other office expenses, a grant-in-aid is paid to them. This grant-in-aid, which was fixed in 1996, hasnot been changed since then, even though the salaries of staff haveincreased considerably after the 1997 Pay Revision and the hono-rarium of elected members was enhanced based on the recommen-dation of the Committee on Decentralisation of Powers. As of noweach District Panchayat gets an annual grant of Rs. 16.43 lakh andeach Block Panchayat gets Rs. 4.01 lakh. Figures collected fromDistrict Panchayats and Block Panchayats show that this provisionis highly inadequate resulting in diversion of other grants-in-aid formeeting establishment cost. (Table 3.31).

TABLE 3.31RECEIPT AND EXPENDITURE OF THE ESTABLISHMENT

GRANTS FOR DISTRICT PANCHAYATS/BLOCK PANCHAYATS

District Panchayat

Year Receipt Expenditure Balance

1996-97 23000000 23974005 -974005

1997-98 23000000 27673952 -4973952

1998-99 23000000 30759337 -7759337

1999-2000 23000000 37830869 -14830869

Block Panchayat

1996-97 57000000 44354743.3 12645256.7

1997-98 61000000 5381-667.57 7189332.43

1998-99 61000000 66897540.97 -5897540.97

1999-2000 61000000 66952677.54 -5952677.54

76

EXPENDITURE OF LEXPENDITURE OF LEXPENDITURE OF LEXPENDITURE OF LEXPENDITURE OF LOCALOCALOCALOCALOCALGOGOGOGOGOVERNMENTSVERNMENTSVERNMENTSVERNMENTSVERNMENTS

EXPENDITURE FROM TRADITIONAL SOURCES

3.14 Expenditure from the traditional sources of revenue can beclassified into three.

1 . Establishment costs

2 . Expenditure on obligatory duties.

3 . Expenditure on development works.

The expenditure on these three categories and their sub-cat-egories over the last six years for Village Panchayats, Munici-palities and Corporations is summarized in Table 3.32.

TABLE 3.32

EXPENDITURE PATTERNS IN VILLAGE PANCHAYATS AND

ULBs.

ESTABLISHMENT COSTS

(1) (1) (1) (1) (1) SalariesSalariesSalariesSalariesSalaries

(Rupees in lakhs)

93-94 94-95 95-96 96-97 97-98 98-99

Village Panchayat 3562.49 4175.21 4906.10 6026.30 6597.46 8123.88

Municipality 2493.27 2707.06 3022.38 3589.28 4163.96 4443.18

Corporation 153545 154393 176603 199559 233709 238184

77

(2) Office Expenses(2) Office Expenses(2) Office Expenses(2) Office Expenses(2) Office Expenses

93-94 94-95 95-96 96-97 97-98 98-99

Village Panchayat 403.52 467.67 512.74 717.61 1002.08 1164.68

Municipality 192.12 215.58 259.26 333.14 424.79 366.96

Corporation 91.35 105.73 139.08 160.93 162.62 162.58

OBLIGATORY DUTIES

(1) Public Health/Sanitation (ex(1) Public Health/Sanitation (ex(1) Public Health/Sanitation (ex(1) Public Health/Sanitation (ex(1) Public Health/Sanitation (excluding salary)cluding salary)cluding salary)cluding salary)cluding salary)

93-94 94-95 95-96 96-97 97-98 98-99

Village Panchayat 72.60 393.89 496.77 729.15 810.94 810.32

Municipality 116.45 110.99 141.68 192.80 169.56 175.23

Corporation 143.65 177.02 173.01 210.83 225.90 250.16

(2) (2) (2) (2) (2) WWWWWater Supply/drainageater Supply/drainageater Supply/drainageater Supply/drainageater Supply/drainage

93-94 94-95 95-96 96-97 97-98 98-99

Village Panchayat 168.00 210.00 264.00 634.98 717.00 584.98

Municipality 169.77 383.77 363.37 531.34 548.22 573.76

Corporation 250.78 465.09 850.01 714.14 876.58 863.99

(3) Street Lighting(3) Street Lighting(3) Street Lighting(3) Street Lighting(3) Street Lighting

93-94 94-95 95-96 96-97 97-98 98-99

Village Panchayat 808.32 831.43 848.65 997.63 1266.52 1164.16

Municipality 327.95 353.23 3888.57 455.98 507.37 577.22

Corporation 265.70 254.63 354.73 399.62 462.35 337.79

78

DEVELOPMENT WORKS

(1) Roads

93-94 94-95 95-96 96-97 97-98 98-99

Village Panchayat 2126.47 2475.49 2853.82 3813.90 6138.24 3103.77

Municipality 1265.34 1468.65 1802.19 2684.68 3045.27 2698.92

Corporation 692.62 1066.45 767.64 1162.16 1445.21 1575.94

(2) Buildings(2) Buildings(2) Buildings(2) Buildings(2) Buildings

93-94 94-95 95-96 96-97 97-98 98-99

Village Panchayat 259.79 216.44 206.99 225.00 486.34 339.34

Municipality 823.97 883.53 978.85 1253.98 1446.51 1367.37

Corporation 126.96 221.33 446.97 395.11 434.13 1414.36

(3) (3) (3) (3) (3) Other amenitiesOther amenitiesOther amenitiesOther amenitiesOther amenities

93-94 94-95 95-96 96-97 97-98 98-99

Village Panchayat 705.08 528.95 499.99 711.49 1106.64 935.60

Municipality 216.22 144.53 170.48 177.69 332.86 174.51

Corporation 171.25 177.83 193.34 185.60 205.51 166.54

3.153.153.153.153.15 SUMMING UPSUMMING UPSUMMING UPSUMMING UPSUMMING UP

In order to get a full picture of the income and expenditure ofVillage Panchayats, Municipalities and Corporations (exceptin respect of plan grants), a detailed summary is presented inthe form of Annexures as shown below:

79

3.5 Relating to Village Panchayat

3.5.1 Total receipts (excluding grant-in-aid for peoples’ plancampaign of Village Panchayats 1993-94 to 1998-99

3.5.2 Abstract of Total receipts of Village Panchayats underown revenue

3.5.3 Percentage share of taxes to total Direct Tax Revenue

3.5.4 Percentage increase of taxes over previous year

3.5.5 Percentage increase of own revenue over previous years

3.5.6 Share of taxes in total own revenue

3.5.7 Share of each item under own revenue

3.5.8 Total expenditure of Village Panchayats for the years1993-94 to 1998-99 (excluding plan grant-in-aid forpeoples’ plan campaign

3.5.9 Per capita expenditure of Village Panchayats

3.6 Relating to Municipalities

3.6.1 Total receipts (excluding grant-in-aid for peoples’ plancampaign) of Municipalities 1993-94 to 1998-99

3.6.2 Abstract of Total receipts of Municipalities under ownrevenue

3.6.3 Percentage share of taxes to total own tax revenue

3.6.4 Percentage increase of taxes over previous year

3.6.5 Percentage increase of own revenue over previous years

3.6.6 Share of taxes in total own revenue

80

3.6.7 Share of each item under own revenue

3.6.8 Total expenditure of Municipalities for the years 1993-94 to 1998-99 (excluding plan grant in aid for peoples’plan campaign)

3.6.9 Per capita Expenditure of Municipalities

3.6.10 Total Receipts and Expenditure of Municipalities at aglance

3.7 Relating to Corporations

3.7.1 Total receipts (excluding grant-in-aid for peoples’ plancampaign of Municipal Corporations 1993-94 to 1998-9 9

3.7.2 Abstract of Total receipts of Municipal Corporationsunder own revenue

3.7.3 Percentage share of taxes to total own tax revenue

3.7.4 Percentage increase of taxes over previous year

3.7.5 Percentage increase of own revenue over previous years

3.7.6 Share of taxes in total own revenue

3.7.7 Share of each item under own revenue

3.7.8 Total expenditure of Municipal Corporations for theyears 1993-94 to 1998-99 (excluding plan grant inaid for peoples’ plan campaign)

3.7.9 Per capita Expenditure of Muncipal Corporations

3.7.10 Tota l Rece ipts and Expendi ture of Munic ipa lCorporations at a glance.

81

3.15.1 For meeting the establishment costs as well as performing theobligatory duties the Village Panchayats and ULBs can usetax revenue other than shared tax, non-tax revenue, specificpurpose and general purpose grants (in the case of ULBs) andRural Pool (in the case of Village Panchayats). The degree ofself sufficiency of various LSGIs can be gauged from Table3.33.

TABLE 3.33

SELF-SUFFICIENCY OF LSGIs

Expenditure Village Municipality Corporationcategories Panchayat

1.Salaries & Office All the All theexpenses. 964 Municipalities Corporations

2.Salaries, OfficeExpenses, Water 862 All the All theCharges and street light Municipalities Corporationscharges.

3.Salaries, officeexpenses, water charges, 849 All the All thestreet light charges and Municipalities Corporationssanitation services. (Except 4)

No. of local governments having sufficient funds

82

3.15.3 The comparative trend of increase in revenue in relation toincrease of expenditure on establishment as well as obligatoryduties over the last six years is given in figures 3.7, 3.8 and3.9 for Village Panchayats, Municipalities and Corporationsrespectively.

TABLE 3.34

SELF-SUFFICIENCY OF LSGIs

Expenditure Village Municipality Corporationcategories Panchayat

1.Salaries & Officeexpenses. 37.75% 48% 39%

2.Salaries, Office

Expenses, Water 40.26% 56% 48%Charges and street lightcharges.

3.Salaries, officeexpenses, water charges, 42.85% 58% 52%street light charges andsanitation services.

3.15.2 General picture of self sufficiency for establishment as well asobligatory functions as revealed by expenditure percentage forvarious categories of establishment and obligatory functionsis given in Table 3.34

83

Village Panchayats

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Revenue 943466 1240114 1385650 2099477 2413635 2597877

Expenditure 541924 577845 669400 845360 943309 1113131

Comparative Trend- Village Panchayats

0

500000

1000000

1500000

2000000

2500000

3000000

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Rs

in th

ousa

nds

RevenueExpenditure

84

FFFFFigurigurigurigurigure 3.7e 3.7e 3.7e 3.7e 3.7

M u n i c i p a l i t i e s 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Own Revenue 556459 629976 688885 819992 934930 999261

Expenditure 443519 494497 552927 667023 758832 798043

Comparative trend - Municipalities

0

200000

400000

600000

800000

1000000

1200000

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Own RevenueExpenditure

C o r p o r a t i o n

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Own Revenue 386603 411067 529989 511777 592810 650393

Expenditure 306960 321740 397427 440371 503455 479813

Comparative trend-Corporations

0

100000

200000

300000

400000

500000

600000

700000

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Own RevenueExpenditure

85

FFFFFigurigurigurigurigure 3.8e 3.8e 3.8e 3.8e 3.8

FFFFFigurigurigurigurigure 3.9e 3.9e 3.9e 3.9e 3.9

CHAPTER 4

THE DECENTRALISATIONPROCESS – A SUMMARY

4.1 Consequent on the 73 rd and 74 th Amendments to theConstitution, Kerala passed two new legislations in 1994, viz.,The Kerala Panchayat Raj Act 1994 and the Kerala MunicipalityAct 1994. They listed out the functional responsibilities of thethree tier Panchayat Raj Institutions and the Urban Local Bodiesin the Schedules of the Acts. However, most of the subjects listedwere quite general in nature and it cannot be said that there wasan attempt to consciously and clearly demarcate the functionaldomains of LSGIs in the sense of shar ing deve lopmenta lgovernance respons ib i l i t i e s wi th the Sta te and Centra lGovernments.

4.2 However, this deficiency was covered to some extent throughthe Government Order No.GO(P)189/95/LAD is sued inSeptember 1995 which provided for the transfer of a largenumber of institutions and staff to the different LSGIs. Thisorder indicated the policy framework for defining the functionalareas to be assigned to local governments. Also the order broughtout the key feature of decentralisation in the State i .e. , thestrengthening of Village Panchayats and the Urban Local Bodies.Only a limited number of institutions and staff were transferredto the Block Panchayats and District Panchayats. The details ofthe transfer are summarized in Annexure 4.1

4.3 But due to want of effective operational instructions and due tolack of sufficient resources, the LSGIs could not realize their

entitlements to any significant level.

The budget presented in 1996 February, can be considered asthe next important milestone in the decentralisation process. Itexpanded the concept of untied funds. It was in 1990 that forthe first time a small amount was set apart for Village Panchayatsas a plan scheme for which they could draw up their own schemesaccording to local priorities. This scheme, which had an allotmentof Rs. 28.58 crores in 1995-96, was stepped up to Rs.155.72crores and extended to all LSGIs, both urban and rural. Thebudget enshrined two important procedural innovations. Firstthe idea of a separate budget document for local governmentswas brought into effect. To this was added the innovation ofgiving the specific Head of Account “191” which indicated grantsto LSGIs and which allowed Heads of Department to transfercredit the amount only to the LSGIs. Any other way of drawingthe grants was prevented by this procedural device. Thus thelocal governments got legislative approval for their resourceallocation and a separate sub system of grants in aid, which couldflow only to LSGIs, was created. The second innovation relatesto bringing certain departmental Plan schemes into the specialsystem and they were the forerunners of the so called “State-sponsored schemes” which still constitute about a tenth of Plangrant-in-aid to LSGIs. Such schemes are implemented by LSGIsaccording to the guidel ines i ssued by the State or Centra lGovernments.

4.4 The most important landmark in the decentralisation process ofthe State is of course the momentous decision taken in July 1996to earmark 35 to 40% of the Plan resources to LSGIs and thelaunch of the People’s Plan Campaign in August 1996 to providea framework for decentralisation, flesh it out and infuse life intoit.

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4.5 Thus considerable resources were handed down to the LSGIsthrough this policy decision of the Government and properutilisation of the resources was attempted through the mechanicsof People’s Plan Campaign. The funds transferred to LSGIs aspart of this government decision are indicated in Table 4.1

Year State Plan Village Block District Munici Corpo Total PercentSize (in Panchayat Panchayat Panchayat pality ration oflakhs) Plan

size

1997- 285500 50686.42 38715.98 18885.64 1525.1 1384.58 111197.7 38.9598

1998- 310000 61460.7 23254.15 17061.74 10174.18 5848.23 117799 38.0099

1999- 325010 63925.3 20049.28 16973 8953 4434.42 114335 35.102000

2000-2001 353500 63637.38 18459.61 16667.47 9802.56 5673.79 114240.8 32.32

4.6 The availability of resources enabled the local governments torea l ize their funct ional responsibi l i t ies by formulat ing andimplementing developmental projects in respect of functionsassigned to them.

4.74.74.74.74.7 P E O P L E ’ S P LP E O P L E ’ S P LP E O P L E ’ S P LP E O P L E ’ S P LP E O P L E ’ S P LA N C A M PA N C A M PA N C A M PA N C A M PA N C A M PA I G N : A I G N : A I G N : A I G N : A I G N : Decentra l i sed loca l l eve lplanning has been used as the engine for harnessing public actionin favour of decentralisation. In order to shake the system andforce the process, a campaign approach has been followed. Thiscampaign has succeeded in setting the agenda for decentraliseddevelopment.

TABLE 4.1

TOTAL PLAN GRANTS TO LSGIs

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4.8 The People ’ s P lan Campaign has succeeded in providing aconcrete methodology for part ic ipatory plan for local leveldevelopment. The sa l ient features of this methodology aredescribed below, stage by stage.

4.8.14.8.14.8.14.8.14.8.1 Needs identifNeeds identifNeeds identifNeeds identifNeeds identificaicaicaicaicationtiontiontiontion: Through a meeting of Grama Sabha/Ward Sabha (in the case of urban local bodies), the felt needsof the community are identified. There is a period of environmentcreation to mobilise maximum participation in the Grama/WardSabhas. Statistics reveal that about 10 to12 percent of thepopulation has participated in the Grama/Ward Sabhas held aspart of the People’s Planning Campaign. The Grama/Ward sabhameetings are held in a semistructured manner with plenarysessions and sub- group sessions deal ing with specificdevelopmental issues. The decisions are minuted and forwardedto the Village Panchayats and ULBs.

4.8.24.8.24.8.24.8.24.8.2 SituaSituaSituaSituaSituation analtion analtion analtion analtion analysisysisysisysisysis: Based on the demands emanating fromthe Grama/Ward Sabha and based on developmental data, bothprimary and secondary, exhaustive Development Reports havebeen prepared and printed in the case of every LSGI in theState. These reports describe the status in each sector ofdevelopment with reference to available data, analyze theproblems and potential and point out broad strategies for futuredevelopment.

4.8.34.8.34.8.34.8.34.8.3 StrStrStrStrStraaaaatetetetetegggggy settingy settingy settingy settingy setting: Based on the Grama/Ward Sabha feed backand the Development Report, a one day seminar is held at thelocal government level in which participation of experts, electedmembers, representatives nominated by Grama/Ward Sabhas,and practitioners from among the public is ensured. TheseDevelopment Seminars decide the broad priorities and thegeneral thrust of developmental projects to be taken up for aparticular year.

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4.8.44.8.44.8.44.8.44.8.4 PrPrPrPrProjectisaojectisaojectisaojectisaojectisationtiontiontiontion: The ideas thrown up by the above threestages are translated into projects by Task Forces at the LSGIlevel. For each LSGI there are about 12 Task Forces dealingwith different sectors of development. Each Task Force isheaded by an elected member and is convened by the concernedgovernment official. The Vice Chairman of the Task Force isnormally a non-government expert in the sector. The projectsare prepared in the suggested format outlining the objectives,explaining the benefits, describing the funding and detailing themode of execution and the phasing of the project.

4.8.54.8.54.8.54.8.54.8.5 Plan fPlan fPlan fPlan fPlan finalisainalisainalisainalisainalisationtiontiontiontion: From among the projects, based on theallocation communicated, the concerned LSGI finalizes its planfor the year and this plan is submitted to the District PlanningCommittee (DPC) through the Expert Committees.

4.8.64.8.64.8.64.8.64.8.6 Plan vPlan vPlan vPlan vPlan vettingettingettingettingetting: The Expert Committees at the Block/Municipaland District level vet the projects for their technical viabilityand consonance with the government guidelines on planning andcosting and forward them to the DPC.

4.8.74.8.74.8.74.8.74.8.7 Plan aPlan aPlan aPlan aPlan apprpprpprpprpprooooovvvvvalalalalal: The DPC gives the formal approval to the plansafter which the LSGI can start implementation. It is to benoted that the DPC cannot change the priority of an LSGI. Itcan only ensure that government guidelines are followed.Administrative approval for implementation is given project-wiseby the concerned LSGI. Every local government has unlimitedpowers of Administrative Sanction subject only to the limits ofits financial resources.

4.8.7.1 The most noteworthy feature of the decentral ised planningprocess is the freedom to plan and prepare projects according to

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local priorities using the Plan grant-in-aid, which is devolved tothe LSGIs in a practically untied form. The only restriction onthe LSGIs is that they have to spend at least 40% (30% in thecase of ULBs) on the productive sector – meaning agricultureand allied activities, industries, self-employment etc., and notmore than 30% (40% in the case of ULBs) on infrastructure. Ageneral stipulation that 10% of the funds have to be spent onwomen’s deve lopment pro jec t s i s a l so there . The Spec ia lComponent Plan/Tribal Sub-Plan component for each LSGI isindicated clearly. Also upper-limits of subsidy for beneficiaryoriented schemes has been fixed by Government after consultationwith the LSGIs. Thus one third of development schemes in theState are conceptualized, formulated and implemented by LSGIs.The physical achievements of LSGIs in the three years startingfrom 1997-1998 are captured in Annexures 4.2.1, 4.2.2 and4.2.3.

4.8.7.2 Another important feature of the People’s Planning Campaignhas been the effective capacity building efforts taken up. In thefirst year a cascading system of training was introduced to enablequick outreach to the cutting edge level. About 600 Key ResourcePersons (KRPs) were identified at the State level both fromGovernment and outside, representing various disciplines. Atthe district level about 10,000 District Resource Persons (DRPs)and at the local government level about 100,000 Local ResourcePersons (LRPs) were selected. All the DRPs and LRPs and agood number of KRPs were selected by the LSGIs themselvesfrom government off ic ia l s , profess ionals and act iv is ts . Themassive training programme ensured that at the level of a VillagePanchayat or ULB, there would be nearly 100 persons sensitizedon the objectives and methodology of decentralised planning.These Resource Persons have taken an active part in spearheadingthe campaign as well as intervening in critical stages of the Planpreparation and implementation cycle.

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4.8.7.3 In order to fortify and simplify the training system from thesecond year, handbooks on various development sectors wereprepared by expert panels and circulated widely among the LSGIsand Resource persons. These handbooks outline the problemsand possibilities of the sector and contain model projects, whichcan be adapted according to local needs. Thirteen such sector-specific handbooks have been prepared so far; in addition twelvehandbooks have been prepared on topics dealing with operationalprocedure.

4.8.7.4 Now the focus is on strengthening the capacity of the Task Forceson various sectors. Institutions like Medical College, AgriculturalUnivers i ty, Centre for Water Resource Deve lopment andManagement (CWRDM) etc., are being utilised to provide highquality technical training to members of Task Forces in theirrespective disciplines. In addition, LSGIs, which have evolvedsuccessful models, are now uti l ised to train sister LSGIs byexposing them to the models evolved.

4.8.8 PROCEDURPROCEDURPROCEDURPROCEDURPROCEDURAL REFORMSAL REFORMSAL REFORMSAL REFORMSAL REFORMS

With the objective of promoting people ’s part icipation andintroducing transparent and norm - based decision making toreduce prosibi l i t ies of malfeasance, certain basic proceduralreforms have been introduced. Three such reforms deserve specialmention.

(1) (1) (1) (1) (1) EXPEREXPEREXPEREXPEREXPERT COMMITTEEST COMMITTEEST COMMITTEEST COMMITTEEST COMMITTEES

4.8.8.1 A major innovation is the setting up of Expert Committees.Originally a Volunteer Technical Corps (VTC) was set up as partof the People’s Planning Campaign at Block and District levels.

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This consisted of experts in various fields who responded to thecall of Government to render voluntary professional services inthe cause of local level development. These VTCs were convertedinto Block/Municipal Level Expert Committees (BLEC/MLEC)and District Level Expert Committees (DLEC) by adding to itsmembership profess ionals f rom Government. These ExpertCommittees are given a three-fold role. Firstly they are expectedto provide technical advice to the LSGIs whenever requested. Inthis respect they act as Technical Resource Groups for LSGIs totap. Secondly they are empowered to technically vet the projectsof the LSGIs before they are sent to the DPCs for approval.Here the Expert Committees function as the Technical AdvisoryGroups of the DPC. However these Expert Committees are notempowered to change the priority of an LSGI; they can onlyins i s t on fo l lowing of technica l s tandards , adherence tomandatory Government instructions and proper costing andphasing of various programmes. The third function of the ExpertCommittees is to give Technical Sanction for works, which requiresuch approval. In this role they function as the Technical SupportGroup of the LSGIs. For technical sanction, sub groups consistingof at least three experts are formed in which as far as possiblethe Government professional is the Convenor and the non-government professional is the Chairperson. This system oftechnical approval is faster, cheaper and more transparent. Inthe case of Village Panchayats without engineers, the engineermembers of these Expert Committees are allowed to performthe role of the engineers on payment of a small fee not exceeding2.5% of the estimate of a work for the full range of functions.

(2) (2) (2) (2) (2) SELECTION OF BENEFICIARIESSELECTION OF BENEFICIARIESSELECTION OF BENEFICIARIESSELECTION OF BENEFICIARIESSELECTION OF BENEFICIARIES

4.8.8.2 Select ion of benef ic iar ies for var ious individual and grouporiented development programmes, particularly relating to anti

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poverty and minimum needs programmes for people belowpoverty line is an important activity of LSGIs. Without infringingon the basic autonomy of LSGIs, the Government have prescribeda due process for beneficiary selection. The key elements of thisprocess are fixing of definite and transparent eligibility criteriafor each scheme as well as prioritisation criteria among thoseeligible for such scheme. The prioritisation criteria have to begiven weightages in the form of points or marks. These criteriahave to be publ i shed and appl ica t ion forms inv i ted a f terwidespread publicity. In fact, full-page advertisements are issuedby Government alerting the people about impending beneficiaryselect ion and exhorting them to approach the LSGIs. Eachapplication received has to be acknowledged. Thereafter it hasto be enquired into either through officials or preferably througha committee of officials and non-officials and marks awarded foreach criterion and totalled. A draft priority list based on thesemarks has to be prepared and taken to the Grama/Ward Sabha inwhich the applicants from that particular ward also participate.The marks have to be justified in the Grama/Ward Sabha andaltered if decided by the Grama/Ward Sabha. Once the Grama/Ward Sabha approves the list, the priority cannot be changed bythe LSGIs. In order to ensure equitable distribution of benefitsamong the different wards of a Village Panchayat/Urban LocalBody, ward-wise physical target is prepared in proportion toeligible applicants. Even for selection of beneficiaries to schemessponsored by Block Panchayats and District Panchayats it is theGrama Panchayat, which is to perform the function through itsGrama Sabhas in the manner prescribed above. All recordsrelating to selection of beneficiaries have been declared as publicdocuments. This insistence on due process has considerablyreduced patronage and nepotism in the selection of beneficiaries.

(3) EXECUTION OF PUBLIC WORKS(3) EXECUTION OF PUBLIC WORKS(3) EXECUTION OF PUBLIC WORKS(3) EXECUTION OF PUBLIC WORKS(3) EXECUTION OF PUBLIC WORKS

4.8.8.3 In a fundamental shift from the existing method a set of rules

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for execution of public works by LSGIs was issued. It providesfor community contracting of works through committees ofbeneficiaries along with stringent provisions to guard againstbenami contractors masquerading as conveners or nominees ofbenef ic iary committees . The ru les provide for compulsorytransparency with all records relating to a public work right frompreliminary estimates, up to final bills and payment vouchers,being declared as public documents for any one to peruse or takecopies. The rules also insist on preparation of a summary of theestimate in layman’s language and exhibition of this summary aswell as details of execution at the work site. In addition theprocess of technical approval is sought to be demystified so thatgovernment could, through an executive order, bestow powersof technical sanction on institutions as well as committees ofgovernment or non-government profess ionals . This radica lfea ture prov ides for easy access to technica l exper t i se . Inpursuance of these rules the government have decided on aprogramme of preparing a separate public works manual for localgovernments with updated specifications and standards and moreaccountable and people-fr iendly methods of preparat ion ofestimates, taking measurements of public works and finalizingbills. This ambitious programme when it is carried to its logicalconclusion is expected to improve the execution of public worksby reducing chances of corruption and facilitating social audit.

4.9 ISSUES TO BE ADDRESSEDISSUES TO BE ADDRESSEDISSUES TO BE ADDRESSEDISSUES TO BE ADDRESSEDISSUES TO BE ADDRESSED

Even while a comprehensive methodology for local planning anda system of procedural safeguards have been put in place, thereare issues of concern which need to be addressed. The settingup of institutions of genuine local self governance is still in thenascent stage. It is in this phase that a careful nurturing is neededwhich includes weeding out undesirable elements and rectifyingdistortions which creep into the implementation process, despitethe safeguards in place. In this respect, the important issueswhich are re levant for the long term susta inabi l i ty of the

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decentra l i sa t ion process , some of them interre la ted , a resummarised below.

1. There is a need to enhance the quality of peoples’participation. Gram Sabhas and Ward Sabhas have to moveaway from being primarily ‘benefit deciding’ mechanisms toinstitutions for meaningful dialogue on developmentalpriorities and for channelising public contribution for thecommon good. All sections of the public have to beattracted to these institutions.

2. The elaborate provisions for transparency are being onlyminimally utilised. Unless there is a powerful check frombelow, there is every likelihood of misutilisation of the vastpowers conferred on the local governments. Hence thereis an urgency for setting up systems of social audit.

3. The persistent malfeasance and corruption is disconcerting.A major threat to decentralisation is the corruptioninvolved in the execution of public works through ‘benami’contractors, defeating the very purpose of participatorydevelopment. It has to be recognised that while on theone hand, decentralisation increases the number of playersinvolved in governance and thereby deepens democracy, onthe other hand, there is a risk of new collusive practicesemerging if the procedural safeguards are not strictlyenforced.

4. The quality of planning needs to be upgraded to preventthin spreading of resources, to reduce beneficiary orientedschemes, to foster productivity increasing schemes, tobetter inter-tier integration of plans and to mobiliseadditional resources through credit linkages.

5. Though most of the officials have been transferred to localgovernments, their active involvement in the planning phase

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is rather limited. Unless these officials, especially theprofessionals take an active interest in the planning processand assume ownership of the plans and serve as the vitallink between the people and the plan, it will not be possibleto consolidate and iteratively refine the quality of the plansin their areas of expertise.

6. More than implementation of schemes using Governmentfunds, decentralisation implies improved quality of services.This would mean that LSGIs are able to manage the staffunder their control in such a way that there is a feltimprovement in the quality of services rendered by themto the public. Such a thing has not happened so far. It ison the performance of LSGIs in this area that the publicwill ultimately judge the gains of decentralisation.

7. The managerial efficiency of LSGIs leaves much to bedesired. There is tremendous scope for improving officemanagement, human resources management and financialmanagement in LSGIs.

8. Local resource mobilisation by LSGIs is an area wherefurther improvements are definitely possible.

9. For achieving good governance through LSGIs, the newlycreated institutions like Ombudsman have to live up to theexpectations with which such institutions were designedand put in place. This would require that these institutionsacquire greater sensitivity to problems of the people andmove closer to them.

4.104.104.104.104.10 REDEFINITION OF FUNCTIONAL DOMAINS OF LOCALREDEFINITION OF FUNCTIONAL DOMAINS OF LOCALREDEFINITION OF FUNCTIONAL DOMAINS OF LOCALREDEFINITION OF FUNCTIONAL DOMAINS OF LOCALREDEFINITION OF FUNCTIONAL DOMAINS OF LOCALGOGOGOGOGOVERNMENTSVERNMENTSVERNMENTSVERNMENTSVERNMENTS

4.10.1 As the People’s Planning Campaign progressed and empiricalevidence flowed in from the field on the areas of strength of

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LSGIs, the Government accepted the recommendations of theCommittee on Decentralisation of Powers (popularly known asthe ‘Sen Committee ’ named a f ter i t s Chai rperson la te Dr.S.B.Sen) and decided on a rat ional a l lotment of functionalresponsibilities among them. Thus the Kerala Panchayat Raj andMunicipality Acts were radically restructured to go beyond the11th and 12th Schedules of the Constitution by attempting todefine clearly the functional areas of the different tiers and typesof LSGIs as precisely as possible.

4.10.2 The 11th and 12th Schedules of the Indian Constitution actuallydo not carve out the functional domains of LSGIs. They onlyl i s t deve lopmenta l areas where , i f so dec ided by the s ta tegovernment, LSGIs could have a role in planning for economicdevelopment and social justice and in the implementation of suchplans. But Kerala has demarcated the functional domains ofLSGIs with a great degree of clarity. The Kerala Acts classifyfunctions as mandatory functions, general functions and sector-wise funct ions . The funct ions ass igned to the three t i e rPanchayats and Urban Local Bodies are given in Annexure 4.3.In areas related to infrastructure and management of publicinstitutions, the functional differentiation is sharp and clear, butin productive sectors it is difficult to clearly earmark functionsseparately for each tier. Only through experience can the naturalfunctional area in such sectors get defined. There is a clearrecognition of the existence of a role-range for LSGIs – Agent,Adviser, Manager, Partner and Actor – with the objective beingto reduce the agency role and expand the autonomous – actorrole.

4.114.114.114.114.11 FURFURFURFURFURTHER TRTHER TRTHER TRTHER TRTHER TRANSFER OF STANSFER OF STANSFER OF STANSFER OF STANSFER OF STAFF TO LOCAL GOAFF TO LOCAL GOAFF TO LOCAL GOAFF TO LOCAL GOAFF TO LOCAL GOVERN-VERN-VERN-VERN-VERN-MENTSMENTSMENTSMENTSMENTS

After the amendments to the Acts the Government decided to

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transfer the district level offices to the District Panchayats andrationalise the staff structure for better service to other tiers oflocal governments. Of particular relevance, is the decision toprovide additional engineering support as per which, there wouldbe three Engineering Circles under Superintending Engineers,each District Panchayat will get an additional division under anExecut ive Engineer, a l l the Block Panchayats would get anAssistant Executive Engineer each and 573 Assistant Engineerswould be deployed among Village Panchayats in such a mannerthat 203 large Village Panchayats would get one engineer eachand others at the rate of one engineer for two Panchayats. Forthe Urban Local Bodies one Superintending Engineer each wouldgo to the two new Corporations, one Executive Engineer to eachof the 12 Grade I Municipalities and one Assistant ExecutiveEngineer to each of the remaining 41 Municipalities.

4.124.124.124.124.12 EXEXEXEXEXTENT OF DECENTRTENT OF DECENTRTENT OF DECENTRTENT OF DECENTRTENT OF DECENTRALISALISALISALISALISAAAAATION – AN ASSESSMENTTION – AN ASSESSMENTTION – AN ASSESSMENTTION – AN ASSESSMENTTION – AN ASSESSMENT

4.12.1 The quantum of resources t rans ferred and the range ofresponsibilities assigned to LSGIs and the strength of staff placedunder their control give an idea of the extent of responsibilitiesassigned to LSGIs. As each year progresses there is clear evidenceof Government withdrawing from areas allotted to the LSGIs sothat the constitutional mandate of setting up institutions of selfgovernment is realized within a short period of time.

4.12.2 The extent of decentralisation is encapsulated in the followingstatements.

(1) In the Health sector all institutions other than medicalcolleges and big regional speciality hospitals have beenplaced under the control of the LSGIs.

(2) In the Education sector, in rural areas the high schools

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have been transferred to the District Panchayats and theprimary and upper primary schools have been transferredto Village Panchayats; in urban areas, all schools have beentransferred to the ULBs.

(3) The entire responsibility of poverty alleviation has gone tothe LSGIs; all the centrally sponsored anti-povertyprogrammes are planned and implemented by them.

(4) As regards Social welfare, barring statutory functionsrelating to juvenile justice, all the responsibilities have goneto LSGIs. The ICDS is fully implemented by VillagePanchayats and Urban Local Bodies. Care of the disabled,to a substantial degree, has become a local governmentresponsibility.

(5) In the Agriculture and allied sectors, the following havebecome the de facto and de jure local governmentfunctions.

a ) Agricultural extension including farmer - oriented

support for increasing production and productivity.

b) Watershed management and minor irrigation.

c) Dairy development.

d) Animal Husbandry including veterinary care.

e) Inland fisheries.

(6) Barring highways and major district roads, connectivity hasbecome a local government responsibility.

(7) The whole of sanitation and almost the entire rural watersupply have moved over to LSGIs.

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(8) Promotion of tiny, cottage and small industries is mostly alocal government task.

(9) All the welfare pensions are administered by the LSGIs.

Thus it is clear that, in terms of governance, more than half iswith the LSGIs.

4.12.3 As of now government pays the salary and meets other operationalcos t s par t i cu lar ly in hea l th ins t i tut ions . Al l the otherresponsibilities of providing new infrastructure and equipmentto attain the minimum standards and of maintaining the assetstransferred have become the burden of the LSGIs. For example282 Krishi Bhavan offices, 2561 Lower Primary Schools; 962Upper Pr imary Schools , and 6911 Anganwadis have beentransferred to the Vil lage Panchayats alone. In addition theVillage Panchayats have to provide new buildings to 2040 FamilyWelfare Centres, 207 PHCs and 9199 Anganwadis.

4.12.4 Thus, in Kerala, LSGIs now share several responsibil it ies invarying degrees with the state government. And naturally, toperform these responsibilities, they deserve the proportionateshare of state government resources.

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CHAPTER 5

The First State FinanceC o m m i s s i o n

INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION

5.1 The first State Finance Commission which was set up along withthe enactment of the Kerala Panchayat Raj Act 1994 and onemonth before the enactment of the Kerala Municipality Act 1994started functioning from 23rd April 1994 and submitted its reporton 29th February 1996. The context in which the First SFCfunctioned needs to be noted. Till October 1995 there were noelected bodies. The Village Panchayats and Municipalities wererun by Administrative Committees, which consisted of the electedmembers who were there before the expiry of the term of office;and in the Corporations, District Collectors were posted asAdministrators. And in Kerala there were no District Panchayatsor Block Panchayats before 1995.

5.2 Elected loca l governments as sumed of f i ce on the 30 th o fSeptember 1995 and powers and funct ions as envisaged inG.O.(P)89/95/LAD were transferred on 2nd October. The factthat the First SFC had to give its Report within five months ofthe functioning of the newly elected local governments and beforethe contours of Government policy on decentralisation becameclear notionally placed several constraints on it. It was too earlyfor the Commission to determine the quantum of responsibilitieswhich actually would move out of the State Government intothe hands of the local governments.

SIGNIFICANCE OF THE RECOMMENDSIGNIFICANCE OF THE RECOMMENDSIGNIFICANCE OF THE RECOMMENDSIGNIFICANCE OF THE RECOMMENDSIGNIFICANCE OF THE RECOMMENDAAAAATIONS OF THETIONS OF THETIONS OF THETIONS OF THETIONS OF THEFIRST STFIRST STFIRST STFIRST STFIRST STAAAAATE FINANCE COMMISSIONTE FINANCE COMMISSIONTE FINANCE COMMISSIONTE FINANCE COMMISSIONTE FINANCE COMMISSION

5.3 In spite of the constraints, the first SFC broke new ground inseveral ways. They are listed below:

(1) It made a number of suggestions with the objective ofincreasing the magnitude of financial devolution from theState Government to local governments. A very significantrecommendation was the one to earmark one percent ofthe State Government’s current revenue for transfer tothe rural and urban pools to be set up for the purpose.Even though the recommendation as such was not acceptedby the State Government, this idea of a fixed percentagefrom the State Government revenue being devolved tolocal governments was a novel one in the Kerala contextand it constitutes an important principle informing theReport of the Second State Finance Commission.

(2) Implicit in the suggestion for setting up the rural andurban pools was an attempt to change the inter sedistribution of resources among the LSGIs. It attemptedto move away, even though in a small manner, from the‘place of collection’ to the population criterion, which wasa step towards greater equity.

(3) The First SFC highl ighted the importance of themaintenance of assets of LSGIs, both own and transferredassets . The problem of reduced a l locat ions formaintenance due to the squeeze on non-plan allocation isbecoming acute day by day. This would be very critical forlocal government functioning in future as most of the socialinfrastructure assets having direct interface with thepublic have been placed under the control of LSGIs. The

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Commiss ion had la id down the pr inc ip le that themaintenance requirements should be calculated on thebasis of the current replacement cost and not on historiccost. Though the State Government did not accept thesuggestion it has certainly influenced the Second SFC inits assessment of the maintenance needs, to quantify thedevolution required for reasonable maintenance of assetstransferred to LSGIs as well as of new assets created bythem using plan funds.

(4) The First SFC made innovative recommendations forrationalization of tax collection to avoid inefficiency andleakages. Taxing of buildings on plinth area, levyingentertainment tax related to seating capacity andoccupancy ratio, preparing tax maps etc., are verysignificant recommendations, which the Second SFC fullyendorses.

(5) The First SFC enunciated the principle of moving awayfrom tied non-plan grants to untied non-plan grants, a veryessential ingredient of financial autonomy for LSGIs. Byvirtue of its recommendations 16 tied grants wereamalgamated into the Rural Pool and a similar attempt hasbeen initiated for urban areas.

(6) Though the First SFC confined itself largely to non-plandevolution, significantly enough, it suggested transfer ofat least 25% of the Centrally Sponsored Anti PovertyProgrammes, thus hinting at the principle that localgovernments could implement plan programmes and theSFC could deal with plan transfers.

(7) A very important contribution of the First SFC was layingdown transparent formulae for various kinds of devolution.

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Thus grants to local governments were brought into therealm of entitlements and all forms of discretion whichwere used earlier to discriminate among LSGIs, were takenaway with the acceptance of the report of the First SFC.

(8) The First SFC had rightly stressed the need for continuousdata gathering on local government finances. The SecondSFC reiterates this need.

(9) The First SFC gave a comprehensive picture of the localgovernment finances by providing an update, which was avery difficult thing to do in the absence of proper data.The analysis of the finance of Village Panchayats andMunicipalities – the distinguishing features and theirrationale, the problems and the potentialities, thedistortions and their correctives – has proved very useful.

STSTSTSTSTAAAAATUS OF IMPLEMENTTUS OF IMPLEMENTTUS OF IMPLEMENTTUS OF IMPLEMENTTUS OF IMPLEMENTAAAAATION OF THETION OF THETION OF THETION OF THETION OF THERECOMMENDRECOMMENDRECOMMENDRECOMMENDRECOMMENDAAAAATIONS OF THE FIRST SFCTIONS OF THE FIRST SFCTIONS OF THE FIRST SFCTIONS OF THE FIRST SFCTIONS OF THE FIRST SFC

5.4 The recommendations of the First SFC could be classified intofour groups.

(1) Devolution of funds to local governments.

(2) Augmenting resources of local governments.

(3) Rationalisation of fiscal systems of local governments.

(4) Miscellaneous issues.

5.5 Out of the 69 important recommendations, 63 were accepted bythe Government. A good number of recommendations involvedamending the concerned legislations and rules. Naturally this

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has proved to be t ime consuming. Also some of therecommendations had to be implemented by departments otherthan the Local Self Government Department. Therefore at thispoint of time some of the recommendations of the First SFCincluding very important ones like rationalization of propertytax, tax mapping etc., have not been fully operationalised eventhough they were accepted by the Government. The status ofimplementation of the various recommendations of the First SFCcan be seen in Annexure 5.1.

R E C O M M E N DR E C O M M E N DR E C O M M E N DR E C O M M E N DR E C O M M E N DAAAAAT I O N S O F T H E S E C O N D S F C F O RT I O N S O F T H E S E C O N D S F C F O RT I O N S O F T H E S E C O N D S F C F O RT I O N S O F T H E S E C O N D S F C F O RT I O N S O F T H E S E C O N D S F C F O ROPEROPEROPEROPEROPERAAAAATIONALISING THE RECOMMENDTIONALISING THE RECOMMENDTIONALISING THE RECOMMENDTIONALISING THE RECOMMENDTIONALISING THE RECOMMENDAAAAATIONS OF THETIONS OF THETIONS OF THETIONS OF THETIONS OF THEFIRST SFCFIRST SFCFIRST SFCFIRST SFCFIRST SFC

5.6 The Commiss ion s t rongly fee l s that the acceptedrecommendations of the First SFC should be operationalisedimmediately with no further delay. It is necessary to implementthem in full, as some of the recommendations of this Commissionare built on the recommendations of the predecessor Commission.This Commiss ion would there fore re i tera te the fo l lowingrecommendations of the First SFC and call for quick, specialfollow-up to carry the implementation process to the logical end.

(1) The rules for levying Property Tax may be notified andthe assessment work started in January 2001 itself. Somegeneral suggestions in this regard are given in Chapter 9.

(2) In the case of Profession Tax in respect of self-employedprofessionals like Doctors, Lawyers, Accountants etc., theFirst SFC had suggested slab rates. This has not beenimplemented. Second Finance Commission has separatelyrecommended slab rates for presumptive taxes, whichwould cover these categories.

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(3) Service Tax may be levied as an independent tax by theurban and rural local governments. Further legislativeaction is needed.

(4) Operational instructions need to be given in the form ofrules and guidelines in respect of collecting EntertainmentTax based on seating capacity. The Second SFC wouldfurther elaborate on this in the second part of its Report.

(5) Rules for levy of Advertisement Tax in Village Panchayatsand Municipalities may be issued at the earliest along withmodel byelaws. A few guidelines are indicated in Chapter9.

(6) The First SFC had suggested revision of rates of feesand other similar non-tax sources. This has been partiallyimplemented. The Second F inance Commiss ion isrecommending thorough revision in Chapter 9.

(7) Steps to finalise the minimum land value for use inregistering sales may be taken immediately.

(8) Further action may be taken to charge licence fee fromCable TV Operators. As regards the question of collectingEntertainment Tax from Cable Operators the SecondFinance Commission’s view is that it should be done throughnecessary legislative amendments.

(9) The suggestion for amending the Building Tax Act toensure that the tax is paid to the concerned localgovernment would become infructuous once governmentaccepts this Commission’s recommendation for a generalsharing of tax revenue.

(10) The tax mapping should be done immediately in all local

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governments and the unique premises numbering systemfollowed.

(11) The First SFC had suggested that the Rural DevelopmentBoard be made into a financing agency and that soft loansshould be given both by the Rural Development Board andthe Kerala Urban Development Finance Corporation. Thismatter will be dealt with in detail by the Second FinanceCommission in the second part of its Report. However, itis suggested that a single financing agency would do forall LSGIs, both urban and rural.

(12) Though bui ld ing exemption has been taken away,compounding is still being resorted to in the process ofregularization of constructions made on or before 1-1-2000. 50% of the fee thus realized should go to theconcerned Village Panchayat and Municipality.

(13) The question of Village Panchayats and Municipalitieslevying daily fee for use of poramboke may be examinedand decided by Government without further delay.

(14) The rationalization of Revenue Vil lage and Vil lagePanchayat/Municipality boundaries may be done in such away that each such LSGI has one or more full revenuevillages within its boundary i.e., no revenue village wouldlie within more than one Village Panchayat or Municipality.

(15) As suggested by the First SFC a special Cell has beencreated in the Finance Department. This Cell should berevamped and assigned the task of regular monitoring ofthe finances of LSGIs, both income and expenditure.

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(16) The recommendations of the First SFC were accepted in1997. Strictly speaking they should have been madeeffective from 1-4-1996. However they are legally in forcesince 1-4-1997. Therefore any shortfall in devolution,below the accepted level in respect of assigned and sharedtaxes should be made good by the government.

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CHAPTER 6

THE DEVOLUTION ANDINTER SE DISTRIBUTION OF

PLAN FUNDS

6.1 The decision to transfer 35-40 percent of plan outlay to LSGIs,who are then left free to spend the amount on plan projectsformulated by themse lves , has been a h i s tor ic one . Whi lepanchayats as active institutions exist in several other states inthe country, notably in West Bengal which played a pioneeringrole in activating them and in Karnataka, the Kerala model ofdemocratic decentralisation is unique in so far as it has threespecific features not found elsewhere: the first is the quantitativemagnitude of devolution; nowhere else is such a high proportionof plan funds handed over to the LSGIs. The second and relatedfeature is the freedom accorded to LSGIs to make plans accordingto their own priorities. There exists of course a system of vettingof local plans at higher levels, which is essential for avoidingunnecessary duplication, for ensuring complementarities, and forenforcing compliance to state government guidelines. But subjectto such general constraints, the priorities informing any localplan are respected. The third feature has to do with the fact thatthere is a clear demarcation of responsibilities between the stateGovernment and the LSGIs These three features make the Keralapractice the first authentic attempt, anywhere in the country, atplanning from below. Not surprisingly, it has unleashed, by allaccounts, unprecedented enthusiasm among people, attractedmuch attention from other states, aroused a great deal of curiosityall over the world, and earned wide acclaim in intellectual circlesas representing a breakthrough in conception, a breakthrough

which has even been hailed as “a synthesis of Gandhi and Marx”.

6.2 There can be little doubt that Kerala’s ability to achieve thisbreakthrough can be attributed to the fact that it was a part ofthe Peoples’ Plan Campaign. The significance of this Campaign,and the array of measures of democratic decentralisation whichfollowed in its wake (of which the devolution of 35-40 percentof plan outlay to LSGIs is only one), have been described in anearlier chapter. Here we would like to reiterate our belief that aminimum share of plan funds of this order of magnitude shouldcontinue to be transferred to the LSGIs every year. While werecommend this for the next five years which constitute ourjurisdiction, we hope this practice would be carried forwardthereafter too. To be sure, there are several problems associatedwith the present practice of decentralised planning. Some of theseare discussed below. But these in no way negate the worth andlegitimacy of the experiment, which should be seen not merelyin narrowly economic terms as an alternative, more effective,model of planning, but more importantly as a means of deepeningdemocratic structures in our country.

6.3 Any estimate of the actual percentage of devolution of plan fundsto the LSGIs is sensitive to the definitions used. In 1999-2000for instance the plan grant-in-aid as a proportion of state planoutlay was supposed to be 31.4 percent (Rs.1020 cr. comparedto Rs. 3250 cr.). But this ratio goes up, if we include state-sponsored schemes, to 35.5 percent (Rs. 1154.4 cr. compared toRs. 3250 cr.). The term “state-sponsored schemes” came to beused from 1997-98 to denote two categories of schemes. Eachof these categories is a part of the state plan but is implementedby LSGIs. The first category consists of certain national andstate level schemes especially in health, poverty alleviation etc.These are likely to continue for some time. The second categoryconsists of those schemes which were originally covered underthe departmental allocation in the state plan but were transferred

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to LSGIs in the transitional phase. These would decline naturallywith the passage of time, and have been doing so. The totaloutlay on state-sponsored schemes has in fact been declining,f rom Rs.276 cr. in 1997-8 to Rs .166.50 cr. in 1998-9, toRs.134.40 cr.in 1999-2000 (RE). As long as state sponsoredschemes exist the outlay on such schemes should not be countedas par t o f tota l devolut ion, but should be t rea ted as anaddit ional ity: counting them as devolution causes a hiatusbetween the actual and apparent magnitudes of funds left to thedomain of LSGI decision-making. (What appears for instance as35 percent devolution actually means less, as we have seen for1999-2000). Our recommendation is that a minimum of one-third of the state’s plan outlay in any year should be statutorilytransferred to the LSGIs, and that in computing this ratio thetransfers on account of s tate-sponsored schemes should beexcluded from the numerator. This is convenient for framingappropriate legislation and corresponds on present reckoning toover 35 percent plan outlay, including state-sponsored schemesin both the numerator and the denominator1

6.4 We now come to the problems associated with transferring suchhuge amounts of plan funds to LSGIs. Among the many problemsthat can be identified we would focus on four broad sets ofproblems here. Two of these will be discussed here only cursorilysince they would be taken up in the second part of our report.The f irst of these is the absence of an adequate permanentinstitutional framework for decentralised planning, which makesthe exerc i se a “vo luntar i s t i c” one , not de- l inked f rom a

1. The figure 35-40 percent was originally arrived at through some studieswhich showed, on the basis of historical data for the state, that theproportion of plan outlay which could in principle fall within the provinceof district-level planning (including planning by tiers below) was aroundthis. It has acquired an added legitimacy from practice which induces usto stick to this figure.

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“Campaign mode”. An example of this absence of an institutionalframework is the fact that the decision to transfer 35 percent ofplan funds to LSGIs has itself till now been only an administrativedecision, reversible at any point of time. It has been without anys ta tutory bas i s whatsoever (a l acuna that we hope ourrecommendation would remove). But more generally, planningof any kind requires trained personnel. A cadre of trainedpersonnel appropriate for this kind of planning, has not yet beenfully created. Decentralised planning has had to make do withwhatever personnel are available from voluntary organisationsand the ranks of locally available experts. Some no doubt wouldsee a virtue in the present state of affairs: the Campaign modearouses popular enthusiasm, whi le shrouding decentra l i sedplanning with in an ins t i tut iona l f ramework would lead tobureaucratisation, ossification, and “routinisation”, all of whichare inimical to the spirit of popular participation. In short thefear may be expressed that the very process of institutionalisingdecentralised planning would rob it of its authentic democraticcharacter, i.e. would make people passive objects all over again,from being, in howsoever limited a fashion, active subjects. Whilethis fear is not without justification, it is nonetheless the casethat voluntarism is essentially impermanent, that the “Campaignmode” can never be susta ined for long, so that eschewinginstitutionalisation eventually means throwing the baby out withthe bathwater. The need is to combine active popular participationwith an appropriate institutional framework which would makethe existing government staff, both professionals and generalists,fully involved. The process of bringing into being an appropriateinstitutional framework for decentralised planning is currentlyunderway in the state. Ensuring that active popular participationin planning is not destroyed as this framework comes into beingwill be one of the challenges before decentralised planning inthe coming years.

6.5 The second problem relates in a broad sense to the issue of

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corrupt ion. Corrupt ion, without a doubt , ex is ts in severa ldifferent forms in the decentralised planning system. But thenso it did, even earlier, i.e. prior to the increased devolution ofplan funds. There is no reason to bel ieve that the sca le ofcorruption in the use of plan funds has increased in any wayafter devolution; indeed several knowledgeable observers havethe impress ion that i t might have decreased. Its continuedexistence nevertheless is a source of concern. The fact of popularparticipation, and hence vigilance, should have the effect ofreducing at least certain types of corruption. On the other handhowever the absence of an appropriate institutional frameworkfor decentralised planning would provide scope for corruption.Putting it differently, a comparison of the earlier planning systemwith an alternative system of decentralised planning with popularparticipation would associate a much lower level of corruptionwith the latter. It follows that if corruption exists on a by-no-means-modest scale in the present dispensation, then this is atleast partly due to the fact that the system of decentral isedplanning, complete with its own institutional framework withits new checks and balances, has not yet been put in place. Oncethe institutional framework for decentralised planning is erected,the scale of corruption should come down significantly. Therecent appointment of an Ombudsman is an example of aninstitutional framework gradual ly coming into place, whichshould reduce the scope for corrupt ion. A more e laboratediscussion of these issues together with specific suggestions willbe made in the second part of our report.

6.6 The third problem springs from the type of plan projects whichsmall bodies, such as the panchayats, are intrinsically capable ofundertaking on their own. These typical ly are t iny projectscatering to local needs. Transferring substantial plan funds tothem would necessarily result in a proliferation of such projects.While this would not be a bad thing at all for a certain period oftime (since centralised decision-making typically ignores local

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needs, and has done so in our country), a continuous replicationof such projects , with progressively lesser and lesser socia lusefulness, can scarcely be justified, especially when resourcesare being taken away from larger state-level projects which mightbe essential for the state’s economic health. Putting it differently,a devolution of 35 percent of plan funds continuing not justinto the immediate, but also into the more distant, future wouldbe justified only if the composition of projects on which thisamount is spent can be made to keep changing in consonancewith the changing requirements of the people. This in turnrequires that the LSGIs should be capable of overcoming theirnarrow, “small bodies’” horizon. Village panchayats, for instance,should in the next phase be prepared to collaborate with oneanother to undertake meso-level projects, or even macro-levelprojects. In short the transfer of resources to the lower levelshould not mean a perpetual entrapment in mini-projects ofprogressively decreasing rationale. One can go further. The LSGIshave to break out at some stage not only from their narrow micro-project preoccupation, but also from their almost exclusive roleof being purveyors of welfare goods and services to the people.To be sure, the need for such goods and services can hardly beoveremphasised, but the word to note is “exclusive”. Even forproviding a larger flow of welfare goods and services to the peopleat a later date, the LSGIs may have to take on a more diversifiedrole, aimed at augmenting the means at their disposal. Many ofthem of course provide help at present to deserving privateindividual producers in their respective areas, but this has notgenerally been a source of revenue for them. It has been anextension of the welfare-purveyor role. They have to pay greaterattention to means augmentation possibilities while renderingsuch help. In addition, LSGIs can also boost their resources byeliminating the wastes and “leakages” that entrusting public workprogrammes to middlemen entails, and by undertaking innovativeoutput augmenting local projects which can yield larger revenuesas well. Taking up government contracts for civil construction

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for a reasonable centage charge is a possibility work exploring.The th i rd problem for decentra l i sed p lanning would ar i setherefore i f the LSGIs do not show suff ic ient f lexibi l i ty totransform and broaden their nature. If they continue to remainmere conduits for distributing welfare goods and services, theneven this role cannot be sustained in the not-unlikely event of aworsening of the fiscal squeeze experienced by the central or thes ta te government , for then, as th i s squeeze gets “passeddownwards”, they would find themselves increasingly bereft ofresources.

6.7 The fourth problem concerns the inadequacy of the LSGIs’ owntax effort. It is often asserted that there has been a slackening ofthe LSGIs’ tax effort as larger plan funds have been madeavailable to them. While hitherto- published research attemptingto establish this slackening hypothesis is not convincing, the viewthat such a slackening has actually occurred is widely held inknowledgeable circles. Time-series data do show a lower level ofrevenue in recent years compared to what a long-term trend fittedto earlier data would project, but this per se does not constituteproof of slackening. Besides, this shortfall relative to trend pre-dates the increase in devolution that came with the Peoples’ PlanCampaign. But whether or not there has been an actual slackeningon account of the larger devolution, the fact remains that LSGIs’tax collections are way below potential. This makes them almostentirely dependent on devolution from the state government andhence extremely vulnerable to the fiscal travails afflicting thestate, and hence by implication the central, government. In theabsence of adequate local-level resource mobilisation the base fordecentralised planning remains extremely fragile. We recogniseof course that resource mobilisation is not synonymous withraising larger tax revenue: the former can take several forms,such as for instance mobilisation of voluntary labour by LSGIs,of which tax effort is only one. It has also been brought to ournotice that not an inconsiderable amount of additional resource

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mobilisation has occurred in LSGIs, even when conventionalindices l ike tax revenue have shown unimpressive increases.Nonetheless, given the indubitable fact that tax collections byLSGIs have been much below potential, our Commission has feltthe need to recommend the introduction of a system of rewardfor tax effort through an amendment in the formula for the interse distribution of plan funds.

6.8 The f irst Finance Commission had suggested the fol lowingcriteria for the inter se distribution of plan funds.

ULBs RLBs

Population in 1991 Census 75 70

SC/ST Population in 1991 10 10

Total Workers ExcludingWorkers in Manufacturing,Processing, Servicing, andOutside household industry 15 10

Proportion of AgriculturalWorkers among Workers Nil 10

Total 100 100

6.9 The Finance Commission had not explicitly demarcated betweenthe different tiers of the PRIs and ULBs, the presumption beingthat the above criteria would apply within each tier, while thedivision between tiers would continue in the same ratios as wereprevailing at the time. The Cabinet Subcommittee set up toexamine the First SFC report felt that, instead of the formularecommended by the Commission, plan funds may be distributedaccording to a s imple formula giving 90 percent weight topopulation and 10 percent to area. The distribution of funds in

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1997-8, the year when plan grant-in-aid was greatly increased,was however entirely on the basis of population alone. ThePlanning Board set up a Working group in October 1997 to lookinto the matter and evolve a fresh formula for the inter sedistribution of plan funds. This formula, on the basis of whichplan funds are distributed at present is the one set out in Chapter3 above.

6.10 The total amount of transfers to local bodies is distr ibutedbetween the General Sector, claiming about 75 percent, the SCPabout 21 percent, and the TSP about 4 percent. The distributionof General Sector funds between the PRIs and the ULBs is inthe ratio of 85 and 15, and within the former the distributionbetween the GPs, BPs, and DPs is in the ratio of 70, 15 and 15.SCP and TSP funds are shared between urban and rural LSGIson the basis of the SC/ST population. The ratio of distributionbetween tiers however is somewhat different here compared tothe General Sector funds: for SCPs it is 60, 20, 20, while forTSPs it is 40, 20, and 40. The inter se distribution of GeneralSector funds across ins t i tut ions wi th in each t ie r i s nowundertaken, as already mentioned, on the basis of the formulagiven in Table 3.2.9 of Chapter 3.

6.11 While suggesting that the tax effort, or more accurately therevenue effort, criterion should be introduced in addition tothe above, we propose not to disturb the current pattern ofdistribution of plan funds among the various tiers. The revenueeffort criterion should be introduced only at the stage of interse distribution within a tier. It follows that this criterion can beintroduced only in the Grama panchayats and ULBs which alonehave significant revenue raising capacities. To see how we proposeto introduce the revenue effort criterion into this scheme, let us

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first look only at Grama Panchayats. We wish to earmark amaximum of 10 percent out of the plan funds destined for Gramapanchayats for distribution on the criterion of revenue effort.This percentage, which is not a fixed one but varies from year toyear, has to come out of the 65 percent currently distributed onthe (Non-SC/ST) population criterion. This percentage shouldbe arrived at as follows. In any particular year some panchayatswill show an increase in their revenue (consisting of all revenuefrom taxes, fees and other sources1 ) over the previous year, whileothers will show either a decline in revenue or the same level ofrevenue. Let the number of panchayats showing an increase inrevenue be n, while the total number of panchayats is N. Thepercentage of plan funds distr ibuted on the revenue ef fortcriterion in the following year (by which time the relevant dataregarding revenue collections by the panchayats would havebecome available) will then be 10.n /N. If for instance out of990 village panchayats in a particular year only 371 show anincrease in revenue (over the previous year) then the proportionof plan funds distributed on the revenue effort criterion in thefo l lowing year wi l l be (10 mul t ip l i ed by 371) / 990. Werecommend that in actual calculation, 990 should be roundedof f to 1000 for s impl ic i ty. Adopt ing th i s procedure , theproportion distributed on the revenue effort criterion would be3.71 percent, and the proportion distributed on the Non-SC/STpopulation criterion would be 61.29 percent. Once the amountof plan funds to be distributed on the revenue effort criterion inany particular year is so determined, this amount has to be

1 There have been instances, where due to some government or Court order,revenue has not been collected for some time under some particular head, andthe lifting of the ban causes a sudden jump in revenue under that head. Sincejumps of this sort would cause a distortion in the application of our proposedcriterion, we suggest that in all such cases the increase in revenue under thishead in the year of the jump should be ignored. This head should begin to countonly from the next year onwards.

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distributed among the panchayats which did raise their revenue,i .e . the 371 panchayats in the above example. For this werecommend the fo l lowing procedure . For each of the 371panchayats there is a certain percentage increase in revenue inthe year just completed over the preceding year. This percentagefor any panchayat multiplied by its population gives a numberfor that panchayat. The share of that panchayat (in the totalamount available for distribution on the revenue effort criterion)is this number divided by the sum of such numbers for all the371 panchayats. If the share for panchayat i is denoted by θ i ,the percentage increase in its revenue is given by r i, and itspopulation by P i then

θ i = r i . P i / Σ r i . P i

6.12 A simple example will clarify the proposed procedure. To do sohowever let us take a smaller number of panchayats showing arevenue increase. Let the number be 10. Then 10 times 10 dividedby 1000, i.e. only 0.1 percent of plan funds will be distributedon the revenue effort criterion and 64.9 percent on the non-SC/ST population criterion. Suppose the plan grant-in-aid earmarkedfor Grama panchayats is Rs.1000 crores; then Rs.1 crore will bedistr ibuted on the revenue effort cr i ter ion. How wil l i t bedistributed? Suppose the percentage increases in the revenue ofthe 10 panchayats are respectively, 1, 2, 3, 4, 5, 6, 7, 8, 9, and10. And suppose their populations are respectively 100, 200,300, 400, 500, 600, 700, 800, 900, and 1000. Then the shareof the first panchayat will be (1 times 100) / (1 times 100 + 2times 200 + 3 times 300 + 4 times 400 +…..). The respectiveshares of the ten panchayats in the pool of Rs.1 crore work outin this fashion to: 1/385, 4/385, 9/385, 16/385, 25/385, 36/385, 49/385, 64/385, 81/385, and 100/385. These shares addup to 1.

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6.13 In the actual application of the formula however we suggest amodi f i ca t ion. S ince we are tak ing percentage increases , aPanchayat with a low base can show a phenomenal increase in aparticular year and hence get unduly rewarded by our formula.Likewise a Panchayat which shows a negative increase in oneyear and a large increase in the following year would stand togain by our formula (since we are not directly penalising negativeincreases). To avoid such quirky results, we propose to count allpercentage increases of 30 or above as 30. The reason for taking30 as the ceiling is the following. From simulations carried outon data for 1998-9 and given in an Annexure, it turns out thatthe difference made to the big losers from alternative ceilings isnegligible. This being the case, since the incentive effect for theothers would get blunted if we take a very low ceiling, say 10 or20 percent, we have decided to take 30 percent as the ceiling.

6.14 We recommend an exactly analogous procedure for incorporatingrevenue effort into the criteria for the distribution of plan fundsamong the ULBs. Here too a maximum of 10 percent of the planfunds earmarked for ULBs can be set aside for distribution onthe revenue effort criterion. The actual percentage would be givenby this maximum multiplied by the proportion of ULBs showingrevenue increases, and this percentage would come out from the75 percent currently earmarked for distribution on the populationcriterion. Likewise the inter se distribution of this amount amongthe ULBs would be on the basis of the following formula: theshare of any ULB = percentage increase (subject to a maximumof 30 percent) in its revenue during the previous year times itspopulation / the sum of the percentage increase in revenue timespopulation of all such ULBs (which show revenue increases).Revenue in this entire discussion, we wish to emphasise, includesonly taxes, fees and license fees, and other incomes, which arethe result of the LSGIs’ own effort. It excludes what they getfrom shared and assigned taxes, the other non-plan grants, andof course the plan grants, from the state government. In short,

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the term “revenue” used in this context is synonymous with “owncollected revenue”.

6.15 Let us now turn to the rationale of the above formula. Ideally,revenue effort should be evaluated by looking at the actualrevenue collections in comparison to some notion of potentialrevenue generating capacity. Unfortunately we simply do not havethe data to calculate this potential capacity for each and everyLSGI. Looking at increases in revenue as an indicator of effortis only a convenient proxy. Here, introducing explicit penaltiesfor LSGIs showing reductions in revenue would be unfair, andwould inevitably result in appeals to discretion on pleas of specialcircumstances, which would have the effect of undermining theentire system. We have therefore introduced penalties indirectly,not mere ly through an exc lus ion f rom reward for revenueincreases, but through consignment to a group that only sharesa reduced amount available for distribution on the populationcriterion. The precise formula of course has been dictated by theneed to have “well-behaved” properties (which also constitute areason for the exclusion of “negative” transfers, i.e. of explicitpenalties for reduced revenue collection), and the need to avoidabsurd results. For instance, a variable proportion of plan fundsis supposed to be distributed on this criterion, as opposed to afixed proportion on other criteria, because of the need to avoidabsurd results. If in a particular year, say, only 10 panchayatshappen to show an increase in revenue, then, with a fixed 10percent distribution on revenue effort basis, they would walkoff, in the above example, with nearly Rs.100 crores betweenthem, which would be extremely unreasonable (especially sincewe are using ordinal terms like “increase” and “decrease”). Asfor the actual formula for the inter se distribution from the poolearmarked for rewarding revenue effort, it satisfies the propertythat if all panchayats showing revenue increases showed the samepercentage revenue increases, then the pool would be sharedamong them exact ly in the same rat io as the i r non-SC/ST

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population, which is perfectly reasonable. On the other handthe above formula also says that i f al l panchayats showed areduction or constancy in revenue collections, then again the sizeof the pool would be zero, so that the entire 65 percent of planfunds would be shared among grama panchayats (75 percent forULBs) on the non-SC/ST population criterion, the same as isthe pract ice now. In such a case in other words, a l l be ingdelinquent, none would be singled out for punishment, whichtoo is reasonable.

6.16 The real limitation of the above formula arises from the fact thatwe are taking percentage increases. This gives rise to two differentkinds of problems: the first is the “low base” effect. For example,if a panchayat had zero (or very low) revenue in one year andsome increase in the next year, then its rate of growth would beinfinitely large, giving it an enormous, illegitimate advantage.One way of avoiding this problem is to divide the absoluteincrease in revenue by the total income of the inhabitants of apanchayat (or some similar variable). But we do not have dataon the total income of the inhabitants of a panchayat. Taking theexpenditure by panchayats as the denominator, while it wouldget rid of the low base problem, would work against the poorerpanchayats. All things considered, therefore, there is no easyalternative to taking percentage increases in revenue as the proxyfor revenue effort. And it may not be a bad proxy in practice.Nonetheless, to guard against anomalies, we are suggesting amaximum figure of 30 for the percentage increase in revenue.The second problem with taking percentage increases is the factthat the revenue raising capacity of panchayats and ULBs issubject to a limit that does not move up much from one year tothe next. It does not even go up in tandem with price increasesor real income increases of residents within their jurisdiction,since a good part of this revenue is supposed to come fromproperty taxation, and the revenue to be raised from a particularproperty can be adjusted only at discrete intervals. As a result,

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even with the best of intentions some local bodies will find itdifficult to raise their revenue beyond a point. Any criterion thatlooks only a t percentage increases in revenue there fore i spotentially discriminatory against them. This no doubt is animportant consideration, but its practical relevance over the nextfive years may not be all that much. The current level of revenuemobilisation relative to potential is too low in the case of allPanchayats and ULBs for us to worry about the impl ic i tdiscrimination against those that have hit or are close to theirrevenue-raising capacity. What is true however is the fact thatthis formula, though adequate for the coming five years, shouldnot be continued ad infinitum. True, the low base effect woulddisappear over time, but the other factor mentioned above wouldintroduce serious biases as some local bodies approach theirrevenue-raising ceiling.

6.17 Let us now turn to the practical problems of using the aboveformula . Whi le the mechanics o f making the necessarycomputations are quite simple and non-time consuming once thedata on tax and non-tax revenue collections by the local bodiesare available, the real problem lies in obtaining reliable revenuecollection data. To overcome this, our recommendation is that itshould be made mandatory for all local bodies to have a separateaccount with the treasury where col lect ions from al l i temsconstituting their own income, and only such collections, aredeposited. Then these data would be easily available to the stategovernment from the treasury, and would be useful for a numberof purposes quite apart from the employment of the revenue effortcriterion for determining the inter se distribution of plan funds.Of course even if this statutory provision is introduced, localbodies would not necessarily comply with it immediately. To goadthem into doing so before more drastic action is taken againstthe deviants, a particular date should be fixed from which therevenue e f for t c r i ter ion should be int roduced into thedistribution of plan funds; and all local bodies for whom there

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is no treasury-authenticated information on revenue collection,should ipso facto be treated as if they have not had any revenueincreases and thereby excluded from any distribution under thishead. Announcing such a date in advance would also be usefulfor another reason, namely, any sudden drops in plan funds forpar t i cu lar LSGIs can be avoided i f they intens i fy revenuecollection effort owing to prior warning. (And if they do not,then they can scarcely claim injured innocence). For an earlyintroduction of the revenue effort criterion, it is essential thatthe government should bring in this statutory provision as soonas possible. Since the criterion is based on increases, time-lagsare intrinsic to it.

6.18. A simulation exercise on the basis of the data given to us on PRIand ULB revenues has been carried out to determine what wouldhave been the distribution of plan funds in 1998-9 if the revenueeffort criterion had been applied in that year. Some results froma comparison of this distribution with the actual distribution isgiven in an Annexure 6.1.

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CHAPTER 7

THE PROBLEM OFMAINTENANCE OF ASSETS

7.1 A substantial number of assets has been transferred from the stategovernment to the LSGIs as part of the functional devolution underthe Panchayat Raj and Municipal Legislations. A good number ofassets were transfered through a Government order in September 1995and some more assets were transferred in the wake of the Peoples’Planning Campaign. As a sequel to this Campaign, the devolution ofplan funds to the LSGIs was substantially increased, and this in turnwas used for building up further assets. The LSGIs today have thusbecome the custodians of a vast array of assets, and the problem of themaintenance of these assets has acquired a degree of urgency. Forconvenience of discussion, the assets existing under LSGI jurisdictionat present can be divided into three categories: assets which the LSGIsowned and maintained prior to the transfers following the September1995 Government Order (for the maintenance of some of these assetsthey had access to specific revenue sources such as VTC, and grantssuch as VRM); assets which have been transferred to the LSGIsfollowing the Government Order; and assets which have been builtsince 1997-8, the year in which enlarged devolution began. Withinthis last category not all assets have been financed out of plan fundsalone; surplus from own revenue and public contribution have alsogone with in. The maintenance requirements as well as the sources offunds for maintenance for these three different types of assets need tobe discussed separately. But let us first see what exactly is being referredto under the concept of maintenance.

7.2 THE CONCEPT OF MAINTENANCETHE CONCEPT OF MAINTENANCETHE CONCEPT OF MAINTENANCETHE CONCEPT OF MAINTENANCETHE CONCEPT OF MAINTENANCE

7.2.1 “Maintenance” is by no means a simple concept. It gets invariablyenmeshed with three other concepts, operational costs, depreciation,and investment, in the sense that it is difficult to demarcate its boundaryfrom those of these three other concepts. The difficulty has a conceptualdimension: we simply cannot tell in many situations how much of anexpenditure is maintenance and how much of it is, say, investment. Inaddition it has an even more overwhelming practical dimension: weoften do not know how to tell what is maintenance expenditure, andwhat is, say, investment expenditure. Strictly speaking the termmaintenance refers to the expenditure required to keep an asset runningwith unimpaired productive potential during its life-time. Operationalexpenses refer to the expenditures on all other current inputs that arecombined with this asset for producing the final good. The termdepreciation refers to the amount that has to be set aside during eachperiod, so that when the asset has reached the end of its life-time, anew asset can be purchased to take its place. Finally, (net) investmentrefers to any addition to productive capacity, unlike either depreciationor maintenance.

7.2.2 Of course the life-time of an asset is not independent of the maintenanceexpenditure that is undertaken upon it; or, putting it differently,different levels of maintenance expenditure, while maintainingapproximately the same level of productive potential (or quality ofservice) of an asset, may cause different lengths of life-time. There is inother words a trade-off between depreciation and maintenance.Notwithstanding this trade off however, there would be some“optimum” level of maintenance expenditure at which the depreciation-cum-maintenance expenditure would be the least. The concept of“maintenance norm” is ideally derived from this consideration. To givean example, if an asset costs Rs.100 (we ignore inflation in this example),and can last 10 years with an annual maintenance expenditure of Rs.10,and 12 years with an annual maintenance expenditure of Rs.15, thenclearly the former option is preferable. This is because the expenditure

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on depreciation-cum-maintenance is Rs.20 per year in the former (10+ 10), and Rs.23 1/3 per year in the latter (15 + 8 1/3).

7.2.3 The logic of this argument is not affected even when there are noexplicit depreciation provisions, as is the case with LSGI assets. This isbecause at the end of 12 years in the above example, following the firstoption (where the asset is replaced after 10 years), we would havespent a cumulative sum of Rs.120 on maintenance and would be havinga 2-year old asset with a depreciated value of Rs.80 (which comes from100 original value minus 20 loss of value owing to depreciation); onthe second option we would have spent a cumulative sum over the 12-year period of Rs.180 on maintenance and would be having a brandnew asset worth Rs.100 at the end of it. By following the second optionthen we would have, compared to the first option, spent Rs.60 extra asmaintenance over the 12 years and ended up with only Rs.20 worth ofextra asset value. This being patently irrational, the first option shouldbe adopted. It follows then that the comparison between the two, orseveral, options is unaffected by whether depreciation provisions areactually made each year or not. There would be some optimum optionon the basis of which the maintenance norms can be ideally calculated.

7.2.4 Of course the concept of life-time of an asset is not unambiguous (sincean asset does not just drop dead); nor is the proportion of maintenanceexpenditure to the value of the asset constant through its life-time.This magnitude typically increases with the age of the asset, and atsome point quite steeply. The point at which this steep increase occurscan be taken approximately as the end of its life-time corresponding tothat particular stream of maintenance expenditure. (The logic of theexample discussed in paragraphs 3 and 4 can be restated in terms ofsuch rising streams instead of the constant streams assumed there).Though in practice the maintenance norms we have are given to us byengineers, and their economic underpinnings are not always clear andnot necessarily what they should be, the notion of “maintenance norms”is at least conceptually well-founded.

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7.2.5 The conceptual basis of actual estimates of maintenance expenditureshowever is shaky because it is invariably mixed up with net investment.When the roof of a school building is repaired, this does not occur inpristine purity. Sometimes a boundary wall is added at the same time.While the repair constitutes maintenance expenditure, the additionconstitutes net investment. But the two are frequently reported togetheras maintenance expenditure. This is not just due to lack of knowledgeabout the distinction. Sometimes drawing the distinction is practicallyimpossible, since it entails a separation that is either impossible ortedious. An example of impossibility of separation is when somemaintenance expenditure raises the quality of service of the assetcompared even to what it was when the asset was newly installed: heremaintenance has got inextricably merged with net investment. A morecommon case however is where disaggregation is possible but tedious.For instance if in the process of adding a new wing to a hospital whichhas to be whitewashed, some existing walls also get whitewashed, thenkeeping track of the latter as maintenance in contrast to the formerwhich is net investment requires a degree of disaggregation that is tootedious to be practically possible. All this, somewhat abstract discussion,has practical implications to which we shall return later.

7.3 MAINTENANCE EXPENDITURE OUT OF PLMAINTENANCE EXPENDITURE OUT OF PLMAINTENANCE EXPENDITURE OUT OF PLMAINTENANCE EXPENDITURE OUT OF PLMAINTENANCE EXPENDITURE OUT OF PLAN ASSISTAN ASSISTAN ASSISTAN ASSISTAN ASSISTANCE?ANCE?ANCE?ANCE?ANCE?

7.3.1 It can be argued that of the three categories of assets, clearly themaintenance requirements of those assets which were with the LSGIsearlier and for whose maintenance specific revenue sources wereassigned, such as VTC, should be maintained by them; the stategovernment should have no responsibility in this regard. As for theassets transferred after the 1995 Government Order, the responsibilityof meeting the maintenance expenditure must fall on the stategovernment. This is because if these assets had not been transferred,and had remained with government departments, then the responsibilityof maintaining these assets would have fallen on the state exchequer.Since these are not income-earning assets, so that their transfer to theLSGIs has not been accompanied by any corresponding transfer of

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income, the task of meeting their maintenance expenditure must stillfall on the state government1 . When it comes to assets constructed byLSGIs from 1997-8 onwards, clearly the responsibility for themaintenance of the assets whose construction has been financed by thelarger devolution of plan funds should also be borne by the government.The reasoning again is that if these funds had not been transferred tothe LSGIs then the departments would have used them for their planprojects, for which the government would have had to providemaintenance. (Of course a distinction may be drawn between the assetsbuilt out of the increased devolution, and assets that would have beenconstructed out of those plan funds which would have come to theLSGIs anyway, and the government’s responsibility for providingmaintenance confined only to the former. But, without the increase,the plan funds with LSGIs would have been so meagre that we canignore this distinction). As for the assets whose construction in theperiod starting 1997-8 has been financed by sources other than planfunds, clearly the LSGIs would have to look after the maintenancerequirements of these assets on their own.

7.3.2 As a matter of fact however even with regard to the assets existingwith the LSGIs earlier to the large-scale transfers, the actualmaintenance expenditure was woefully small. The first State FinanceCommission had noted that with respect to roads, the most important

1 While this principle is perhaps accepted at present, the amount of actualmaintenance expenditure undertaken is too minuscule to confirm this acceptance.The total maintenance grant to LSGIs in the budget during the four years 1996-7 to 2000-1 has been, respectively, Rs.3.74 cr., Rs.5.05 cr., Rs.5.77 cr. andRs.3.53cr.

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asset owned by LSGIs in the pre-1996-7 per iod, against themaintenance expenditure requirement of Rs.102.88 crores, onlyRs.30 crores were being spent.2 Of these Rs.30 crores, Rs.23crores came from VTC and VRM. The LSGIs’ own resourcescontr ibuted only about Rs .7 crores . Thus , for the propermaintenance even of these assets, the state government has tomeet the bulk of the maintenance requirement, while ensuringthat the LSGIs do not spend in other ways what it provides formaintenance. In return it need not make any VTC payments tothe LSGIs. (The first Finance Commission’s recommendation thatthe VTC and VRM should be merged has been accepted by thegovernment).

7.3.3 Of course it may be argued that with such a large share of planfunds being set aside for the LSGIs, they should now meet theirown maintenance requirements. But this argument is wrong forseveral reasons: first, using plan funds for purposes of meetingnon-p lan current expendi ture , which i s what maintenanceexpenditure amounts to, is wrong in principle and would set anunhealthy precedent. Secondly, it would defeat the very purposeof democratic decentralisation, which is to let people prioritiseinves tments a l locat ion based on loca l needs . Maintenanceexpenditure, though essential, does not really involve any choice.If financed out of plan funds it precludes plan projects, and ipsofacto any choice in the matter of plan projects. Thirdly, plan

2 The fact that the “norm” used by the Commission relates to 1996-7 while theactual expenditure figures relate to 1993-4 makes little difference to the argument.Likewise the questions raised in the text below about the accuracy of the estimateof Rs.102.88 crores do not invalidate the Commission’s general point about theinadequacy of the actual maintenance expenditure undertaken

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ass i s tance f rom the s ta te government to the LSGIs , a s aproportion of the state government’s total tax revenue, hasalready shown a decline in the last couple of years: from 19.12percent in 1997-8 and 19.52 percent in 1998-9 it came down to15.6 percent (RE) in 1999-2000 and 13.3 percent (BE) in 2000-01. As the state government has faced a somewhat tighter fiscalsituation owing to a stagnation in central grants-in-aid andincreased expenditure on implementing the Pay Commissionrecommendations, its plan outlay has suffered, and even thoughthe 35 percent “norm” has been maintained, the devolution ofplan funds to LSGIs as a proportion of tax revenue has gonedown. If in this situation, maintenance requirements on LSGIassets have to come out of the plan funds, then the size of theLSGI plans would in effect become a sort of residual which wouldmean an a t tenuat ion of loca l p lanning. Fourth ly, s incemaintenance requirement on LSGI assets is going to increase inthe coming years, relative to other variables, owing to the factthat maintenance expenditure on some of the newly constructedLSGI assets , negl igible t i l l now, wil l have to begin and besustained on a rising scale, the attenuation of local level planninginvolved in making LSGIs finance their maintenance needs outof plan funds, would be far greater than appears at first sight.The following paragraphs highlight some of the issues.

7.3.4 If a certain proportion x of the value of an asset has to be spenteach year for i t s maintenance , then the tota l maintenanceexpenditure Mt upon this asset in any year t is given by

Mt = x .( I1 + I2 + I 3 +……..It-1)

where I denotes gross investment, the subscript refers to theyear when a particular addition to the asset (represented by thecorresponding investment) started functioning, t-1 the previous

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year ( the asset’s life-time T is assumed to be not less than t).3

There are however some assets, of which roads are a primeexample, for which the pattern of maintenance expenditure hasa singular complexity. Roads too require a certain amount ofexpenditure on repairs every year; but, in addition, surfaced roadsrequire re-topping every three to five years. Since, with suchmaintenance and re-topping, surfaced roads can last a very longtime, both these types of expenditure should be counted asmaintenance expendi ture . Our percept ion of maintenanceexpenditure then has to be modified in the case of surfaced roads

3 With this definition we have two formulae representing simple logical truisms ina universe where gross investment grows at a steady rate g. If the asset (assumedfor simplicity to be a single homogeneous one), which it creates, has, as before,a life of T years and requires x percent of its value as maintenance expenditureeach year, then the ratio of total maintenance expenditure to gross investment inany year becomes a constant

Mt / It = (x/g).{1 – 1 / (1+g)T-1}

after a minimum period of T years of operating the asset has passed. Before Tyears have passed, the ratio of maintenance expenditure to gross investmentduring any year t , such that 1 < t < T, is given by

(x/g).{1 - 1 / (1+g)t-1 }

which, for any x and g, keeps increasing until it reaches the value given in thefirst formula. The first formula therefore gives an upper limit for the ratio. If theratio of maintenance expenditure to the value of the asset increases over the lifeof the asset, then x in the first formula has to be interpreted as a weighted average.In the second formula maintenance expenditure as a proportion of grossinvestment would then rise even faster, both because t rises and because x alsorises with time. Now, even if gross investment creates an assortment of assets,and not just one single asset, as long as they have similar life-spans and similarpatterns of maintenance requirement (as proportion of value of asset) throughlife, both formulae remain valid.

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(whose maintenance is of overriding practical importance inKerala). If a surfaced road needs re-topping every T years, if theexpenditure on re-topping per unit of investment (howevermeasured) is given by y, and the expenditure on repair per unitof inves tment i s g iven by x , then the tota l maintenanceexpenditure on surfaced roads in any year t is

Mt = x. (I 1 + I 2 + …..I t-1 ) + (y-x). I t-T.

For unsurfaced roads of course the first definition of maintenancegivenabove would continue to hold.

7.3.5 Now, on the basis of “norms” mentioned below, the maintenanceexpenditure at 2000-1 prices for the road length that existedwith the LSGIs prior to September 1995, or has been transferredto them after September 1995, comes to about Rs.109 crores(the calculations are given below). In addition, on the basis ofassuming that about 5000 kms. of surfaced roads are, on average,newly constructed each year by the LSGIs out of plan funds from1999-00 onwards (we know that about 8000 kms. wereconstructed in the two years 1997-8 and 1998-9), and that allsuch new roads are constructed entirely by converting existingun-surfaced roads into surfaced roads (an assumption that turnsout to be not very consequential), the additional maintenancerequirement for this road length comes to about Rs.159 croresfor the year 2005-64 . In that year in other words, Rs.268 croreswould be needed for the maintenance of roads a lone. Themaintenance expenditure on assets, either already with LSGIs

4 The assumption of 5000kms of extra roads each year is perhaps on the highside. Knowledgeable persons we have spoken to believe that 4000 km. is a moreplausible figure. On the other hand however Planning Board estimates suggestthat 17600 kms of new roads have already been built in the three-year period1997-8 to 1999-00, as against 13000 assumed by us. If 4000 km is taken to bethe average annual addition after 1999-00, the number of extra kms of road-length assumed by us for the terminal year 2005-6 still remains valid (though itsdistribution over time would be different from what we assume).

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prior to Septemebr 1995 or transferred to them thereafter, comesto about Rs.30 crores at 2000-1 prices. On the assumption thatp lan ass i s tance to LSGIs in 2001-2 would be ra i sed onepercentage point to 14.2 percent of total tax revenue, and wouldgrow (like total tax revenue)at 5 percent per annum in real termsthereafter, the magnitude of maintenance expenditure (at 2percent of capital cost) on newly created, plan-assistance-financedassets would be a further Rs.88 crores at 2000-1 prices in 2005-6. The total maintenance requirement of the LSGIs for theseparticular assets in that year would thus be Rs.386 crores whichwould absorb 25 percent of plan assistance on our assumptions.Moreover i f LSGIs are a l lowed to use p lan ass i s tance formaintenance , then they would use such funds even formaintaining those assets which have been constructed in the post-1997-8 period out of funds other than plan assistance. In sucha case the share of maintenance in plan assistance would go up to41 percent. The conclusion is inescapable that if LSGIs are giventhe freedom to use plan assistance for maintenance, and if theyare serious about maintenance, then they will end up using up totwo-fifths of such assistance even as early as 2005-6, and stillhigher and higher proportions beyond that date. This clearly isan untenable situation. On the other hand if they are not seriousabout maintenance, then that too becomes an untenable situation.The object is both to prevent erosion in plan size and to ensurethe maintenance of assets. And this can be served only if thes ta te government takes the respons ib i l i ty of f inanc ing themaintenance requirement of the bulk of the LSGI assets. Theonly exception would be those assets which have been constructedin the post-Campaign period by LSGIs with funds other thanwhat the government has provided. Even as the government takesthe responsibility of financing the maintenance expenditure on awhole range of LSGI assets, it must be emphasised to the LSGIsthat the maintenance of the remaining assets would have to befinanced from their own sources, other than plan assistance. Inother words the habit of treating plan funds as a cornucopia that

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can f inance a l l k inds of expendi tures should be ac t ive lydiscouraged5 . We shall return to this issue in the second part ofour report.

7.3.6 According to our perception then, what the government has tomeet by way of maintenance expendi ture , cons i s t s o f twocomponents: one component for a fixed stock of assets eitherpossessed by LSGIs earlier or transferred to them after the 1995GO; this would be a constant component (except to the extentthat the maintenance requirement itself might grow with the ageof the assets). The other component is for assets constructed outof plan assistance in the period since 1997-8; this would be agrowing component since the stock of assets whose maintenancehas to be covered would itself be growing.

7.4 ESTIMATES OF MAINTENANCE REQUIREMENTS

7.4.1 There is a serious paucity of reliable data for making a properes t imate of maintenance requirements . Even though acomprehensive list of assets transferred to the LSGIs is nowavailable, the age-structure of the transferred assets is not known.What is more, even on the road length owned by the LSGIs thereare vastly differing estimates. Thus, the first Finance Commissionhad shown a total road length of 112491 kms. with the LSGIs

5. This argument also applies to the view that re-topping of roads should becounted as part of plan, rather than maintenance, expenditure. This view is bothconceptually questionable, given the meaning of the term “maintenance”discussed earlier, and practically inadvisable, since it would entail a big drainon plan outlay. To be sure, if the maintenance expenditure undertaken by LSGIson roads is separately met by the State government, as we suggest, then thiswould only encourage still more extravagant road building. But this problemhas to be addressed separately, by placing tighter constraints, if need be, onroad-building. If LSGIs are both left free (within the 30 / 40 percent ceiling) togo on building roads and have to re-top these roads from plan outlay, then theproblem of unwise use of plan funds would only get compounded.

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as on 31.3 .1996 ( inc luding 3437 kms. of PWD roadstransferred), of which 105553 kms. were with Grama Panchayats.On the other hand data g iven to us by the Directorate ofPanchayats show that Grama Panchayats own only 77359. 49kms. of road length as on 31.3.1999. This decline of 28000-oddkms, in four years i s whol ly inexp l i cab le . Under thecirucumstances we have assumed in our estimates that the totalroad-length shown by the first Finance Commission is correct,and that the increase in the road-length of surfaced roads thathas occurred since 31.3.1996 has been through the surfacing ofhitherto un-surfaced roads6 .

7.4.2 The first Finance Commission had estimated the maintenanceexpenditure required on the 112491 kms. of roads with LSGIsat Rs.102.88 crores on the basis of maintenance norms fordifferent road surfaces which were derived from figures givenby the Ministry of Surface Transport of the Government of India.There are however two problems with the estimate of the firstFinance Commission. First, it does not take into account thequestion of re-topping at all. Its estimate relates exclusively toannual repairs in the sense of patchwork. Secondly, the norm ittakes for the maintenance of un-surfaced roads, which is Rs7500per km. per year at the prevailing prices, is extremely high. Wehave been told by several knowledgeable persons that even attoday’s price a sum of Rs.2000 would be quite adequate for theannual maintenance expenditure per km. of earthen and gravelledroad. We attempt to rectify the estimates on both these counts.For re-topping, the PWD rates are Rs.6.5 lakhs per km. of Black-Topped road, and Rs.7.25 lakhs per km. of WBM road wherethe road width is 15 metres. Since village roads are 3.8 metreswide, we have, with proportionate adjustment, Rs.1.65 lakhs

6. Dropping this last assumption and taking the entire increase since 31.3. 1996as a net increase (consisting of surfaced roads) would not make much differenceto our estimates

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per km. of B-T road and Rs. 1.84 lakhs per km. of WBM roadsas the re-topping expenditure. As for costs of repair, we take thefirst Finance Commission’s f igures for B-T and WBM roadsadjusted for a 30 percent price increase7 , and Rs.2000 per km.for un-surfaced roads at today’s prevailing prices. Applying thesenorms to the figures given by the first Finance Commission’sdata on road lengths, taking four years as the interval for re-topping (and making allowance for the fact that if a road is beingre-topped in a given year, it does not need repairs in addition inthe same year), we get a total annual maintenance requirementof Rs.108.6 crores at 2000-1 prices on the road-length existingwith LSGIs on 31.3.1996, i.e. prior to the 1997-8 plan assistanceincrease.

7.4.3 As regards the assets transferred, the first Finance Commissionhad qui te r ight ly sugges ted that the bas i s for ca lcu la t ingmaintenance expenditure should be, not the original cost of thebuilding but its current replacement cost. We have accordinglytried to calculate the current replacement cost of this list ofbuildings on the basis of certain assumptions: an LP School hasseven rooms (20’ by 20’) and a veranda 5’ wide running its entirelength; a UP School has 8 such rooms with a correspondingveranda; a High School has 2 labs (40’ by 40’) in addition towhat a UP School has; and PHCs, Dispensaries, VeterinaryCentres and Krishi Bhavans have 4 rooms each (20’ by 20’). Wehave assumed Rs.400 per sq.ft. as the current construction cost,2 percent of capital cost as maintenance expenditure for schoolsand hospita ls and 3 percent for other bui ldings. What our

7 This is not too far from an alternative estimate we can make. That is as follows.For annual repairs we can take the PWD norms of Rs.150 per sq.metre as thecost of patchwork, and 4 2/3 percent of surface areaas the necessary extent of patchwork per annum. This gives us an estimate forrepairs on B-T roads which is Rs.26619 per km. of road length. Our estimatesbased on adding 30 percent for price increase to the first FC’s figure assumeRs.25090 per km.

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i l lustrative calculations indicate is that the total amount ofmaintenance requirement on this part of the asset stock of theLSGIs is very small compared to that on roads. We surmise inthe basis of our calculations that a sum of about Rs.30 croreswould perhaps be adequate for the maintenance needs of thetransferred assets (i.e. more accurate information on the age-structure would not add all that much to the total). This sum(of Rs. 140 crores approximately) is unlikely to increase muchin real terms in the coming years. True, there would be someincrease in the maintenance requirement with the ageing of theassets. But it is only for schools and hospitals that we haveassumed a 2 percent maintenance cost; for the others we havetaken 3 percent which is the government’s norm for ordinaryold buildings. The increase in maintenance requirement owingto asset aging will add only a small sum.

7.4.4 What would increase is the maintenance requirement of assetsnewly constructed a f ter 1997-8 out of the increased p lanassistance. Let us take the State Planning Board figure of about8000 km. of new roads in the first two years of the increaseddevolut ion 8 , and assume 5000 km. of extra roads each yearthereafter. If we take a re-topping interval of four years for theseroads (taking cognisance of the view held by many that they areof slightly inferior quality compared to the old PWD-built roads)then the extra amounts needed for the maintenance of these newlyconstructed roads (after deducting the saving in expenditurearising from the fact that the un-surfaced roads, now convertedto surfaced roads, would no longer need to be maintained), cometo as follows.

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7.4.5 On the assumption that approximately 40 percent of the totalplan assistance has taken the form of assets whose maintenancewould require about 2 percent of capital cost per annum we geta figure for the maintenance of such assets at around Rs.35 croresin 2001-2 and Rs.88 crores in 2005-6 at 2000-1 prices (the latteron the assumpt ion, a l ready s ta ted , that p lan ass i s tance aspercentage of total tax revenue goes up by one point from itscurrent level to 14.2 percent in 2001-2 and remains there, whiletotal tax revenue grows at 5 percent per annum from 2000-1onwards). It follows then that the extra maintenance requirementon account of the newly-constructed assets goes up from Rs. 105crores in 2001-2 to about Rs.247 crores in 2005-6.

7.4.6 Taking the two components together we can say that the totalmaintenance requirement on account of all the LSGI assets whosemaintenance should in our view be the responsibility of the stategovernment, goes up from Rs.245 crores in 2001-2 to Rs. 387crores in 2005-6 at 2000-1 pr ices . I f we assume the s tategovernment’s total tax revenue at 2000-1 prices to grow at about5 percent per annum from 2000-1 onwards, which is roughlyequiva lent to the SDP growth ra te , then the maintenancerequirement on account of all these assets, new as well as old, asa proportion of the tax revenue of the state, would increase from2.72 percent in 2001-2 to 3.55 percent in 2005-6. The formerfigure is more firmly based than the latter. In arriving at thelatter figure we have had to make assumptions about the size of

2001-2 Rs. 69.95 crores

2002-3 Rs. 129.97 crores

2003-4 Rs. 134.91 crores

2004-5 Rs. 147.25 crores

2005-6 Rs. 158.70 crores

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plan assistance in the years to come which may not materialise.On the other hand, the assumpt ion that the ra t io of p lanassistance to total tax revenue can be raised by at least onepercentage point during the next year and kept at that level until2005 appears to be an eminently reasonable one, in view of thefact that this ratio was as high as 19.1 percent in 1997-98 and19.5 percent in 1998-99. Likewise the assumption that realrevenue would grow at 5 percent per annum is by no means afar- fe tched one . I f th i s happens then the government ’ smaintenance commitments as visualised by us would increase froman estimated 2.72 percent of the total tax revenue in 2001-2 to3.55 percent in 2005-6.

7.5 R E C O M M E N DR E C O M M E N DR E C O M M E N DR E C O M M E N DR E C O M M E N DAAAAAT I O N S R E G A R D I N G M A I N T E N A N C ET I O N S R E G A R D I N G M A I N T E N A N C ET I O N S R E G A R D I N G M A I N T E N A N C ET I O N S R E G A R D I N G M A I N T E N A N C ET I O N S R E G A R D I N G M A I N T E N A N C EEXPENDITUREEXPENDITUREEXPENDITUREEXPENDITUREEXPENDITURE

7.5.1 To keep the procedure simple, we are of the view that each yearthe government should set aside an amount equivalent to 3percent of its total tax revenue for distribution among LSGIsfor meeting their maintenance requirements8 . Since it was felt

8. This would mean a slight surplus relative to requirements in the first coupleof years but a deficit in the later years. And if it is felt that the correct re-toppinginterval on newly-constructed LSGI roads should be five rather than four years(so that the re-topping exercise in effect gets postponed by a year), then thesurplus would be larger for the first couple of years. On the other hand howeverit should be remembered that our estimate of Rs.140 crores as maintenanceexpenditure on transferred assets assumes a steady state of maintenance, i.e.the absence of any backlog with regard to maintenance. Given the fact that thereis actually likely to be a backlog, the surplus may be only illusory. Moreover, ifthere is any surplus, as long as it is spent on the assets for which it is meant,even if it entails some capacity addition (which, as mentioned earlier, is oftenindistinguishable from maintenance), there can be no possible harm in it. It isthe diversion of funds, destined to be spent on assets, towards sundry currentexpenditures that is questionable, not diversion of the reverse kind (after currentexpenditures are met). Besides we are also allowing the expenditure of up to 10percent of the Maintenance Transfer for meeting operational costs. Seeparagraphs 7.5.13 and 7.5.14 below.

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by the Commission that earmarking a share of total tax revenueincluding the share in central taxes might not be appropriate,we would like to present our recommendation in terms a sharein the tax revenue raised by the state. On average an approximateratio of 3:1 has been maintained in recent years between thestate’s own tax revenue mobilisation and its share of central taxes.Given this fact we would l ike to recommend that the stategovernment should put aside 4 percent of the tax revenue raisedby itself each year over the next five year period for distributionamong the LSGIs for meeting their maintenance requirement.LSGIs should not accordingly have the option, that they nowenjoy of spending 10 percent of their plan funds for purposes ofmaintenance.

7.5.2 We would however like to present our final recommendation inyet another way. Since it is important that LSGIs know at thebeginning of the financial year the exact amount of maintenancefunds they are going to get, it would be more appropriate if werelate these to the latest audited Actuals. These, at the time ofpreparing the budget for the year t , are known only for the yeart-2 . On the basis of the projected trends it turns out that 4percent of the current year ’s revenue of the state governmentamounts to about 5.5 percent of the own revenue two years back.Our prec i se recommendat ion there fore i s that the s ta tegovernment should make available to the LSGIs each year anamount of maintenance grant amounting to 5.5 percent of thelatest audited Actuals of own tax revenue.

7.5.3 This amount consisting of two parts, one constant and the otherchanging, must also be distributed according to two distinctcriteria. Of the total amount so earmarked, Rs. 140 crores at2000-1 prices should be distr ibuted in accordance with thedistribution of old and transferred assets among the LSGIs, forwhose maintenance i t i s meant . The remainder has to bedistributed in accordance with the distribution of newly created

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assets out of plan assistance among the LSGIs. Since the latterwould correspond roughly to the distribution of plan assistanceitself, the distribution of this part of the maintenance transfershould mirror exactly the distribution of plan assistance. Ofcourse we are introducing a break in the pattern of distributionof plan assistance, by bringing in the revenue effort criterion inaddition to those being used earlier. As a result, the distributionhenceforth would be somewhat different from what it has beentill now, so that if this part of the maintenance fund is distributedaccording to our cr i ter ion then i t may d iverge f rom themaintenance requirement on newly constructed assets whichwould have been determined till now by the way plan assistancehas been distributed so far. But this divergence is unlikely to bevery significant and may in fact provide further inducement forundertaking a revenue effort. Besides, simplicity has to be animportant consideration. Our recommendation for the inter sedistribution of the maintenance fund then is as fol lows: anamount equivalent to Rs.140 crores at 2000-1 prices has to bedistributed keeping in mind the distribution of a stock of assets.The remainder is to be distributed in exactly the same way asplan assistance. The adoption of this dual criterion would ensurethat neither the Block and District Panchayats whose share inthe stock of assets is larger than their share in plan assistance,nor Grama Panchayats for whom the opposite is true, would haveany cause for complaint.

7.5.4 At present 3437 kms. of roads which have been handed over tothe District Panchayats are being maintained by the PWD. If theentire maintenance of the transferred assets is going to be therespons ib i l i ty o f the LSGIs themse lves , then the Dis t r i c tPanchayats should get the amount equivalent to the maintenanceexpenditure on these 3437 kms of roads. Likewise at presentwhile assets have been handed over to the LSGIs, the maintenanceof these assets often remains with the respective Departments.The responsibility for the maintenance of all such transferred

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assets should from now on be transferred to the LSGIs, since weare asking for funds to be made available to them for this purpose.

7.5.5 While the distribution of a part of the maintenance fund inaccordance with that of plan assistance is easy to arrange, thedistribution of the other part, the Rs.140 crores at 2000-1 prices,in accordance with the maintenance requirements of old andtransferred assets, would be more difficult to effect. We wouldtherefore suggest the following procedure only for the fixedcomponent of the maintenance transfer. Out of the total ofRs.140 crores at 2000-1 prices (which has to be translated tocurrent prices every year), one-seventh should be kept aside forthe District Panchayats and Block Panchayats. Five percent ofthis amount (i.e. 1 /140 th of the total amount) should be givento the Block Panchayats for equal division among them. The other95 percent should go to the District Panchayats which wouldnow have the responsibility of maintaining 3437 kms of surfacedroad-length (including re-topping at four year intervals). Theremainder of the Rs.140 crores (at 2000-1 prices) should bedistributed among the Grama Panchayats and the Municipalities.The mode of distribution of the respective amounts among theDis t r ic t Panchayats and among the Grama Panchayats andMunicipalities will be initially according to the following formula.The maintenance amount for District Panchayats should be splitbetween road and non-road assets on a 50:50 basis. The formershould be distributed on the basis of road length and the latteron the basis of certain “norms” (given below) applied to the valueof non-road assets. For Grama Panchyats and Municipalities,exactly the same formula should hold except that the distributionof the maintenance amount between road and non-road assetsshould be in the ratio 7:1 (correspondingly roughly to theirestimated requirements). For the distribution of the maintenanceamount on roads the ex i s t ing cr i ter ia based on Babu PaulCommittee report should be followed. For the other part, the“norms” mentioned below could be applied to the data on the

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magnitude of transferred assets to get an inter se distribution.To be sure, what any particular LSGI would get out of Rs.140crores (at 2000-1 prices), distributed in this manner, may bevery different from what it objectively needs for the maintenanceof the old and transferred assets at its command in accordancewith the g iven “norms” . Idea l ly, to get a t a genuinecorrespondence between the two vectors, namely, what the LSGIsget for the maintenance of these assets and what they objectivelyneed, there should be an iterative procedure of the followingkind.

7.5.6 In the first year, as the total maintenance expenditure amountingto Rs.140 crores (at 2000-1 prices) is distributed according tothe above criteria, the government can simultaneously announcethese maintenance expenditure “norms” (e.g. rupees per sq.ft.of buildings and per km. of road length etc.) on the basis ofwhich those LSGIs which feel that they have got less than theirdue would put in claims for more. At that point, the validity oftheir claims will have to be verified by the government (and inthe process a proper inventory of the i r pre-ex i s t ing andtransferred assets built up). Now, suppose the sum of valid extraclaims comes to Rs.10 crores. Then, in the second year, since thetotal maintenance transfer would increase to a larger figure owingto price increase (say to Rs.154 crores, i f prices rise by 10percent), these extra claims can be met out of this increase. Inthe second year then Rs.10 crores would be given to thoseparticular LSGIs which had got less in the first year, and Rs.144crores (154 – 10), distributed among all the LSGIs (includingthose who have been given the extra Rs.10 crores) in a new ratio(where the Rs.10 crores get added to the weights of those whohave been given this sum). If on the other hand the sum of extraclaims exceeds the increase in the provision in the second year,say the valid extra claims come to Rs. 20 crores against an increasein provision of Rs.14 crores, then the Rs.14 crores would haveto be rationed out among the claimants, with each getting 70

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percent of the extra claims, and being asked to put in fresh claimsfor the remainder next year. When the available funds exceedthe claims at the old norms, this excess can be distributed inaccordance with the latest prevailing weights. And at this pointthe norms can be revised to take account of price increases in theinterim, on the basis of which fresh claims would be put forward.

7.5.7 When a situation arises where all LSGIs put in valid extra claims,we have reached the end of the iterations. Once these claims havebeen accommodated in the manner described above, the patternof weights prevailing at that point can be used for all subsequentdistribution of the fixed amount (of Rs.140 crores at 2000-1prices). In this manner we start with incomplete information,and hence only a rough and ready index of weights for inter sedistribution, but we keep revising the index as we go along onthe basis of information provided by the LSGIs themselves (andverified as authentic by the government), and simultaneouslybuilding up the information base. This way eventually we shouldget at the “true” index of weights (i.e. the iterations will convergeto the “true’ index), provided we start in the neighbourhood ofthe “true” index.

7.5.8 In case this procedure, which relies heavily on the assumptionthat a posteriori verification would be authentic, is found to beadminis t ra t ive ly in feas ib le , the more s imple and obviousalternative is to cut out iterations, and take the initial inter sedistribution as the final one as well. In this case a careful a prioricalculation, based on the available data on transferred assets,supplemented by further verif ication through visits and theeliciting of additional information through questionnaires, maybe made of the maintenance requirements, especial ly of thetransferred non-road assets. Rs.30 crores can be distributed onthe basis of these calculations and the Rs.110 crores (both figuresat 2000-1 prices) can be distributed on the basis of the BabuPaul Committee recommendations, and the matter can be left atthat.

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7.5.9 The scheme of iterations has several additional advantages: first,it is flexible in the sense that it can be stopped after any round ifwe are not too finicky. For instance when the very first round ofexcess claims have been accommodated, and available funds haveshown an excess over claims (and hence distributed according tothe latest prevailing weights), the iterations may be stopped. Thelatest prevailing weights can then be taken as final, for the sakeof convenience. Secondly, it is flexible in yet another sense: theupward revis ion in the maintenance norms (to ref lect priceincreases) can be calibrated in accordance with the capacity ofthe administration. Since all claims have to be verified by theadministration, a sharp increase in the norms would put a greaterburden on the administration than a small increase in the norms.Thirdly, the scheme works even if the original estimate of Rs.140crores (at 2000-1 prices) as maintenance expenditure requirementon old and transferred assets is inaccurate. What the schemeachieves is the following: if the amount is “too little” or “toomuch”, th is “ too l i t t le -ness” or “ too much-ness” i s evenlydistributed across LSGIs. Notwithstanding the advantages of thescheme of iterations however, it was felt by us that on practicalconsiderations a once-for-all formula of inter se distributionwould be better. We would therefore recommend the latter.

7.5.10 A poss ib le cr i t ic i sm of our proposa l i s that i t requires anidentification of pre-existing or transferred assets separate fromthose newly constructed. But even though by looking at a houseone cannot say whether it is newly-constructed or whether it hasbeen transferred, or looking at a road-length one cannot be surewhether i t was pre-ex i s t ing wi th the LSGI or has beenconstructed out of the plan assistance (especial ly since suchass i s tance might have been used to re - top an o ld road) ,nonetheless records are avai lable on the basis of which theauthenticity of maintenance claims on pre-existing or transferredassets can be verified. Besides, this whole system of dual criterionthat we are suggesting is a transitional arrangement anyway: in

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the future when the weight of the maintenance expenditure onpre-existing or transferred assets in the total would have gonedown (it being a fixed part of a growing amount), this dualcr i ter ion can be replaced by a s ingle one, v iz . distr ibutingmaintenance assistance entirely in the same proportion as planassistance.

7.5.11 It remains to identify the verifying authority and to fix the initialnorms. This authority should vest with the Ministry of LocalSelf Government of the state administration. The initial normscan be as follows

(i) Maintenance on BuildingsConstructed Before 1.4.67 3 % of capital cost

(ii) Maintenance on BuildingsConstructed After 1.4.67 2 % of capital cost

(iii)Current Construction Cost Rs.400 per sq.ft.

(iv) Frequency of Re-topping ofSurfaced Roads Once in Five Years

(v) Repair Expenditure:B-T Roads Annually Rs.25090 per km.

(vi) Repair expenditure:(WBM) Roads Annually Rs.23140/km.

(vii)Repair Expenditure:Un-surfaced Roads Annually Rs.2000/km.

(viii)Cost of Re-toppingB-T Roads (3.8 m. width) Rs.1.65 lakhs/km.

(ix) Cost of Re-ToppingWBM Roads (3.8m width) Rs.1.84 lakhs/km.

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These figures would have to be updated from time to time totake account of inflation.

7.5.12 The procedure we are sugges t ing can be summed up forconvenience as follows:

(i) Set aside, in each year’s budget, 5.5 percent of the taxrevenue raised by the state government during the latestyear for which audited accounts are available, for transferto LSGIs as a maintenance fund.

(ii) On the basis of a price-index work out what Rs.140 croresat 2000-1 prices amount to for the coming year for whichthe provision is being made in the budget. (The deflatorfor the construction sector employed in SDP calculationscan be used for the purpose and the Department ofEconomics and Statistics can be asked to give a quickestimate of its increase during the preceding 12-monthperiod at the time of the formulation of the state budget,and this increase can be assumed to hold over the nexttwelve months).

(iii) Of this sum, one-seventh is to be kept aside for Districtand Block Panchayats, and divided between them in the ratioof 19:1. The Block Panchayats should have the amountequally divided among them. The District Panchayats shouldhave half the amount divided among them in exactly thesame ratio as the 3437 km. road length is distributed.,and the other half on the basis of “norms” applied toestimated non-road asset values.

(iv) The remaining six-sevenths of this sum is to be distributedamong the Grama Panchayats and the Municipalities andCorporations; seven-eighths of this is to be distributedon the basis of the Babu Paul Committee recommendations

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and the remaining one-eighth on the basis of “norms”applied to estimated asset values.

(v) The remaining part of the maintenance fund, i.e. the excessof 5.5 percent of the state’s own tax revenue two yearsago over Rs.140 crores at 2000-1 prices, is to bedistributed exactly in the same ratio as the plan assistance.

7.5.13 The LSGIs should not in general be allowed to spend the amountthey receive as maintenance transfer for any other purpose. Therei s however a problem here . S ince , a s a rgued ear l i e r, theexpenditure on maintenance cannot be distinguished from netinves tment in many cases , the LSGIs would per force getembroiled in tedious, almost theological, hair-splitting if theyseek scrupulously to follow this injunction. The only practicalway of avoiding this and yet ensuring that the maintenancetransfer is not illegitimately used, is to insist that the total amountof such transfer should be spent exclusively (subject to onequalification mentioned below) on the assets for which they aremeant . Idea l ly, the amount meant for the maintenance oftransferred and old assets should be spent on these assets aloneand on nothing else, and the amount meant for the maintenanceof newly constructed assets should be spent on only these assetsand on nothing else. But, ensuring that maintenance transferswithin each category are spent exclusively on assets belonging tothat category, would be practically impossible. What can howeverbe ensured is that the total amount transferred for maintenanceis spent only on assets that require maintenance. (Of course, inthe process, some of the maintenance transfer would be used forthe maintenance of assets newly-constructed from sources otherthan plan funds. But this is a problem which can be ignored forthe time being). What is most important is that maintenancetransfers to LSGIs should not be diverted either towards entirelynew projects or for arbitrary current expenditures. If this muchis assured through proper audit, then it can be left to the peoples’

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intervention to ensure that the maintenance amounts are spentas far as possible on maintenance. Once it is known that adequateamounts are available for the maintenance of assets, then anyobserved poverty in the quality of these assets would arousepopular anger which is the best means of ensuring that the LSGIsfollow the straight and narrow path of rectitude.

7.5.14 We now come to the qualification mentioned in para 7.5.11.There is a widespread feeling that the present practice of makingLSGIs rely exclusively on the supplies of medicines and booksand consumables made available by the state government is aninef f i c ient one; l ikewise the pract i ce of making the s ta tegovernment meet a host of current costs such as rent, telephonebills, the repair and fuel consumption bills on vehicles, electricityand water charges etc. is both cumbersome and inefficient. Inthis context we propose in Chapter 8 that the state governmentshould be freed from the obligation of having to meet anyoperational expenses other than on medicines and books andconsumables. To meet these other costs, the LSGIs should maketheir own provisions; and even in the matter of medicines andbooks and consumables where we recommend a continuation ofthe present system, the LSGIs should be allowed to make theirown additional purchases at the margin. For all this, however,the LSGIs need some funds. We recommend that they should beallowed to spend up to a ceiling of 10 percent of the MaintenanceTransfer for meeting current expenses. While we strongly opposethe practice of diverting maintenance transfers for current uses,we make this exception only as a transitional arrangement, toprovide a bridge from the existing system to a new one. By thetime the next Finance Commission comes into being, how theproposed system works would have become clear, and appropriaterectifications can be made so that operational expenditure andmaintenance expenditure are kept strictly separate, and the formerdoes not lay claim to what is earmarked for the latter.

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7.5.15 To recapitulate, we are allowing LSGIs to use maintenance fundsfor operational expenses up to a ceiling of 10 percent; in additionwe are allowing them some leeway in selecting the assets formaintanance expenditure in a particular year. This is becausemaintenance too is undertaken in practice in a bunched manner.It is not as if little bits are spent regularly on the repair andmaintenance of particular assets; rather, sizeable sums are spentevery once in a while for the maintenance of particular assets.The candidates on whom such sums are spent differ from year toyear.

7.5.16 Earmarking a part of the state’s own tax revenue for transfer toLSGIs for the maintenance of their assets would no doubt entaila certain additional strain on the state’s finances. The wholepurpose of the exercise however would be lost if this strain issought to be met by cutting back on plan outlay. If we disapproveof the use of plan funds for maintenance at the LSGIs’ level,then we are equally opposed to the use of what in effect wouldhave been the state’s plan outlay for the purpose of maintainingLSGI assets. Any such reduction in the state’s plan outlay wouldalso entail a reduction in plan assistance to the LSGIs (underthe one-third formula suggested by us), so that a part of whatthe latter would gain through maintenance transfers would belos t through reduced p lan ass i s tance . The funds for themaintenance transfers therefore have to be found independently.One way of ensuring that plan assistance to LSGIs is not adverselyaffected by the maintenance transfers, is to suggest that a certainminimum proportion of tax revenue should go as plan assistance,in the same way as we have done for maintenance assistance. Butif we do so, then, together with our stipulation of one-thirdtransfer of plan outlay to LSGIs, it would amount to fixing theminimum size of the state’s plan outlay itself (as a proportion ofits tax revenue) which is outside our terms of reference. Ourexpectation is that plan assistance to LSGIs which has fallen to13.3 percent of total tax revenue in 2000-01 (BE) would be raised

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by at least one percentage point and whould be kept at least atthat level for the next quinquennium.

7.5.17 That still leaves the question: how is the state government tofind the resources to make this extra transfer to the LSGIs? Theamount is not much, s ince against payments to be made asmaintenance transfer we have to offset the savings the governmentwould be making by not paying VTC, by not paying the PWDfor the maintenance of 3437 km. of road-length, by not payingthe (very small amount of) maintenance grants currently used byDepartments for maintaining assets falling within the jurisdictionof LSGIs, and by not paying the operational expenses except forthe purchase of medicines, books and consumables. Even so,funds have to be found for this. How the government can do sois an issue that falls outside our terms of reference. It seems tous nonetheless that that if the service sector in Kerala, which hasbeen the fastest-growing sector, could be brought under the ambitof taxation to a greater extent than has been the case till now,then the state which has a good record of revenue mobilisationwould do still better.

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CHAPTER 8

NON-PLAN, NON-MAINTENANCE TRANSFERS

8.1 Traditionally, transfers from the state government to the LSGIshave been grouped under two separate heads: plan transfers andnon-plan transfers. We have discussed plan transfers in Chapter6. In Chapter 7 we have introduced a new category, namelytrans fers for the maintenance of cer ta in LSGI asse t s , or“maintenance transfers” for short. In the current chapter we shalldiscuss what was traditionally referred to as “non-plan transfers”and what we shall call “non-plan, non-maintenance transfers” toemphas i se that we are no longer d i scuss ing “maintenancetransfers” (which logically must also fall under the general rubricof “non-plan”). At the time of the first Finance CommissionReport, the bulk of the “non-plan transfers” referred exclusivelyto the transfers of shared and assigned taxes and a host of specificand general purpose grants to LSGIs. And these “non-plan”transfers were divided into two parts: statutory transfers andnon-statutory transfers. The former referred to the transfers onaccount of the assigned taxes (Basic Tax, and Surcharge on Dutyon Transfer of Property) and shared taxes (Motor Vehicle Tax),while the non-statutory transfers included a host of grants (apossible 18 in the case of panchayats and a possible 10 in thecase of municipalities). Now, on account of the shifting of a wholearray of as se t s and respons ib i l i t i e s to the LSGIs whoseoperational costs have to be financed by the state government,there is an additional and significant element of transfers whosemagnitude even exceeds what comes to LSGIs through sharedand assigned taxes and sundry grants. An entirely new category,

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which had appeared only in an embryonic form at the time ofthe first Finance Commission has now grown to an extent wherei t even dwarf s what t rad i t iona l ly const i tuted “non-p lantransfers”. This category in turn has two distinct parts: one islisted in the budget under the Minor Head “191: Assistance toLocal Bodies and Municipalities/ Municipal Corporations”. Weshall refer to this part as the “191 Non-Plan Transfers” (sincePlan Transfers are also listed under 191). The other part consistsof the amounts that are made available to the LSGIs on accountof meeting the operational costs, i.e. the salaries and materialinput costs, on transferred assets. We shall refer to these transfersas “Operational Cost Transfers”. Finally, we shall refer to thetransfers on account of tax devolution and minor grants as “Tax-Cum-Minor Grants Transfers”. It follows then that we are talkingof four distinct kinds of “non-plan transfers”: the “Tax-Cum-Minor Grants Transfers” (which were the predominant elementuntil 1995-6), “191 Non-Plan Transfers” (which are a result ofthe shifting of several responsibilities to the LSGIs), “OperationalCost Transfers” (which are a result of shifting assets to LSGIs),and “Maintenance Transfers” (which we wish to bring intobeing).

8.2 At the t ime of the f i rst Finance Commission, the transfersthrough these minor grants, or what the Commission had called“the non-plan, non-statutory transfers”, were many in number,minuscule in amount, and divided, in addition, into general andspecific purpose grants. The Commission had therefore made anumber of suggestions for simplifying the system and making itmore meaningful. One was to make all of them general purposegrants. The other was to ensure that the total of such transfersshould constitute 1 percent of total state revenue (appropriatelydefined for the purpose), and should go into two pools, the ruraland the urban, according to the weights of the rural and urbanpopulations in the total population of the state. In addition, therural pool was to have 25 percent of the Basic Tax from panchayat

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areas, and 25 percent of the Surcharge on Stamp Duty frompanchayat areas, while the urban pool was to have 100 percentof the (newly-proposed) Bas ic Tax and 25 percent of theSurcharge on Stamp Duty collected from urban non-Corporationareas (the Corporations were to be simply given the taxes collectedfrom their areas). In the event the government accepted the othersuggestions but not the one relating to 1 percent of total staterevenue, which essentially meant retaining the tail without thesting. It accepted the idea of the rural and urban pools, but thesepools could not be nourished by 1 percent of state revenue.

8.3 Today we once again have a complex and intricate system of “Tax-Cum-Minor Grants” transfers whose complexity and intricacy isentirely unnecessary. There is a rural pool, which undoubtedlyhad a rationale at the time of the first Finance Commission’sreport, but whose rationale is much reduced after the usheringin of democratic decentralisation. It represents, besides, a rathermeagre sum. To make up this meagre sum, even more meagrestreams from various tax transfers have to be joined together;and their respect ive s izes too are determined by e laborateformulae.

8.4 This is not all. Quite apart from the question of complexity andintricacy, the whole conception of assigned taxes and shared taxesis open to question. If the financial relationship between the stategovernment and the LSGIs is to be characterised by sharing,then it is not clear why this sharing should take the form ofsome particular taxes being destined for LSGIs and others forthe s ta te government , and why the revenue of on ly someparticular taxes should be shared between the two in certainratios. This conception, apart from its complexity and lack ofra t iona le , i s a l so fore ign to the under ly ing phi losophy ofdemocratic decentralisation. This visualises not a tussle betweenthe s ta te government and the LSGIs , not an antagonis t i crelationship, but a relationship aimed at constituting a total

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democratic structure more meaningful than what exists now. Weare ta lk ing a f ter a l l o f two ent i t ies , each of which has anadministration headed by elected representatives of the people.The conception of success of the overall structure must be definedin terms of the degree of empowerment of the people. Animportant component of the index of success of institutions atone level therefore must be the degree to which they strengthenthe institutions at the other level. We have to get over the mindsetof visualising the problem of resource sharing between the twolevels as if two self-centred, self-absorbed, hedonistic entities aresquabbling over shares in a piece of cake (with the role of theFinance Commission being that of an arbitrator reconciling theseconflicting claims). In short the old formulae for sharing, whichmeant assigning particular tax revenues to particular levels, haveto be replaced.

8.5 There is an additional reason for our suggesting this. If we lookinto the fiscal future of Kerala, there can scarcely be any doubtthat the state will have no option but to rely increasingly ontaxation of the service sector. It is more than likely that such ashift would give a greater buoyancy to the tax-revenue of thestate government, compared to the tax revenue of the LSGIs, ifthe latter continue to depend exclusively on a certain limitednumber of assigned taxes. An overcoming of this dichotomy willinevitably come on to the agenda. Sooner or later in other wordswe have to move away from the system of basing LSGI financeson a set of assigned taxes, towards one where the LSGIs and thestate government share the proceeds of the entire tax revenueraised by the latter. If this be so, then we may as well move to asystem of tax-shar ing r ight f rom now. We are bas ing ourrecommendations on the existing set of taxes. We hope thatfuture State Finance Commissions would take into account newtaxes which may get imposed, so that the principle of total tax-sharing is continued.

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8.7 The category “others” in Table 8.1 comprises what we havereferred to as “Tax-Cum-Minor Grants Transfers”. For the lastthree years, when the VRM grant was discontinued, this categoryconsists of the following items:

Table 8.1

Non-Plan transfers to LSGIs (Rs.Crores)

1995-6 1996-7 1997-8 1998-9 1999-00 2000-1RE BE

(i)Under 191 17.1 151.2 178.0 229 236.0* 245.2 *

(ii) Others 87.4 148.8 160.4 155.8 199.3 179.7

Of which

a. Basic Tax 5.25 14.2 11.6 16.0 7.0 7.7

b. V.T.C. 20.8 32.8 50.9 50.2 78.9 58.6

c. Surcharge on 54.3 83.5 77.9 75.9 100.0 100.0Duty on Property

Transfer

* See footnote 1.

Source: Budget Documents

Note: Comparison across the years is problematical because of systemic changesover the period and also because figures for the last two years represent onlyestimates.

8.6 The magnitudes of non-plan transfers to LSGIs which haveoccurred under two of the several heads, viz.191-Transfers andTax-Minor Grant Transfers, are given in table 8.1.

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(i) the three main tax sources

(ii) a grant of Rs. 8.4 crores (in 1999-00 and also in 2000-01) to District Panchayats (who got Rs. 2.3 crores) andBlock Panchayats (who got Rs.6.1 crores) for meeting theirrevenue expenditures1

(iii) Rs. 3.5 crores as “Grant-in-Aid Assistance to Panchayats”,and several minor grants for the maintenance of minori r r igat ion, water supply, ra i lway cross ing e tc . whichtogether came to Rs. 1.49 crores in 1999-00 and Rs.1.54crores in 2000-01.

8.8 These figures exclude, as they rightly should, the expenditureon account of the state government’s Panchayat administrationat the state and district levels, and the expenditure on Panchayatpublication and training programmes undertaken by the stategovernment.

8.9 In view of what has been said above, we recommend that in lieuof the present arrangement of specifically assigned and sharedtaxes and of sundry grants, a certain proportion of the stategovernment’s own tax revenue (excluding its share in centraltaxes) should be set aside for transfer to the LSGIs. In thepreceding chapter we have already provided for “MaintenanceTransfers”, i.e. non-plan assistance from the state governmentto the LSGIs for the maintenance of transferred assets, of oldassets which were with them, and of newly constructed assetsfrom 1997-8. While doing so the state government need not payany VTC to the LSGIs, since the purpose of VTC and VRM wasto f inance maintenance expendi ture for roads under thejurisdiction of the LSGIs. Now, if the state government did nothave to pay VTC, then the amount of “Tax-Cum-Minor Grant

1 . Since this particular item also appears under the non-plan expenditurelisted in Appendix 4, in order to avoid double counting we have removedit from our total of “191 Non-Plan Expenditure”. For 1999-2000 and2000-1 therefore the totals of “191 Non-plan expenditure” do notcorrespond to the figures available in published official statistics.

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Table 8.2

Tax-Cum-Grants Transfers (Excluding VTC)

Tax-Cum-Grants State’s Tax-Revenue (ii) / (iii)Transfers (Rs.Cr.) (excluding share in %

Year Central taxes) Rs.Cr.

(i) (ii) (iii) (iv)

1995-96 66.6 3383 1.97

1996-97 116.0 3899 2.98

1997-98 109.5 4501 2.43

1998-99 105.6 4650 2.27

1999-00 (RE) 120.4 5472 2.20

2000-01 (BE) 121.1 6440 1.88

Transfers” that it would have made available to the LSGIs duringthe last six years is given in Table 8.2

8.10 The average figure for the percentage of the state’s own taxrevenue transferred each year on account of taxes and minorgrants comes to 2.29 percent for the entire six-year period. Infact if we leave out 2000-1, for which we have only budgetestimates anyway, then the figure for the preceding two years isremarkably close to this average. It would appear then that anamount approximately equivalent to 2 ¼ percent of the stategovernment’s own tax revenue (excluding its share in centraltaxes) has been handed over each year, in recent years, to theLSGIs on account of tax assignments, tax sharing and the minor

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grants (other than through the VTC). We recommend that 2.5percent , o f the tota l tax revenue of the s ta te government(excluding its share in central taxes), should henceforth be setaside for distribution to the LSGIs. On the other hand thegovernment should retain the entire tax proceeds from those taxeswhich it either collects on behalf of the LSGIs or shares withthem currently. The reason for our suggesting a slightly higherpercentage (2.5 as opposed to 2.25 ) of own tax revenue fordevolution to LSGIs under the head “Tax-Cum-Minor GrantsTransfers” (which we wish to re-christen as “General PurposeTransfers” or “General Purpose Grant”) will become clear later.But the increase is marginal. Our main concern is s imply arationalisation and simplification of the existing system.

8.11 It is more convenient however if the transfer on this score isexpressed as a percentage not of the current year ’s tax revenueof the state government, but of the tax revenue of the latest yearfor which the Actuals are available (which in effect means thetax revenue two years ago), so that a precise figure appears inthe current year ’s budget of the state government. Assuming a16.8 percent growth rate of own tax revenue (which happens tobe the “norm” prescribed by the CFC for the state), 2.5 percentof the current year ’s own tax revenue would amount to 3.5percent of the own tax revenue two years ago. Our preciserecommendation therefore is that an amount equivalent to 3.5percent of the state’s tax revenue (excluding its share in centraltaxes) of the latest year for which certif ied accounts by theAccountant General are available should be transferred each yearby the state government to the LSGIs in lieu of the current systemof transfers of taxes and grants to them.

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8.12 The Commiss ion’ s recommendat ions amount to a rad ica ldeparture from assigning and sharing of specific taxes to sharingof revenue from all the own taxes of the State Government. Ofcourse assigned taxes and specific shared taxes have a certainsanctity coming out of their long history and universal practice.And more importantly they are legal entitlements, which over aperiod of time have come to be seen as a matter of right forLSGIs enshrined as legislation and protected by it. The LSGIshave a historic as well as legal right over these sources of revenue.They have been used to it for so long that it has become anintegral part not only of their fiscal system but also of theirexpectations of revenue. Thus any move away from this systemhas to be done with caution and care. Not even in the slightestway should there be any erosion in the legal entitlement of LSGIs.In fact there should be a strengthening of them. In deciding thequantum as well as in the precedure of sharing the state taxesthere cannot be any discretion whatsoever; it cannot be in thenature of a grant left to the executive to decide nor can it be lefteven to the annual Finance Act. It has to become an unambiguouspart of the Panchayat Raj and Municipal legislation, additionallysafeguarded by policy commitment to allay all misgivings. Therefore, when the Commission recommends a shift away from thepresent system of specific taxes assigned or shared to a generalsharing of all taxes, there need not be any doubt or fear aboutthe potency of the new entitlement. In fact by suggesting ageneral share of all taxes, the entitlements are broadened anddeepened. It has the added symbolic significance suggestive ofLSGIs standing shoulder to shoulder with the State Governmentin sharing responsibil it ies and revenue. It is as if the localgovernments have grown in importance to claim a general shareof all taxes rather than just three specific taxes.

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8.13 We recommend the following principle of inter se distributionof this amount between the different tiers of the LSGIs. TheDistrict Panchayats and the Block Panchayats, which have nosources of income as yet, rely exclusively on state governmentgrant for their house-keeping expenditure. Since the size of thehousehold to be kept is not uniform their share should bedetermined on a normative basis. The total amount earmarkedfor them should be set apart and dis t r ibuted among themaccording to the i r genuine requirments which should bedetermined on the basis of prescribed norms. The share ofMunicipalities, Corporations, and Village Panchayats, each takenas a group, should in principle be fixed at the levels which havebeen observed in recent years. There is however an importantaddi t iona l cons iderat ion, namely, the s igni f icant boundarychanges that have taken place of late. Two new Corporations,Kollam and Thrissur, have been created out of Municipalities,wi th the addi t ion of cer ta in Panchayats . L ikewise theThiruvananthapuram Corporation has been expanded with theaddition of certain Panchayats. And there have been other changesinvolv ing the incorporat ion of Panchayat areas intoMunicipalities. In view of these changes, the distribution of theGeneral Purpose Grant across tiers can no longer conform tothe historically observed shares; suitable adjustments have to bemade. Taking this fact into account we recommend the following

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distribution of the General Purpose Grant across tiers2 , aftersetting apart the share of District and Block Panchayats.

2. The basis of these calculations should be clarified. Since each ofthese tiers would be getting a separate grant for the maintenance of theirold assets and transferred assets, there would be no need to transferVTC to them any longer. As far as the Municipalities and Corporationsare concerned, they get very little government (non-tax) grants of thesort that Panchayats get. The first Finance Commission had recommendedthat urban local bodies too should be eligible for Basic Tax Grants whichshould then be put into the urban pool. Though this suggestion wasaccepted by the government, appropriate legislation is in the process ofbeing enacted, so that no actual Basic Tax has yet accrued to the urbanLSGIs either directly or indirectly (via the urban pool). Likewise sincethe urban pool has not yet taken shape, the deduction of 25 percent of theSurcharge on Stamp Duty in urban areas, which is supposed to go intothis pool, has not yet taken place. It follows that for the urban LSGIs,once VTC is excluded, the surcharge on stamp duty coming their way isthe sole form of “Tax-Cum-Minor Grants Transfer”. The budgetaryallocations on this score, as a proportion of the total “Tax-Cum-MinorGrants Transfers” excluding VTC, were on average about 18 percentover the period since 1997-8, and these were approximately evenly dividedbetween Municipalities and Corporations. The observed shares of thedifferent tiers obtained on this basis are then adjusted to take account ofthe boundary changes to give us the figures of table 8.3.

Table 8.3

Proposed Distribution of General Purpose Grant Between Tiers

Tier Share in Total (%)

Grama Panchayats 78.5

Municipalities 8.5

Corporations 13.0

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8.14 As regards the inter se d i s t r ibut ion among t ie r s , GPs ,Municipalities and Corporations, our recommendation is thefol lowing. For Municipalit ies and Corporations the inter sedistribution should be entirely on the basis of population. Asregards Grama Panchayats, out of the total amount earmarked,Rs.10 crores should go towards fil ling the deficits of certainpoor GPs in meeting establishment expenses (as is the practicenow). The remainder should be distr ibuted on the basis ofpopulation. For District and Block Panchayats, they may be grouped,based on requirements, and allocations made on normative basis,including expenditure ceilings for certain categories like telephonecharges, P.O.L, travelling allowance and extraordinary items.

8.15 The really novel element in our recommendations in this chapteris the proposal that the inter se distribution, within the groupof Grama Panchayats, to the individual Panchayats should be onthe basis of population; and the same principle should be adoptedfor Municipalities and Corporations. At present, 75 percent ofthe basic tax col lected in the Panchayat areas is distr ibutedaccording to where it is collected from, and only 25 percent goesinto the rural pool from which the criteria of distribution are inkeeping with certain specified norms. The entire surcharge onstamp duty collected from urban areas is distributed accordingto where it is collected from (since the urban pool into which 25percent of it should go, has not yet come into existence). Andthe distribution of VTC is supposed in principle to be in keepingwith maintenance needs. The tax revenues transferred for non-maintenance purposes at present are therefore distributed, to asignificant extent, on the criterion of place of collection. Theshift to population as the basis of distribution marks a radicaldeparture. This shift can be justified as follows. Once we moveaway from the notion of “assigned taxes”, the criterion of placeof collection ceases to be relevant. True we could still mimic thatcriterion (as we have implicit ly done in f ixing the share of

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Corporations and Municipalities), but the only justification fordoing so would to avoid any sudden financial hardships to anyparticular local bodies, such as a sudden shift to a differentcriterion of distribution would entail. But this is an argumentof pragmatism not of principle. If the pragmatic concerns couldbe taken care of in some other way, then we could move to somealternative criterion which is more reasonable in principle. Sinceplan assistance which constitutes the bulk of the transfers isalready being distributed according to a set of complex andcarefully-worked out norms, population is the obvious simplebasis for distributing the “General Purpose Transfers”.

8.16 But the move to this simple criterion may create hardships forparticular LSGIs in the transitional period. They may suddenlyfind themselves with reduced incomes. True, they are gettingsubstant ia l p lan ass i s tance and would be get t ing, on ourrecommendat ions , a s igni f i cant amount of funds for themaintenance of assets. It may therefore be thought that a certaintransit ional reduction in incomes should not be a cause forconcern. But prec i se ly because we are of the v iew thatmaintenance grants should not be used indiscriminately for otherpurposes, and that plan funds should not be used for currentexpenditure needs, we feel it necessary to ensure that no incomefall occurs in the period of transition; otherwise we would becondoning, indeed encouraging, financial impropriety. It is forobviating any such hardships that we have recommended a smallr ise in the proportion of “ Tax-Cum-Minor Grant Transfers”(excluding VTC), now christened “General Purpose Transfers”,from its current figure of about 2 ¼ percent of the state’s owntax revenue to 2 ½ percent. This extra ¼ percent would come toabout Rs.15 crores (out of a total own tax revenue estimate ofRs.6440 crores) in 2000-1, but it would result in a streamliningand simplification of the system in a relatively painless manner,

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in the sense that no individual LSGI would experience an absoluteshortfall in its receipts on account of these transfers.

8.17 One consequence of our recommendations is that the rural andthe urban pools would have to go. In fact they would no longerbe necessary. The rationale of having the rural and the urbanpools was precisely to provide some relief from the relentlesslogic of the “place of collection” criterion in distributing thesetax transfers. Many LSGIs, from whose territorial jurisdictionnot much tax could be collected, required succour, and the poolswere meant to provide such succour. By providing for these pools,the first Finance Commission had already taken a few steps awayfrom the “place of collection” criterion which in turn derivesfrom the logic of “assigned taxes”. We have only taken thatmovement to its logical conclusion. Of course, a certain practicalawkwardness is introduced in the process. Several legislations togive e f fec t to the recommendat ions of the f i r s t FinanceCommission have already been enacted or are in the process ofbeing enacted. Our recommendations being introduced at thiss tage would make many of these l eg i s l a t ions i r re levant ,unnecessary or infructuous. But the awkwardness here is in partan inevitable product of the inordinately long time-lags withwhich Finance Commission’s recommendations are implemented,and in part a result of the peculiarity of any period of transition,such as what characterises the process of decentralisation inKerala. Many things have happened between the first FinanceCommission and the second, and in taking cognisance of theseour report necessarily has to differ qualitatively in many spheresfrom that of the first Commission. But once this remarkableperiod of transition is over, subsequent Finance Commissionscan build on their predecessors’ reports to a greater extent (andthus provide greater continuity) than we have been able to do.

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8.18 We now come to the question of “191 Non-Plan Transfers” whichis yet another component of “Non-Plan, Non-MaintenanceTransfers”. An idea of what this component covers can be hadfrom Table 8 .4 which g ives in format ion on the budgetedexpenditure for 2000-1 on some important items under this head.

Table 8.4

Some Important Items of 191 Non-Plan expenditure 2000-1

Item Expenditure (Rs.Crores)

1. Special Pension Scheme for PhysicallyAnd Mentally-handicapped 13.97

2 Destitute Pension 19.78

3 Agricultural Workers’ Pension 37.20

4 Old Age Pension 3.07

5 Mid-day Meals 29.50

6 Unemployment Allowance 70.00

7 Flood Damage Repairs, Renewal ofCommunications,Special repair to Communications etc 23.25

8 Medical materials and Supplies 8.40

9 Production Incentive to Paddy-Growers 10.00

10 Assistance to BPs and DPs 8.40Total of these items 223.57Total 191 Non-Plan 253.63

8.19 Clearly the bulk of the 191 non-plan transfers consists of socialexpenditure of different kinds, for which the responsibility hasnow been shifted to the LSGIs. These, with the sole exceptionof the “Assistance to BPs and DPs” (for whom we have madealternative provisions), should continue exactly as before. Weref ra in f rom making any recommendat ions regard ing the

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minimum provisions on these heads, though the stipulation ofsuch a minimum is essential to take account of both inflationand the inev i tab le increase in the number of intendedbeneficiaries, in the belief that the pressure of public opinionwould automatically enforce such a minimum.

8.20 The “Operating Cost Transfers”, as mentioned earlier, have twocomponents: the payment of salaries to the staff employed onassets transferred to LSGIs, and the provision of current inputs,e.g. medicines, books and consumables in schools, electricity andwater charges, rent, telephone charges etc., for the transferredassets. The salaries, for reasons discussed in paras 2.9 and 2.10,must continue to be paid by the state government; we do notwish to change the current system in any way. As regards thetransfers for current inputs there are at least three separateproblems with the present system: f i rs t , in the hea l th andeducation sectors, the transfers to a significant extent are madein kind rather than in cash, which introduces inflexibility intothe system (and hence irrationality of the sort where there maybe too much of one kind of medicine and too little of another).Secondly, even apart from such micro-level disproportionality,the very fact of having to depend on a distant entity, namely thes ta te government depar tment , for suppl ies , in t roducesinflexibility into the system which is undesirable. Thirdly, sincein a whole range of other sectors, the transfers, though theymay not be in kind, are many but minuscule, the system has acumbersomeness which is avoidable. Having said all this howeverwe also recognise that messing about with a system which isalready in place and working with some degree of success, isalways a risky affair. Besides, the transfers in kind, in the healthsector at least, have some rationale in terms of the advantages ofbulk purchase, and of providing a centralised direction and thrustto the public healthcare system. There is also a danger in allowingthe state government to wash its hands completely of vital socialsectors l ike educat ion and health by entrust ing the task of

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purchasing current inputs entirely to the LSGIs. Taking all theseconsiderations into account, we recommend the following withregard to “Operating Cost Transfers”: first, the state governmentshould cont inue to provide for medic ines and books andconsumables in schools exactly the way it has been doing tillnow; secondly, the LSGIs should be permitted to make extrapurchases of medicines and books and consumables which theymay consider necessary at any point of time; thirdly, the stategovernment should be absolved from the responsibility of meetingall other current costs such as telephone, electricity and watercharges, vehicle operating costs and rents in these two sectors aswell as and in other sectors, and for these costs the LSGIs shouldmake their own provisions; fourthly, these provisions and theextra expenditure on health and education materials, can befinanced, upto a ceiling of 10 percent, from the “MaintenanceTransfers” made available to the LSGIs.

8.21 These recommendations have the virtue of introducing a degreeof flexibility into the system at the margin while retaining itsbasic existing structure. They also reduce its cumbersomeness byabsolving the state government from the responsibility of havingto meet current costs in a whole range of sectors, a move whichhas the additional merit of providing it slight fiscal relief. Aboveall however our recommendations are designed to anticipate aproblem that is likely to arise in the future, which has to dowith the operational expenditure on assets that the LSGIs wouldbe constructing out of their enhanced plan assistance. Until nowthe newly-constructed assets of the LSGIs have generally notbeen of a k ind that requires any la rge-sca le operat iona lexpenditure. But this is going to change in the coming years. Atthat point not only would some provision have to be made forsuch expenditures, but steps taken to ensure that the LSGIs’demand on this score does not become too heavy: this wouldrequire some constraints on their choice of assets and some fixingof norms to avoid profligacy in operational expenses for any given

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choice of assets . An a l ternat ive course , more in tune withdemocratic decentralisation, might be to have a certain sum,earmarked for operational expenditures and arrived at accordingto certain macro norms, distributed among the LSGIs in the sameratio as plan assistance. The LSGIs can then be left free to choosetheir assets, i.e. make their plans, keeping two budget constraints(in the sense of state government assistance) in mind, one relatingto plan assistance, and the other relating to operational assistance.(Needless to say, they can use their own funds to spend in excessof these constraints). These issues of course are not of greatimmediate concern: in the next five years, which constitute ourtime-horizon, the LSGIs are likely to continue emphasising theconstruction of those assets, e.g. roads, bridges, houses etc.,which do not require any significant operational expenditures(as d i s t inct f rom maintenance for which we have madeprovisions); it is only future Finance Commissions that wouldbe exercised over such issues. Nonetheless we have opened awindow towards a poss ib le “ two-constra ints” so lut ion byallowing LSGIs (for the time being) to spend up to 10 percentof the Maintenance Transfers for meeting operational costs. SinceMaintenance Transfers are to constitute approximately 4 percentof the state government’s own tax revenue in any year (which wehave translated as 5.5 percent of the state government’s own taxrevenue two years ago), we are implicitly putting in place a systemwhere a certain percentage of the state government’s current owntax revenue (0.4 in this case) is transferred to LSGIs for meetingtheir operational costs. Future Finance Commissions may wellconsider building on this foundation while changing the ratiosin question.

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CHAPTER 9

ENHANCING OWN REVENUESOF LSGIS

9.1 As of now, only the Village Panchayats and the ULBs have thepower to levy taxes, fees and fines. Though, theoretically Blockand District Panchayats can realize user charges, donations andcontributions, the scope for raising any significant amount fromthese sources is rather l imited now. The Commission is notrecommending any additional sources of revenue for these LSGIsnow.

9.2 However there is every reason to improve the revenue-raisingcapacity of the Village Panchayats and ULBs, for own incomegives full freedom of use. In order to improve civic services, anobligatory function of these LSGIs, own funds are essential. Alsoown funds could be used to take up innovative programmes,which may not be possible under Plan guidelines.

9.39.39.39.39.3 A peculiar feature of the local government legislation of Keralais that there is a striking similarity between the Kerala PanchayatRaj Act 1994 and the Kerala Municipality Act 1994. In fact afterthe fundamental amendments made in 1999, there is hardly anydifference between the two Acts. This is true of financial mattersrelating to the urban and rural local governments. Therefore theState Finance Commission would be making recommendationscommon to both urban and rural LSGIs, and in those specialcases, which relate only to urban or rural LSGIs, they will besuitably denoted. The recommendations are arranged in the same

order as the descr ipt ion of the sources of own revenue inChapter3.

9.49.49.49.49.4 TAX REVENUE

9.4.19.4.19.4.19.4.19.4.1 (1) PrPrPrPrProperoperoperoperoperty ty ty ty ty TTTTTaxaxaxaxax: With the change over of Property Taxassessment from rental value calculation to plinth areabased assessment, it is expected that instances of under-assessment and corruption in assessment would be reducedconsiderably. Empirical studies are being done to determinethe rates, factor values and suitable methodology ofassessment; which would then be issued in the form ofrules. The Commission would recommend a transparentsystem of self-assessment with a proviso that forconcealing or under-reporting of plinth area, there shouldbe a penal provision to collect tax at ten times the normalrate. This penal provision should be equally applicable toany misreporting by verifying or inspecting authoritieseven if detected later by a supervisory or vigilanceauthority.

9.4.1.1 The Commission would urge the Government to complete theswitch over to the new system latest by 1st June 2001. Early ac-tion is warranted because of the fact that new LSGIs have justassumed office and at this point of time they would have themoral authority to take difficult decisions regarding tax assess-ment. The Commission would suggest the following scheme forclassifying buildings and fixing the tax.

(a) Zone – Four zones based on location.

(b) Type of Building

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(1) Ordinary Building.

(2) Medium Type Building.

(3) Luxury Building

(c) Type of use

(1) Commercial

(2) Non-commercial

(d) The relative weights for Zones could be 1, 1.5, 2,

2.5.

(e) The relative weights for the types of building could

be 1:1.5:2

(f) Relative weights between non-commercial and com-

mercial use could be in the ratio 1: 3.

(g) The deductions for age and owner occupation may

be as provided for in the Kerala Municipality Act.

9.4.1.2 It is possible that when the changeover happens some of theexisting under-assessed buildings would have to pay taxes severaltimes the existing amounts. It is also possible that a few of thebuildings would have to pay much less tax than at present. TheCommission would strongly recommend that on no accountshould there be a cap on increases or limit to decreases in respectof any building, for what is due as per law has to be paid. Pastfailures in assessment cannot be legitimatized when a new systemis designed. In order to avoid unnecessary and i l l - informedcriticism, it is suggested that massive publicity campaign beinitiated immediately, pointing out the virtues of a simplifiedtaxation system, which would free the citizen from dependenceon the mercies of the taxing and appellate authorities.

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9.4.1.3 It has been brought to the notice of SFC that, in some cases atleast , owners of bui ldings under construction approach theassessing authority immediately after the skeleton of the buildingis complete and seek to get a door number in order to apply forelectricity and water connections which would be helpful incarrying out the remaining part of the construction. Assessingan incomplete building would naturally lead to under-assessmentand there is no way of tracking its completion. Therefore it isrecommended that a dual system of numbering be resorted to.In such cases, a provisional number would be given to a partiallycompleted building and a final number would be given to onlythe fully completed building. There should be a system to monitorfinal assessment of buildings having provisional numbers.

9.4.29.4.29.4.29.4.29.4.2 (2) PrPrPrPrProfofofofofession ession ession ession ession TTTTTaxaxaxaxax . As regards Profession Tax, theCommission strongly endorses the recommendation of theEleventh Finance Commission to raise the ceiling on thetax even while removing it from the Constitution andmaking it part of a Central Legislation. Discussions withelected representatives and officials have convinced theCommission that there is tremendous scope for extendingthe coverage of Profession Tax even within existingconstraints. It is noticed that other than the salariedclass who are working in the public or private sectors,self-employed groups like professionals and traders arevery rarely taxed. In this connection the Commissionrecommends introduction of a presumptive Profession Taxfor certain occupations as detailed in Annexure 9.1

9.4.2.1 The Commission would like to reiterate the recommendationmade by the First SFC to have a tax mapping system. This maybe done immediately in about ten Village Panchayats, five Mu-nicipalities and one Corporation and then later expanded to coverall local governments.

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9.4.39.4.39.4.39.4.39.4.3 (3)EnterEnterEnterEnterEntertainment tainment tainment tainment tainment TTTTTaxaxaxaxax. Here again, the Commissionwould reiterate the recommendation of the First SFC togo in for tax assessment on the basis of seating capacityand occupancy ratio. Detailed suggestions on the assess-ment procedure would be given in the second part of theReport after conducting a quick field study and afterevaluating the systems prevalent in Tamil Nadu and AndhraPradesh.

9.4.3.1 In the meanwhile the Commission would suggest implementa-tion of the recommendation of the First SFC to make Cable TVliable for Entertainment Tax and also to bring Internet Serviceswithin the definition of entertainment.

9.4.49.4.49.4.49.4.49.4.4 (4) AdAdAdAdAdvvvvvererererertisement tisement tisement tisement tisement TTTTTaxaxaxaxax. The Commission feels that thereis much scope for collection of Advertisement Tax in astate like Kerala where marketing of consumer goods isquite widespread even in rural areas. But the collectionfigures show that this source of tax is not even partiallytapped by the LSGIs. The Commission recommends thefollowing:

(i) Government may fix the minimum rate of taxa-

tion for different types of advertisement for dif-

ferent locations.

(ii) Advertisement Tax Rules may be issued by Gov-

ernment setting out the guidelines for the LSGIs

to assess the tax.

(iii) Penal provisions for ‘escaped tax’ should be at

least five times the normal tax.

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Show Tax

The unified Show Tax may be revised as follows:

Minimum Tax (in Rupees)

Panchayat ULB

1) Regular cinematograph exhibitions at licenced theatres 15/- 25/-

2) Other cinematograph exhibitions 30/- 40/-

3) Regular shows other than cinemas. 30/- 40/-

4) Other exhibitions 75/- 100/-

There should be a system of authenticating advertisement bythe LSGIs so that unauthorised advertisements can easily bedetected.

9.4.59.4.59.4.59.4.59.4.5 (5) Land ConLand ConLand ConLand ConLand Convvvvvererererersion sion sion sion sion TTTTTaxaxaxaxax. Conversion of land use imposesadditional burden on LSGIs, which have to provide civicservices and other basic amenities. Therefore the Com-mission recommends expansion of the existing ConversionCess into a Land Conversion Tax. For the purposes of thistax conversion may be defined as change of land use fromagriculture to non-agriculture, which would include con-version for the purpose of house plots, building construc-tion etc.

9.4.5.1 It is recommended that Conversion Tax, which is essentially aone-time charge, may be collected on the capital value of theland converted as indicated by the minimum value to be fixed bythe Government. (Till such time the minimum value is notified,the valuation may be got done by the Tahsildars). In the case of

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authorised conversion of paddy fields as per provisions of theKerala Land Utilisation Order five percent of the capital valuemay be realized as Conversion Tax. However, exemption fromthe Land Conversion Tax may be given if the extent of paddyland converted is five cents or less and the building put up is lessthan 50 sq. metres in area. If no building is put up within sixmonths of the conversion, then no exemption need be given.

9.4.5.2 In respect of other kinds of conversion the tax may be fixed astwo and a half percent of the capital value with the same kind ofexemption as suggested for conversion of paddy land.

9.4.6 (6) SerSerSerSerService vice vice vice vice TTTTTaxaxaxaxax. At present the tax is optional for Vil-lage Panchayats and it is an integral part of the PropertyTax in the case of ULBs . In the context ofdecentralisation, which enjoins LSGIs to perform certainfunctions declared as mandatory. Service Tax should bemade compulsory and made an independent tax. It couldbe assessed as a percentage of the Property Tax linkedto the recurring cost of performing the mandatory func-tions.

9.4.7 (7) SurSurSurSurSurcccccharharharharhargggggeseseseses. As per Section 208 of the Kerala PanchayatRaj Act and as per Section 230 of the Kerala MunicipalityAct, Village Panchayats and ULBs are permitted to levy sur-charges on Property Tax. Now the upper limit is statuto-rily fixed as 5% for Village Panchayats and 10 % for ULBs.Since the surcharge is to be specifically used for taking upnew development projects, it is felt that the ceiling maybe removed and the LSGIs be given the freedom to decidethe percentage which can be varied every year as decidedby them to meet the cost of the selected new projects.

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9.5 NON-TAX REVENUE

9.5.19.5.19.5.19.5.19.5.1 The major i tems of non-tax revenue in the case of Vi l lagePanchayats and ULBs have been described in Chapter 3.

9.5.2 Non-tax Revenue constitutes 51 percentage of the total own col-lected revenue of Village Panchayats, 42.62 percentage, in thecase of Municipalities 24.39 percentage, in the case of Corpora-tions. (Own revenue here means, own revenue less assigned andshared taxes and grants-in-aid) It is an important source and itneeds to be enhanced.

9.5.3 The main issues related to the collection of Non-tax Revenueare:

(1) In the case of ULBs, most of the Non-tax Revenue rateshave to be determined by themselves. This is as perSection 492 of the Kerala Municipality Act. Due toinexperience, lack of awareness and weak political will,these rates do not often get fixed and even if they arefixed they are pegged at very low levels, for theMunicipality Act or Rules do not fix a minimum or maximum.Another problem is that once fixed these items are rarelyrevised.

(2) The problem in the case of Village Panchayats is the re-verse one. Here in most cases the rates are fixed in Ruleseither as minimum or maximum or by giving a range be-tween the minimum and maximum. Since Rules are noti-fied after receiving proposals from the Director ofPanchayats, examining them in the Local Self GovernmentDepartment and Law Department and sending them forthe views of the Subject Committee and finally gazettingthem, amendment to rules is a cumbersome process and

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most of the rates do not get revised. This issue waspointed out by the First SFC, but solutions have not beenfully found.

(3) As regards auct ions , which fetch good amounts,particularly in the case of river sand, gate fees in publicmarkets and usufructs from local government properties,the auctioning process is often not very transparent,resulting in poor competition. In most of the cases thesame person bids during successive years and develops apermanent interest which is difficult to dislodge due topractical and humanitarian considerations like efficiencyof operation, labour security, etc. Thus a kind of monopolydevelops.

(4) As far as rent is concerned, in spite of Government in-structions, the fixing of rent amount is not very rationaland does not appear to have any relation to the marketrent or the investment made. A Government circular cap-ping annual increase of rent at 5 percentage has furthercompounded the problem. Similarly, fixing of rent for tem-porary occupation is also found to be unrealistically low.

(5) There is a general unwillingness on the part of LSGIs tocollect user charges or service charges even to the ex-tent of the amount required for routine operation andmaintenance. This affects the sustainability of variousservices.

(6) Since LSGIs are very close to the people, there is a natu-ral limitation in imposing penalties and fines. Even if, forthe sake of deterrence, prosecution is to be resorted to,it is not done due to the cumbersome litigation process,

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which would take away a lot of valuable time from seniorofficials of the LSGIs. This causes laxity in collection ofdues.

9.5.4 Against this background the general recommendations of theSecond SFC are spelt out as follows:

(i) In the case of ULBs, the Government should take up

the responsibility of fixing the minimum fees for vari-

ous kinds of licences. This could be done through noti-

fications. Similarly, in the case of Village Panchayats,

the Rules may be amended to ensure that only the

minimum is fixed; but the minimum should be fixed in

such a way that it is a reasonable one because it is

noted that LSGIs tend to take the minimum as the

general rate.

(ii) As far as possible the fees, rents etc., are to be in-

dexed to take care of inflation. Necessary enabling

provisions have to be made in the Kerala Panchayat

Raj Act and the Kerala Municipality Act to allow for

automatic two-yearly increases based on a general

government notification.

(iii) In the case of Licences and Permits, which need to be

renewed deterrent penal provisions have to be incor-

porated for delayed renewal. It is suggested that af-

ter a period of grace of ten days, 25 percentage of

the Licence Fee may be collected as fine for delayed

payment. This has to be increased by 25% for every

further fortnight of delay.

(iv) Wherever auctions are held there should be transpar-

ent procedures. The Panchayats and the Municipali-

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ties should disclose the various items which are given

by auction, the likely time of auction and the amount

received during the previous years, during Grama

Sabha, Ward Sabha and Ward Committee meetings.

There must be a compulsory display by all LSGIs indi-

cating the various items, which are auctioned, the

name of the successful bidder and the amount. This

should be permanently exhibited at the site like the

sand mining place, market, slaughterhouse, shop

building etc. This transparency provision should be

enshrined in the Kerala Panchayat Raj Act and the

Kerala Municipality Act and detailed rules issued.

(v) It is recommended that every year before the end of

December all the Village Panchayats should inform

the Deputy Director of Panchayats the auctions, which

they have to conduct in the coming three months. This

should be advertised in at least three newspapers

having largest circulation in the district as a general

advertisement. As far as ULBs are concerned this

advertisement could be given for a group of ULBs in

every district. The Joint Director of Municipalities

could facilitate this.

9.5.5 In addition to these general recommendations, the Commissionrecommends enhancement and modifications in the followingcategories of non-tax revenue.

9.69.69.69.69.6 LICENCE FEESLICENCE FEESLICENCE FEESLICENCE FEESLICENCE FEES

9.6.19.6.19.6.19.6.19.6.1 TTTTTrrrrrade Licencesade Licencesade Licencesade Licencesade Licences. In the case of Village Panchayats licensingof trades is done as per the Kerala Panchayat Raj D & O TradesRules. These rules as of now fix the maximum fees related toturnover. It is suggested that instead of this, minimum fees alone

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be fixed by Government. This may be converted into flat ratesbased on the size of the trade as in the case of ULBs, with sepa-rate rates for large, medium and small sizes.

9.6.1.1 In urban areas it is the local government, which set the ratesunder Section 492 (5) of the Kerala Municipality Act. The analy-sis made by the Commission shows that most of the ULBs havefixed relatively low rates and have been tardy in revising them.Since revision does not take place for very long periods of timeit acts as an inhibitor when a Municipality wants a change, asthese revisions after long intervals would invite protest due tothe inevitable steep increases. The Commission would recom-mend that the minimum rates alone should be fixed by the Gov-ernment through notification. In ULBs, since milk trade can belicensed under Section 447 there is no need to retain Section456.

9.6.1.2 The rationale for shifting to trade-wise notification in the caseof Village Panchayats is the difficulties encountered in assessingturnover of t rades , which have resu l ted in gross under-assessment. A three-fold broad classi f icat ion conforming tomanufacturers, wholesalers and big retailers as Group A, medium-s ized trades as Group B and smal l reta i lers as Group C issuggested. This classification has to be made by LSGIs themselvesbased on transparent criteria relating to nature of activity, size/volume of activity, location, investment, etc.

9.6.1.3 Under Section 448 of the Kerala Municipality Act, rules wereissued in 1966 viz. ‘Construction or Establishment of Factoriesand Installation of Plants or Machinery Rules’. But the rateshave not been revised for nearly three and a half decades.

9.6.1.4 The existing rates and the suggested rates for each kind of tradeincluding factories, plants and machinery are given separately

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for Village Panchayats and ULBs in Annexure 9.2.

9.6.1.5 In order to get a clear idea of the trade establishments function-ing within a local government area, to keep track of renewal oflicences, to serve as a guide for assessment of profession tax andto help in the discharge of other local government obligatoryfunctions it is suggested that a separate numbering system shouldbe adopted for trade establishments. This would be in additionto the building number assigned for Property Tax assessment.Every year the new establishments should be given supplemen-tary numbers before the first of March.

9.6.2 TTTTTheaheaheaheaheatrtrtrtrtre Licencee Licencee Licencee Licencee Licence..... Theatre construction and installation ofmachinery are governed by the Kerala Cinema Regulation Rules.It is recommended that the rates be brought on a par with thosegiven in Kerala Building Rules 1996. The existing and revisedrates are shown in Annexure 9.3.

9.6.39.6.39.6.39.6.39.6.3 PriPriPriPriPrivvvvvaaaaate Marte Marte Marte Marte Markkkkket licenceet licenceet licenceet licenceet licence..... Licence fees for private marketsmay be revised as indicated in Annexure 9.4 Departing from pastpractice it is recommended that the minimum rates be set andfor renewal of licence either the license fee or one-third the gatecollection of the previous year whichever is higher could be fixed.

9.6.49.6.49.6.49.6.49.6.4 Licences under KLicences under KLicences under KLicences under KLicences under Kerererererala Places ofala Places ofala Places ofala Places ofala Places of Pub Pub Pub Pub Public Rlic Rlic Rlic Rlic Resoresoresoresoresort t t t t Act.Act.Act.Act.Act.The fees for these licences issued under Rule 28 may be revisedand the minimum rates be fixed as indicated in Annexure9.5.

9.6.59.6.59.6.59.6.59.6.5 PriPriPriPriPrivvvvvaaaaate Slaughterhousete Slaughterhousete Slaughterhousete Slaughterhousete Slaughterhouse..... These are regulated under Section230 of the Kerala Panchayat Raj Act and Section 453 of the KeralaMunicipality Act. The licence fees may be enhanced from theexisting rate of Rs.300/- to Rs.1,000/- per year and for renewalit can be based on one-third the gate collection of the previousyear or Rs.1,000/- whichever is higher.

184

9.6.69.6.69.6.69.6.69.6.6 Licence fLicence fLicence fLicence fLicence fee fee fee fee fee for Bror Bror Bror Bror Brokokokokokererererersssss,,,,, Commission Commission Commission Commission Commission AgAgAgAgAgentsentsentsentsents,,,,, WWWWWeigheigheigheigheighmen,men,men,men,men, Measur Measur Measur Measur Measurererererers etcs etcs etcs etcs etc..... Licence fee is fixed as per the provisions ofRule 13 of the Kerala Panchayat Raj Public and Private Market Rulesissued under Section 221 and Section 222 of the Kerala Panchayat RajAct and Section 458 (2)(e) of the Kerala Municipality Act. It is sug-gested that the minimum licence fee should be fixed as Rs.100/- peryear.

9.6.79.6.79.6.79.6.79.6.7 Licensing ofLicensing ofLicensing ofLicensing ofLicensing of pr pr pr pr premises wemises wemises wemises wemises wherherherherhere animals are animals are animals are animals are animals are ke ke ke ke keeeeept fpt fpt fpt fpt for com-or com-or com-or com-or com-mermermermermercial purcial purcial purcial purcial purposesposesposesposesposes..... These licences are issued as per Section 444 ofthe Kerala Municipality Act. The minimum suggested rates are givenin Annexure 9.6. Similar provision for licensing may be made in theKerala Panchayat Raj Act and the same rates may be made applicable.

9.6.89.6.89.6.89.6.89.6.8 Licensing ofLicensing ofLicensing ofLicensing ofLicensing of Butc Butc Butc Butc Butcherherherherhersssss,,,,, Fishmong Fishmong Fishmong Fishmong Fishmongererererersssss,,,,, P P P P Poulteroulteroulteroulteroulterererererers etcs etcs etcs etcs etc.....This is done under Section 469 of the Kerala Municipality Act. It issuggested that the minimum license fee for butchers may be fixed atRs.100/- per year, Fishmongers at Rs.50/- per year and Poulterers atRs.30/- per year. The same rates may be made applicable to VillagePanchayats also by including them in the D & O Trade Rules.

9.79.79.79.79.7 GAGAGAGAGATE FEESTE FEESTE FEESTE FEESTE FEES

9.7.19.7.19.7.19.7.19.7.1 MarMarMarMarMarkkkkket Fet Fet Fet Fet Feeeeeeeeee..... The various fees for using public markets maybe increased as given in Annexure 9.7.

9.7.29.7.29.7.29.7.29.7.2 PubPubPubPubPublic Halting and Plic Halting and Plic Halting and Plic Halting and Plic Halting and Parararararking Placesking Placesking Placesking Placesking Places..... Fees for the use ofpublic halting and parking places is levied as per Section 227 ofthe Kerala Panchayat Raj Act and Section 472(1) of the KeralaMunicipality Act. Minimum rates may be fixed both for Munici-palities and Panchayats as given in Annexure 9.8.

9.7.39.7.39.7.39.7.39.7.3 Slaughterhouses.Slaughterhouses.Slaughterhouses.Slaughterhouses.Slaughterhouses. Entry fees to slaughter houses are col-lected as per Section 229 of the Kerala Panchayat Raj Act and

185

Section 452 of the Kerala Municipality Act. The rates may berevised as suggested in Annexure 9.9.

9.8 AUCTIONING OF MEAAUCTIONING OF MEAAUCTIONING OF MEAAUCTIONING OF MEAAUCTIONING OF MEAT STT STT STT STT STALLS / RIGHT TO FISH INALLS / RIGHT TO FISH INALLS / RIGHT TO FISH INALLS / RIGHT TO FISH INALLS / RIGHT TO FISH INWWWWWAAAAATER BODIES TER BODIES TER BODIES TER BODIES TER BODIES etcetcetcetcetc.....

These may be auctioned every year by the concerned LSGIs aftergiving adequate publicity.

9.9 SERSERSERSERSERVICE AND USER CHARGESVICE AND USER CHARGESVICE AND USER CHARGESVICE AND USER CHARGESVICE AND USER CHARGES

LSGIs must broaden and deepen their collection of service/usercharges. A list needs to be made of all services provided andutilities maintained by LSGIs with the cost of providing/run-ning them. A policy decision may be taken by each Vil lagePanchayat or ULB on the proportion of the cost to be realizedfrom the users. Thereafter the users may be classified, and therates for each class of users determined. As a rule of thumb fullcost may be realized from commercial concerns and exemptionneed be given only to the families below the poverty line. It issuggested that service charges should be collected compulsorilyfrom users of burial grounds, burning ghats and electric crema-toria, which are maintained by the LSGIs. In the case of electriccrematoria the fee should be fixed to meet the operation andmaintenance cost of the machinery.

9.109.109.109.109.10 FINES AND PENALFINES AND PENALFINES AND PENALFINES AND PENALFINES AND PENALTIESTIESTIESTIESTIES

The data available with the Commission show that realization byway of fines and penalties is extremely low. Of course at the lo-cal government level it would be rather difficult to exercise regu-latory powers with an iron hand. However in certain cases ofpublic nuisance like pollution, strewing of solid waste, occupa-

186

tion of public land etc., in the larger public interest, it is neces-sary to be as strict as possible through realization of fines andeven prosecution.

9.10.1 It is seen that there is a discrepancy between the Compoundingof Offences Rules applicable in Village Panchayats and those ap-plicable in Municipal bodies. It is suggested that the same provi-s ions appl icable to the ULBs could be inc luded in Vi l lagePanchayat Rules also. This will bring larger number of offenceswithin the compounding powers of the Secretary enabling im-mediate punitive action to be taken.

9.119.119.119.119.11 GROUND RENT FOR FAIRS AND FESTIVGROUND RENT FOR FAIRS AND FESTIVGROUND RENT FOR FAIRS AND FESTIVGROUND RENT FOR FAIRS AND FESTIVGROUND RENT FOR FAIRS AND FESTIVALSALSALSALSALS

Now there is a practice in ULBs to auction right to set up tem-porary shops etc. in porambokes as per Section 376 of the KeralaMunicipality Act. It is suggested that a similar practice be fol-lowed in Village Panchayats also.

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CHAPTER 10

STATE FINANCES DURINGTHE DECADE 1990-2000

10.1 Our Commission has been guided by two major considerations whileanalysing the State Finances. Firstly, the issue that we have addressedis whether the state finances are in a position to accommodate thescale of transfers that we have suggested in our recommendations.Secondly, we have also examined whether there are significant pointersthat we need to highlight on the evolving trends in the overall financialposition. This becomes necessary because such movements accumulateto impinge on delivery of services to the people of the State and thusaffect the LSGIs directly. In this process we would also like to capturebroadly what the current trends reflected by the figures mean for thefuture development of the State, with reference particularly to theexpenditure on maintenance services on assets, whose benefits directlyaccrue to the poor. A snapshot of expenditure and receipts figures, beit on the revenue or capital side, at the end of a particular year, willnot serve the requirements of such an examination. To facilitate thisdiscussion on the finances of the State Government, an analysis of thetrends of a reasonably long period becomes necessary.

10.2 We feel that for three reasons, the decade of the nineties would afforda sufficiently long enough spectrum for the analysis. Firstly, datafrom this decade can be expected to capture the years when the worldsaw liberalisation and globalisation characterising internationaleconomies in general. Secondly, given the fact that trends in the ninetiescontinue to firm up in various economies of the world as is reflectedby subsequent developments, data from the nineties may broadly reflectthe shape of things at least in the short term, and expectedly, for the

starkly rising internal debt and interest payment liabilities on theborrowing State. The resource base of States is far too limited tomeet growing expenditure commitments. State Governments accountfor a third of the combined receipts of the Union and the States, whilethey incur three quarters of the entire social service expenditure andhalf the economic service expenditure. Tax receipts in the States haveexhibited a certain degree of rigidity during the nineties as comparedto the eighties. States’ tax base has remained narrow with greaterdependence on sales tax in particular. States’ own tax revenue receiptsfinance only 32-34 per cent of the total expenditure. Losses of theState Public Sector Undertakings (particularly the Electricity Boardsand the Road Transport Corporations) have also contributed to thepressure on State Finances. Resource gaps are financed by verticalresource devolution from the Centre apart from direct borrowings bythe State Government and its Public Sector Undertakings. The fiscalconsolidation measures initiated by the Union Government since theearly nineties have also had their effect on state finances. There hasbeen a definite falling trend in the resource transfer from CentralGovernments particularly in the form of loans and advances to States.In the last two decades, debt-SDP ratio of States rose from an averagelevel of 17.6 per cent in the eighties to 19.4 per cent in the nineties.Gross Fiscal Deficit and Revenue Deficit of States have recorded alltime high levels of 4.3 per cent and 2.3 per cent of their State DomesticProduct respectively. The additional expenditure arising out ofimplementation of the revised pay scales of the State GovernmentEmployees in 1996-97 continues to affect the deficit levels of mostState Governments. The gross expenditure of the States in 1998-99peaked at an annual growth rate of 22.4 per cent while the averagedecadal growth rates for the eighties and nineties have been of theorder of 15 per cent only. Development expenditure accounted for70.7 per cent of the total expenditure in the eighties. This fell to 65.4per cent during the nineties. The high level of debt of all the StateGovernments put together raises questions about its sustainability,especially since its utilisation for capital investment is declining.

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trend of (-) 14.00 per cent in total transfers. This is explained by thefact that the increase in 1997-98 was on account of the share of proceedsto the State from the earnings of Government of India under theVoluntary Disclosure Scheme (VDIS) – which was an isolated and onetime revenue enhancing measure.

10.8 Overall, the own tax revenue of the State (OTR), reckoned as the sumof the tax and non-tax revenues of the State Government excluding alltransfers from Government of India have grown annually at 15.78 percent over the decade. The sharp dip in both tax revenue and non-taxrevenue in 1998-99, mentioned earlier, is reflected in the low growthrate of 3.05 per cent in OTR for that year.

REVENUE EXPENDITUREREVENUE EXPENDITUREREVENUE EXPENDITUREREVENUE EXPENDITUREREVENUE EXPENDITURE

10.9 Revenue expenditure has been growing at a steep rate of 16.82 per centper annum over the nineties. The Pay Revision granted by Governmentfor its employees in 1997-98 led to a sharp spurt with expenditureregistering a sudden jump of 21.4 per cent. Revenue expenditure in theyear 1999-2000 increased by 24 per cent. Increase in the salary billaccounted for the major share of the increase in 1997-98. In 1999-2000, the increases in non-plan expenditure on account of interestpayment (34.99 per cent), pension (56.65 per cent), police (38.35 percent) and education (33.51 per cent) accounted for the high increase inrevenue expenditure.

10.10 Table 10.1 below shows the salary, interest and pension components ofthe State for the period 1991-1999. An average of 60-65 per cent ofthe Revenue Expenditure of the State is devoted to meeting interestpayments and paying the employees both serving and retired. Here,we would like to sound a note of caution. The State’s bill on salary,interest and pension has assumed a level, which does not bode well forthe future spending plans of Government. We have in detailing ourapproach observed that the State, as demanded by prudent fiscal

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REVENUE DEFICITREVENUE DEFICITREVENUE DEFICITREVENUE DEFICITREVENUE DEFICIT

10.11 The excess of revenue expenditure over revenue receipts, which is therevenue deficit, is a good first measure of how well a Government isable to manage its finances. It is instructive to appreciate the behaviourof the revenue deficit of a State from year to year. For any given year,let the revenue expenditure, revenue receipts and revenue deficit bedenoted by Et, Rt and Dt respectively. Let the growth in revenue receiptsand revenue expenditure for the next year be denoted by gr

t+1 and get+1

respectively. The Revenue Deficit in the next year Dt+1 will be given by

Revenue Deficit = Revenue Expenditure - Revenue Receipts

Dt+1 = Et+1 - Rt+1

Hence Dt+1 = (Et) (1 + get+1 ) - Rt (1 + gr

t+1)= (Rt + Dt) (1 + ge

t+1 ) - Rt (1 + grt+1)

= Rt(get+1 - g

rt+1) + Dt (1 + ge

t+1)

10.12 The first component Rt(get+1 - gr

t+1) shows the effect of the revenuemobilisation relative to growth in expenditure. If the growth in revenuegr

t+1 equals the growth in expenditure get+1 then this component would

become zero and hence there is no contribution to the revenue deficit.If the growth in revenue gr

t+1 exceeds the growth in expenditure get+1,

this would contribute towards decreasing the revenue deficit. Thus animprovement in this component can result from either a reduction inexpenditure or a growth in revenue. Hence this may be referred to asthe relative efficiency component.

10.13 Given the deficit Dt in any year, the second component Dt(1 + get+1)

solely depends on the growth in expenditure. If the growth rate get+1

can be controlled then this component of revenue deficit can be managed.Hence this component may be referred to as the expenditure componentof revenue deficit. Reductions in expenditure growth ge

t+1, directlyresult in reductions of this component. Table 10.2 shows thesecomponents for the ten years 1990-2000.

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during this period. There seems to be an incongruity in this and wefail to understand how revenue mobilisation and economic growthcould exhibit this kind of a divergence in their growth trends. But,suffice it for us to say, that if there has been any let up in the efficiencyof tax and revenue administration in the State during the period, thenunless such trends are guarded against in future, these would havevery debilitating effects on the State finances.

10.1610.1610.1610.1610.16 It is pertinent to remark here that the data reveal that high revenueIt is pertinent to remark here that the data reveal that high revenueIt is pertinent to remark here that the data reveal that high revenueIt is pertinent to remark here that the data reveal that high revenueIt is pertinent to remark here that the data reveal that high revenuedeficit in Kdeficit in Kdeficit in Kdeficit in Kdeficit in Kerala in the rerala in the rerala in the rerala in the rerala in the recent years, is primarily a recent years, is primarily a recent years, is primarily a recent years, is primarily a recent years, is primarily a result of fall inesult of fall inesult of fall inesult of fall inesult of fall inefficiency of resource mobilisation, and only secondarily because ofefficiency of resource mobilisation, and only secondarily because ofefficiency of resource mobilisation, and only secondarily because ofefficiency of resource mobilisation, and only secondarily because ofefficiency of resource mobilisation, and only secondarily because ofthe growth in expenditure.the growth in expenditure.the growth in expenditure.the growth in expenditure.the growth in expenditure. It is not the growth rate of expenditurethat has shown a marked increase; it is the growth rate of revenue thathas fallen noticeably. This interpretation of the State’s deficit affordsfair ground for optimism about the future of the State finances. Growthin revenue has historically been 18-20 per cent in the past. Manyreasons are ascribed for the general fall in revenue collection in thesecond half of the nineties. Several analysts hold the view that revenuemobilisation has fallen partly on account of the general economicrecession in the country and the slump in prices of agriculturalcommodities. The general prices of agricultural commodities grownin the State remain far from satisfactory and do not yield a reasonablemargin to the farmer for sustaining production. Both Governments,at the State and the Centre, are seized of this crisis in the agriculturalsector. If there is a recovery in the agricultural sector, then this fact,coupled with some improvements in the tax and non-tax administration,will push up revenue collections. There already are positive indications,which suggest a recovery in revenue collections. From figures availablein the Finance Department, the half yearly tax collections show a growthrate near the 18 per cent mark in 2000-01. Of course, the absolutefigures this year will not be impressive since there has been considerableerosion in revenue receipts in the years 1997-1999; but signs of arecovery are there. Even so, the task ahead for the Government in thenext few years is quite formidable.

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DEBT AND INTEREST BURDEN OF THE STDEBT AND INTEREST BURDEN OF THE STDEBT AND INTEREST BURDEN OF THE STDEBT AND INTEREST BURDEN OF THE STDEBT AND INTEREST BURDEN OF THE STAAAAATETETETETE

10.18 In this section we have attempted to present a summary of the debtsituation of the State and the annual interest payments incurred by theState. Given the high gross fiscal deficit of the State, the entire extradevolution to the local bodies too would have to be financed byborrowing. It is in this connection that the picture of the State’s debtand its growing interest payment has to be borne in mind.

10.19 Tables 10.4 to 10.10 show the growth of various components in theoverall debt of the State in the years 1990-1999. Debt of the Statearises from borrowings on account of Internal Debt, Savings and Loansfrom Government of India. Internal debt of the state consists ofMarket Loans borrowed by Government and Ways and Means Advancesreceived from the Reserve Bank of India. Debt liabilities on Savingsarise from the deposits received in the Savings Accounts in theTreasuries, the remittances retained in the State Provident Fund, Moneyin Insurance and Pension Funds and in trusts and endowments. Loansreceived from Government of India include those received under CentralPlan, Non Plan Loans, State Plan Loans and Centrally SponsoredSchemes. Each of these three streams of the State’s debt (viz. Internaldebt, Savings and Loans from Government of India) was subjected toa detailed analysis. The interest payment on accumulated liabilities ineach of these streams was also examined. We looked at gross retention(defined as the excess of receipts over disbursements) and net retention(defined as gross retention less interest payments for that stream ofborrowing). This approach has its limitations: interest payments in aparticular year used for reckoning net retention, would relate whollyor largely to accumulated balances on that stream of borrowing in thepast. Likewise the disbursements in any year would correspond to therepayment on the principal borrowed in the past. A rigorous analysiswould therefore include an analysis of the lag in the receipts,disbursements and interest payments over a longer time horizon.

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TABLE 10.5

Small Savings and Deposits (in Rs. Cr.)

Year Receipts Disburse Interest Gross Growth Net Growthments Retention Rate Retemtion Rate

1990-91 786.85 709.16 23.14 77.69 54.55

1991-92 996.95 905.35 27.37 91.60 17.90% 64.23 17.75%

1992-93 1268.78 1142.05 40.19 126.73 38.35% 86.54 34.73%

1993-94 1629.29 1504.39 45.79 124.90 -1.44% 79.11 -8.59%

1994-95 1880.90 1581.54 103.26 299.36 139.68% 196.10 147.88%

1995-96 1887.17 1824.76 64.62 62.41 -79.15% -2.21 -101.13%

1996-97 1988.28 1809.58 62.46 178.70 186.33% 116.24 -5359.73%

1997-98 2396.71 2168.57 76.70 228.14 27.67% 151.44 30.28%

1998-99 3875.61 2935.66 78.92 939.95 312.01% 861.03 468.56%

10.22 Net accretions from the State Provident Fund have steadily taperedoff, and in some years show negative balances (Table 10.6). Insuranceand Pension funds account only for a very small amount of the totalborrowing and hence separate data for this stream of borrowings arenot presented here.

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TABLE 10.7

Internal Debt (in Rs. Cr.)

Year Receipts Disburse Interest Gross Growth Net Growthments Retention Rate Retention Rate

1990-91 1355.50 1143.87 97.56 211.63 114.07

1991-92 1859.13 1635.48 124.61 223.65 5.68% 99.04 -13.18%

1992-93 2162.62 1831.94 154.98 330.68 47.86% 175.70 77.40%

1993-94 1143.35 1102.81 180.90 40.54 -87.74% -140.36 -179.89%

1994-95 509.32 164.68 216.41 344.64 750.12% 128.23 -191.36%

1995-96 427.64 20.68 253.63 406.96 18.08% 153.33 19.57%

1996-97 623.01 138.44 318.08 484.57 19.07% 166.49 8.58%

1997-98 947.81 333.54 388.50 614.27 26.77% 225.77 35.61%

1998-99 3101.91 2262.67 465.38 839.24 36.62% 373.86 65.59%

10.24 For the limited purpose of this analysis, a discussion on each line ofdebt financing in detail may not be called for. But, the stark realitythat confronts us is that with respect to many of the sources of debtfinancing, outflows exceed the inflows. The overall picture that emergesis given in Table 10.8.

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TABLE 10.9

GR = Gross Retention, NR = Total Retention, INT = Interest. All figures in %.

Year Internal Debt L&A from GOI Small Savings etc. State Provident Fund

GR/ NR/ INT/ GR/ NR/ INT/ GR/ NR/ INT GR/ NR/ INTTotal Total Total Total Total Total Total Total Total Total Total TotalGR NR INT GR NR INT GR NR INT GR NR INT

9-91 27.36 26.26 28.64 34.82 30.28 40.61 10.03 12.56 6.79 26.02 28.53 22.82

91-92 29.83 37.17 25.78 35.89 14.25 47.82 12.22 24.11 5.66 19.05 19.84 18.61

92-93 39.81 60.98 28.57 34.47 16.88 43.80 15.26 30.04 7.41 8.08 -12.09 18.79

93-94 4.50 -65.45 26.33 43.61 53.63 40.48 13.85 36.89 6.66 35.86 69.56 25.34

94-95 21.25 15.98 26.40 37.72 35.03 40.35 18.45 24.43 12.60 21.26 23.13 19.44

95-96 31.48 41.60 27.45 39.62 25.54 45.24 4.83 -0.60 6.99 22.24 30.25 19.05

96-97 37.06 81.59 28.83 28.63 -58.74 44.79 13.67 56.96 5.66 18.65 14.27 19.46

97-98 42.44 140.01 30.21 26.12 -107.13 42.82 15.76 93.92 5.96 13.28 -38.12 19.73

98-99 29.63 26.97 32.18 23.22 3.69 41.94 33.19 62.12 5.46 12.64 5.90 19.11

10.26 Table 10.10 shows the growth of the Debt of the State along withthe interest payments over the period 31.3.1990 to 31.3.2000.

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10.27 The picture of the year-to-year borrowing of the State that emerges isnot encouraging. The data in Tables 10.4 to 10.10 above warrant acritical look at the advisability of the State’s taking increasing recourseto debt. We feel that drawing up a comprehensive debt strategy for areasonably long period ahead, with the assistance of experts would beeminently desirable for the State at this juncture. We leave thissuggestion for the consideration of Government.

MAINTENANCE EXPENDITURE OVER THE PERIODMAINTENANCE EXPENDITURE OVER THE PERIODMAINTENANCE EXPENDITURE OVER THE PERIODMAINTENANCE EXPENDITURE OVER THE PERIODMAINTENANCE EXPENDITURE OVER THE PERIOD1990-20001990-20001990-20001990-20001990-2000

10.28 In the preceding chapters, it was argued that the maintenance of assetscreated should be a focal point for action for LSGIs. Given the scaleof transfer of resources to the LSGIs, through Plan devolution from1995-96, the State is witnessing an unprecedented surge of activity,which has led to creation of wealth at the community level, in the formof buildings, roads and irrigation structures. Besides, institutionsthat were hitherto managed by Departments of the State have beentransferred on a large scale to LSGIs. These aspects have been discussedelsewhere in this report.

10.29 It has been a general experience that the first casualty of a shortage offunds is the outlay earmarked for maintenance expenditure. This isnot confined to LSGIs or State Governments alone, but seems to be auniversal phenomenon. Successive Finance Commissions have beenseized of this problem and have in their assessment made provisionsfor maintenance requirements of the States. The Eleventh CentralFinance Commission in its report (Chapter V, Para 5.38) observed asfollows: “It is a matter of concern that our capital assets are languishingbecause of poor maintenance”. Despite affirmations about theimportance of earmarking adequate provisions for maintenance,expenditure for this has not been commensurate with the requirements.The Report of the Eleventh Central Finance Commission further notes:“This has happened in spite of the fact that successive Finance

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GROSS FISCAL DEFICIT OVER THE DECADE 1990-2000GROSS FISCAL DEFICIT OVER THE DECADE 1990-2000GROSS FISCAL DEFICIT OVER THE DECADE 1990-2000GROSS FISCAL DEFICIT OVER THE DECADE 1990-2000GROSS FISCAL DEFICIT OVER THE DECADE 1990-2000

10.31 Data on the growth of the gross fiscal deficit (GFD) of the State andits components are shown in the Table below. The growth in revenuedeficit accounts for a growing share of the gross fiscal deficit. Therehas been a decline in net capital expenditure on the State account,particularly from 1997-98. This watershed line coincides with the 35-40 per cent devolution of the total plan to the local bodies in the wakeof decentralised planning. The revenue deficit has grown inordinatelyin the second half of the decade, particularly since 1997-98, the firstyear in which decentralised planning was introduced. Revenue deficitaccounted for 74 per cent, 82 per cent and 73 per cent of the grossfiscal deficit in the years 1997-98, 1998-99 and 1999-2000. A partialexplanation for this disproportionate growth in revenue deficit, is thatthe entire devolution under Plan to local bodies, is, for accountingreasons prescribed by the Comptroller and Auditor General, classifiedas revenue expenditure. However, the stiff rise in revenue expenditureon account of the pay revision has also contributed significantly to theproblem.

10.32 There are two ways of assessing the high revenue expenditure.Government has held the view that as much as 60-70 per cent of thetransfer to local bodies is on capital works, and that there is not muchcause for alarm in the figures of revenue deficit. While it is not possibleto confirm the actual percentage of capital expenditure out of the plandevolution to local bodies, in the absence of data, it should be concededthere is a great deal of merit in this argument. Even when final figuresare available, classifying micro-level infrastructure works into twoneat categories of ‘revenue’ and ‘capital’ expenditure would poseproblems. By Government’s argument thus, the percentage of revenuedeficit in the gross fiscal deficit for the three years would reduce to 25per cent, 45 per cent and 65 per cent respectively.

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FORECAST OF STFORECAST OF STFORECAST OF STFORECAST OF STFORECAST OF STAAAAATE FINANCES 2001-2005TE FINANCES 2001-2005TE FINANCES 2001-2005TE FINANCES 2001-2005TE FINANCES 2001-2005

10.35 In this section, we attempt a fairly simple forecast of State Financesover the period covered by the award of our Finance Commission.This forecast is aimed at presenting a picture of how the finances areaffected by the aggregate transfer of nine per cent of the Own TaxRevenue that we have recommended as general and maintenance grants.We have, while keeping the number of assumptions as few as possible,looked at the major components of revenue receipts. But we do notpropose to analyse individual components of revenue expenditure. Wehave adopted this ground rule, which stems from the observation thatrevenue expenditure, as stated earlier, has been far more stable thanrevenue receipts in the State. Of course this approach also uses amajor premise, that Government may find it difficult in the mediumterm, in the absence of an explicit strategy, to make reductions inexpenditure, beyond the range of 1-2 per cent. At the same time wenote that it can ill-afford to step up expenditure beyond what is beingincurred now. Hence we believe that fine-tuning our efforts to forecastindividual components of the revenue expenditure will not yieldcommensurate improvements in the quality of our forecast. The onlydisaggregation we use is to look at the interest burden and the rest ofthe revenue expenditure separately. For the year 2000-01 we have usedthe revised estimates used by Finance Department for its annualprojections. This is justified as these projections are generally fairlyclose to those presented in the budget. For the year 2001-02, weemploy the estimates of revenue receipts used for the assessment of theresources for the annual plan 2001-02. For revenue expenditure, weuse the revised estimate for the year 2000-01 and the forecast for theyear 2001-02; we do the same for interest payments.

10.36 The allocations to local bodies are a part of the revenue expenditure ofthe State. As stated earlier, since it is not our intention to prescriberemedies or measures to improve the State’s finances, we have notattempted to project the capital side of the state finances or the grossfiscal deficit.

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(5) However where there has been a decrease or negative growth ineither of the two previous years (i.e. 1998-2000), we take theminimum of the half yearly buoyancy for 2000-01 and the positivegrowth rates registered in 1993-1999.

NON TAX REVENUENON TAX REVENUENON TAX REVENUENON TAX REVENUENON TAX REVENUE

(1) The major components of this non-tax revenue in the State areForests, Miscellaneous Departments and Interest receipts.Collection from Forests is largely dependent on the revenues thatcome out of felling of trees and disposal of timber. With fellingof trees having been brought under more rigorous guidelines inthe recent years, the growth of this line of revenue has not beenas significant as it used to be in the past. For Forests, we use thehalf yearly growth rate.

(2) Non Tax Revenues from other departments come largely throughcollection of fees and user charges. The Non Tax Revenue Wingof the Finance Department has submitted proposals for approvalof Government. Decisions are yet to be taken in many of these.Hence for the years 2001-02 and 2002-03, we assume that therewill be a quicker growth in such revenue and assume this to be 17per cent per annum. Subsequently we have assumed this to stabiliseat the same rate as the non-interest component of revenueexpenditure viz., at 13 per cent.

(3) Interest receipts are assumed to grow at the average historicalrate observed for the period 1993-1999.

GRGRGRGRGRANTS IN AIDANTS IN AIDANTS IN AIDANTS IN AIDANTS IN AID

Grants in aid received from Government of India are for Non Plan,State Plan, Central Plan, Centrally Sponsored Schemes and SpecialPlan schemes. The major share is accounted for by Grants in aid for

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Forest 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 32.94%

Others 17.00% 15.00% 14.00% 13.00% 13.00% 13.00% 13.00% 62.16%

GOVERNMENT OF INDIA

Grant in aid 8.98% 8.98% 8.98% 8.98% 8.98% 8.98% 8.98%

Fin. Commission Transfers PROJECTIONS OF THE CFC

REVENUE EXPENDITURE

Interest Payments 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%

Revenue Exp. minus Interest 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00%

Maintenance Expenditure 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%

STATE DOMESTIC PRODUCT

SDP 15.94% 15.94% 15.94% 15.94% 15.94% 15.94% 15.94%

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 MaximumGrowth

Rates forselecteditems in

1990-2000

STATE NON TAX REVENUE

10.4010.4010.4010.4010.40 The figures for own revenue, revenue receipts, revenue expenditure andThe figures for own revenue, revenue receipts, revenue expenditure andThe figures for own revenue, revenue receipts, revenue expenditure andThe figures for own revenue, revenue receipts, revenue expenditure andThe figures for own revenue, revenue receipts, revenue expenditure andrevenue deficit for the years 2001-02 to 2005-06 arrived in the forecastrevenue deficit for the years 2001-02 to 2005-06 arrived in the forecastrevenue deficit for the years 2001-02 to 2005-06 arrived in the forecastrevenue deficit for the years 2001-02 to 2005-06 arrived in the forecastrevenue deficit for the years 2001-02 to 2005-06 arrived in the forecastexexexexexererererercise arcise arcise arcise arcise are shown in Te shown in Te shown in Te shown in Te shown in Table 10.14. Wable 10.14. Wable 10.14. Wable 10.14. Wable 10.14. We have analysed the figure have analysed the figure have analysed the figure have analysed the figure have analysed the figures fores fores fores fores forthree years beyond the period 2005-06. However the general resultsthree years beyond the period 2005-06. However the general resultsthree years beyond the period 2005-06. However the general resultsthree years beyond the period 2005-06. However the general resultsthree years beyond the period 2005-06. However the general resultsfor the awarfor the awarfor the awarfor the awarfor the award period hold also for this extra period. Wd period hold also for this extra period. Wd period hold also for this extra period. Wd period hold also for this extra period. Wd period hold also for this extra period. We see a declinee see a declinee see a declinee see a declinee see a declinein the perin the perin the perin the perin the percentage of rcentage of rcentage of rcentage of rcentage of revenue deficit as a sharevenue deficit as a sharevenue deficit as a sharevenue deficit as a sharevenue deficit as a share of State Domestic Pe of State Domestic Pe of State Domestic Pe of State Domestic Pe of State Domestic Prrrrroductoductoductoductoductfrom the current level of 3.5 per cent to under 2 per cent, even assumingfrom the current level of 3.5 per cent to under 2 per cent, even assumingfrom the current level of 3.5 per cent to under 2 per cent, even assumingfrom the current level of 3.5 per cent to under 2 per cent, even assumingfrom the current level of 3.5 per cent to under 2 per cent, even assuminga comparatively low nominal growth rate of SDP at 15.94 per centa comparatively low nominal growth rate of SDP at 15.94 per centa comparatively low nominal growth rate of SDP at 15.94 per centa comparatively low nominal growth rate of SDP at 15.94 per centa comparatively low nominal growth rate of SDP at 15.94 per cent(the average historical value).(the average historical value).(the average historical value).(the average historical value).(the average historical value).

10.41 The State has seen a comparatively steep decline in tax collection overthe last few years. However, if the cycles of economic growth, asreflected in the eighties and nineties repeat over the next five years, theState is poised for a faster financial recovery than what we have givenin Table 10.14. We have taken care to recommend a scale of transfers,which therefore would not impose an unduly difficult target for thefinancial managers of the State.

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10.43 In our exercise, we have also looked at the behaviour of this differenceunder various growth rates of the State Domestic Product for theforecast period. With our recommended scale of transfers, the averagevalue of transfers as a percentage of State Domestic Product stabiliseswith improved economic growth at around a peak value of 0.2184, asis shown in Chart 10.1. As mentioned elsewhere earlier, we haveassumed that the State Domestic Product will grow at the averagehistorical value. For alternative growth rates, Own Tax Revenue hasto be correspondingly adjusted for the forecast period. This has beendone by using a simple proportionality factor. It is clear that withfaster growth the transfers that have been recommended by thisCommission will be accommodated better in the fiscal balance of theState: this is so because revenue deficit as a percentage of SDP declinesfor increasing growth rates of SDP (Table 10.15)

10.44 Table 10.15 shows the behaviour of Revenue Deficit, post transfers,over the forecast period for a few alternative rates of economic growth.The transfers that have been recommended will not upset fiscalmanagement, since they do not, by themselves, introduce any spurts inRevenue Deficit as a percentage of the State Domestic Product.

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0.1850%

0.1900%

0.1950%

0.2000%

0.2050%

0.2100%

0.2150%

0.2200%

12.00% 14.00% 16.00% 18.00% 20.00% 22.00% 24.00% 26.00%

Growth Rate of SDP

% of Transfers to SDP

CHART 10.1

Recommended Transfers as % of SDP

Chart 10.1

10.46 We have taken the non plan revenue surplus projected by the EleventhCentral Finance Commission in Table 10.2. We have also assumedthat the Annual Plan will grow at a rate of 13 per cent per annum overthe award period (at the rate of growth of non-interest component ofrevenue expenditure). Given that the revenue component in the Plancontinues to be 70 per cent of the total plan outlay then the revenuedeficit computed is shown in Table 10.16.

10.4710.4710.4710.4710.47 The figures arrived at in our forecast lie between those given in theThe figures arrived at in our forecast lie between those given in theThe figures arrived at in our forecast lie between those given in theThe figures arrived at in our forecast lie between those given in theThe figures arrived at in our forecast lie between those given in thereport of the CFC and those presented in the State’s Memorandum toreport of the CFC and those presented in the State’s Memorandum toreport of the CFC and those presented in the State’s Memorandum toreport of the CFC and those presented in the State’s Memorandum toreport of the CFC and those presented in the State’s Memorandum tothe CFC. Generallythe CFC. Generallythe CFC. Generallythe CFC. Generallythe CFC. Generally, memoranda pr, memoranda pr, memoranda pr, memoranda pr, memoranda presented by State Governments tendesented by State Governments tendesented by State Governments tendesented by State Governments tendesented by State Governments tendto overestimate the Expenditure figures. This is largely to prevent theto overestimate the Expenditure figures. This is largely to prevent theto overestimate the Expenditure figures. This is largely to prevent theto overestimate the Expenditure figures. This is largely to prevent theto overestimate the Expenditure figures. This is largely to prevent thepossibility of the State losing out on non plan assistance in the Apossibility of the State losing out on non plan assistance in the Apossibility of the State losing out on non plan assistance in the Apossibility of the State losing out on non plan assistance in the Apossibility of the State losing out on non plan assistance in the Awarwarwarwarward.d.d.d.d.The Memorandum’s estimate of revenue deficit for the year 1999-2000The Memorandum’s estimate of revenue deficit for the year 1999-2000The Memorandum’s estimate of revenue deficit for the year 1999-2000The Memorandum’s estimate of revenue deficit for the year 1999-2000The Memorandum’s estimate of revenue deficit for the year 1999-2000for example is Rs.5680 crfor example is Rs.5680 crfor example is Rs.5680 crfor example is Rs.5680 crfor example is Rs.5680 cr. while the audited figur. while the audited figur. while the audited figur. while the audited figur. while the audited figures show a res show a res show a res show a res show a revenueevenueevenueevenueevenuedeficit of Rs.3625 crdeficit of Rs.3625 crdeficit of Rs.3625 crdeficit of Rs.3625 crdeficit of Rs.3625 cr. Lik. Lik. Lik. Lik. Likewise, the Fewise, the Fewise, the Fewise, the Fewise, the Finance Commissions use normativeinance Commissions use normativeinance Commissions use normativeinance Commissions use normativeinance Commissions use normativemeasures of ‘prescriptive’ rates for various items particularly on themeasures of ‘prescriptive’ rates for various items particularly on themeasures of ‘prescriptive’ rates for various items particularly on themeasures of ‘prescriptive’ rates for various items particularly on themeasures of ‘prescriptive’ rates for various items particularly on theexpenditure side. As a result the final audited figures at the end of theexpenditure side. As a result the final audited figures at the end of theexpenditure side. As a result the final audited figures at the end of theexpenditure side. As a result the final audited figures at the end of theexpenditure side. As a result the final audited figures at the end of theawarawarawarawaraward period of the various Fd period of the various Fd period of the various Fd period of the various Fd period of the various Finance Commission and the prinance Commission and the prinance Commission and the prinance Commission and the prinance Commission and the projectionsojectionsojectionsojectionsojectionsthat these commissions have made in their awards differ by a verythat these commissions have made in their awards differ by a verythat these commissions have made in their awards differ by a verythat these commissions have made in their awards differ by a verythat these commissions have made in their awards differ by a verylarge margin. This detracts considerably from the reliability of thelarge margin. This detracts considerably from the reliability of thelarge margin. This detracts considerably from the reliability of thelarge margin. This detracts considerably from the reliability of thelarge margin. This detracts considerably from the reliability of theprprprprprojections, particularly of rojections, particularly of rojections, particularly of rojections, particularly of rojections, particularly of revenue expenditurevenue expenditurevenue expenditurevenue expenditurevenue expenditure by the Fe by the Fe by the Fe by the Fe by the FinanceinanceinanceinanceinanceCommission.Commission.Commission.Commission.Commission.

10.48 In our own forecast, we have adopted figures, which are suggested bythe trends in the past, specifically the period 1993-94 to 1999-2000.At the same time we neither anticipate any runaway expenditure norany unusual momentum in the growth of any revenue stream. At theend, it is relevant to mention that we have avoided taking into accountthe implications of a further pay revision for the employees of theState Government through the next Pay Commission. We have donethis for two reasons. Firstly there is a recommendation of the last PayCommission that pay revisions should be made once in ten years asagainst the existing practice of once in five years. As of now, the State

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CHAPTER 11

SOME ISSUES RAISED BY THEELEVENTH CENTRAL FINANCE

C O M M I S S I O N

11.1 Our report is being prepared at a time when the Eleventh CentralFinance Commiss ion has jus t submit ted i t s report to thePresident. The Eleventh Central Finance Commission’s reporthas given rise to a lively controversy on the appropriate criteriafor the inter se distribution of resources between the differentstates. These issues are outside the sphere of our concern; butthe CFC has made a number of important suggestions regardingthe setting up and functioning of State Finance Commissions,and has expressed its views on a number of questions relating todecentralisation, on which we feel we must give our opinion.

11.2 The CFC has pointed to an anomaly which has been exercisingus as well. This consists in the following. Article 280(3)(bb)and (c) of the Constitution states that the CFC must makerecommendations as to the measures needed to augment theConsolidated Fund of a State to supplement the resources ofPanchayats and Municipalities in the State “on the basis of therecommendations made by the Finance Commission of the State”(emphasis added). But the timing of the setting up of the cropof First State Finance Commissions happened to be such thattheir reports could not be made available to the Tenth CentralFinance Commiss ion and appeared a lmost immediate lyafterwards. The only SFC reports available to the Eleventh CFCtherefore are almost five years old and hence at the end of theirtime-frame of reference, they cannot conceivably be of any use

to the CFC in formulating its recommendations. Besides, sinceboth CFCs and SFCs are constituted once every five years, thisproblem will recur with every CFC. In the case of Kerala forinstance the first SFC’s report was submitted in February 1996and was supposed to cover the period 1996-7 to 2000-1. Thiscan hardly form the basis of the recommendation of the EleventhCFC whose report is supposed to cover the period 2000-1 to2004-5. Thus the only SFC report available to the CFC is onewhose t ime-frame of reference has nearly ended; it can notpossibly form the basis of the CFC’s recommendations.

11.3 The first SFC of Kerala had drawn attention to this problem. Ithad suggested that the SFCs should be constituted on a dateearly enough, such that their reports could be made available sixto nine months before the CFC submits its report. It had alsodrawn attention to the discrepancy that while Article 280 of theConstitution empowered the President to appoint a CFC afterfive years or “at such earlier times as the President considersnecessary” there was no such leeway provided in Article 243 (I)dealing with the appointment of the SFCs; clearly a removal ofthis discrepancy allowing for the appointment of SFCs earlierthan at the “expiration of the fifth year” can resolve the problem.

11.4 The Eleventh CFC has sugges ted prec i se ly th i s , namely aConstitutional Amendment which merely adds “or earlier” to“the expiration of the fifth year” in Article 243(I), making itexactly analogous to the provision regarding the appointment ofCFCs. While we agree with the spirit of this suggestion, there isa practical problem here, namely that such an amendment wouldopen up the possibility of a state government appointing a FinanceCommission whenever it fancies. This danger already exists inthe wording of the provision governing the appointment of theCFC; it would now get generalised to the case of the SFCs aswell. A more suitable amendment therefore would be to say thatSFCs have to be appointed “two years before the expiry of the

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term of award of the preceding CFC”. Since it would take aboutone year for any SFC to submit its report, this would mean thatSFC reports would appear in the midst o f the CFC’sdeliberations.If this Constitutional amendment is enacted thenin the case of Kerala the next State Finance Commission wouldhave to be appointed around March 2003, i.e. three-and-a-halfyears after the date of appointment of our Commission. Of courseonce the SFC and CFC dates are synchronised, the “expirationof the fifth year” rule can be applied in each case without anyfurther anomalies.

11.5 The CFC however makes a second suggestion for a Constitutionalamendment to Article 280, with which we cannot agree. This isfor deleting the words “on the basis of the recommendationsmade by the Finance Commission of the State” from Article280(3)(bb) and (c). The reasons given by the CFC are that inseveral states the SFCs had not been constituted or submittedtheir reports, and that even where they had submitted theirreports, there was extreme heterogeneity in “approach, contents,and period covered”. This suggestion of the CFC appears to usto amount to an abandonment of a Constitutional principle forreasons that are purely technical, and to an extent trivial. Issuesrelating to the non-constitution of SFCs, non-submission ofreports in t ime, heterogene i ty of the per iod covered, andheterogeneity of contents (which can be overcome by havingsimilar terms of reference) can be separately addressed, at theInter-State Council for instance, where both the Central and Stategovernments are represented. Heterogeneity of approach on theother hand has to be taken as a fact of life in a democracy andcannot possibly be a reason for abandoning a Constitutionalprinciple. Thus none of the reasons cited by the CFC appears tous to be compel l ing enough to jus t i fy a change in theConstitutional provision in this regard. The principle underlyingthis provision is clear: in deciding upon financial devolution fromthe Centre to the states, the CFC must be fully informed of the

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total picture regarding state finances, including what the statesthemselves are being called upon to devolve to LSGIs. (Sincethe latter is governed by the recommendations of the SFCs, theConstitution talks of the CFC making its own recommendations“on the basis of the recommendations made by the FinanceCommission of the State”). This is an eminently reasonableprovision. What is more, it constitutes an anti-thesis of the “top-down” approach and an expression of commitment to the primacyof LSGIs: instead of SFCs taking the devolution from the Centreas a datum in their decision-making it is the CFC that is supposedto take the devolution to LSGIs as the datum in its decision-making. The needs of LSGIs , a s re f l ec ted in the SFCrecommendations, have a primacy and constitute a constraintwithin which the CFC must operate, rather than having to adjustto what the CFC decides to devolve. An amendment deletingthis provision therefore is not just unwarranted; it amounts toan overturning of a basic principle.

11.6 Indeed it seems to us that the two Constitutional amendmentssuggested by the CFC would undermine each other ’s rationale,i.e. the second Constitutional amendment suggested by the CFCwould undermine the ra t iona le of i t s f i r s t Const i tut iona lamendment, and vice versa. If CFC recommendations are nolonger to be linked constitutionally to those of the SFCs thenthe need for synchronising the two, so that the latter comes beforethe former, disappears. On the other hand if the Constitution isto be amended to ensure synchronisation, then the exercise ofdoing so would be futile if at the end of it the CFC is no longerrequired to take SFC recommendations as the basis on which itmakes its own awards. To be sure, it may be argued that SFCrecommendations, if available to the CFC, would be useful forit, even though the latter may not recommend on the basis ofthem. But the case for synchronisation would lose much of itscompelling power if convenience alone is invoked in support ofit . And in any case the argument that the second proposed

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amendment would remove some of the Constitutional shackleson the CFC would still remain. There may be a case for adding“and other re levant fac tors” to “on the bas i s o f therecommendations made by the Finance Commission of the State”,but none in our view for deleting the latter.

11.7 There is however an implication of Article 280(3)(bb) and (c)which has gone generally unnoticed. In stating that the CFCshould make recommendat ions regard ing augment ing theConsolidated Fund of a State to supplement the resources of thePanchayats and Munic ipa l i t i e s on the bas i s o f the SFCrecommendations, the Constitution implicitly suggests that therecommendations of the SFC would be more or less binding onthe state government. There would be no point in the CFC takingthe SFC recommendations as the basis of its own award, if thelatter recommendations amounted to no more than mere piouswishes which the state government could accept or reject at will,or, in the case of those it accepts, could give effect to at a time ofits own choice. In short, in enjoining on the CFC the need toheed the SFC recommendations, the Constitution accords thelatter a degree of sanctity. Unfortunately, state governments havebeen quite cavalier in their treatment of SFC recommendations.The CFC itself quotes instances of Action Taken Reports on SFCrecommendations not being presented to state legislatures eventwo to three years after the submission of the SFC report. InKerala too some of the recommendations of the First SFC wererejected by the government (e.g. the provision regarding 1 percentof State revenue, appropriately defined, going towards the Ruraland Urban Pools); and, even with regard to the others, thenecessary legislation has taken an inordinately long time. Ofcourse the total devolution from the state government to theLSGIs in Kerala has been impressive and unprecedented, andhas in fact gone beyond the prevailing conception at the time ofthe first Finance Commission report. This fact however was neveradvanced as the reason for the partial acceptance of the SFC

224

report. We welcome the CFC’s suggestion that the Action TakenReport on the SFC’s recommendations should be placed beforethe state legislatures within six months of the submission of theSFC report, and urge greater regard on the part of the stategovernment for the spirit of the Constitutional provision indealing with the recommendations of the SFC.

11.8 The CFC’s suggestions for augmenting the Consolidated Fundsof the States are welcome, and in particular the suggestion thatParliament should be empowered to raise the ceil ing on theProfession tax without going in for a Constitutional Amendmenteach time. This is a matter that has also exercised us, especiallysince in Kerala LSGIs have been empowered to levy Professiontax, and it constitutes an important source of their revenue. Thescope for raising revenue from Profession tax is very large, giventhe weight of the service sector in Kerala’s economy, providedits rate as well as coverage could be increased. Specific suggestionsregarding ways of extending its coverage (as well as garneringrevenue through other means) have been made in Chapter 9,which also highlight the constraint placed by the Constitutionalceiling. We welcome the addition of the CFC’s voice to ours forovercoming this constraint.

11.9 Of the annual amounts of Rs.1600 crores for Panchayats andRs.400 crores for Munic ipal i t ies which the CFC would betransferring for an improvement in civic services, Kerala’s sharewould be Rs.65.92 crores for distribution among Panchayats,and Rs.15.05 crores for distribution among Municipalities. Thecriteria for inter se distribution within each of these categorieshave been left to the SFCs. We recommend that these sums bedistributed entirely on the basis of the population criterion amongthe Panchayats and among the Municipalities. Since this sumaccording to the CFC “should be over and above the normal flowof funds to the local bodies from the States, and the amountsthat would f low f rom the implementat ion of SFC

225

recommendations”, its availability makes no difference to the restof our report. These funds, it must be emphasised too, shouldnot be included in the Plan funds which have a completely distinctexistence. It is suggested that these grants should be devolvedin one instalment.

11.10 A perusal of the CFC report however makes it clear that theprocess of decentralisation in Kerala has gone way beyond whatthe CFC, looking perhaps at the average picture among states,visualises. The CFC had commissioned a study by the NIRD onrural local bodies and by NIPFP on urban local bodies. Accordingto the CFC, “The Study done by the NIRD reveals that the 73rdamendment has not significantly altered the functional domainof the panchayats at various tiers. Few states have been seriousin vesting the panchayats with the necessary powers, funds andstaff to enable them to perform the functions assigned to themunder the s ta tutes . The Centre as we l l a s the Sta tes havesponsored schemes for rura l people wi thout as soc ia t ingpanchayats in planning and implementation.” The picture inKerala is vastly different: not only were a whole array of assetstransferred to the LSGIs in 1995 together with staff and fundsto meet operating costs, but, under the stimulus of the Peoples’Plan Campaign, over 35 percent of plan outlay has been given toLSGIs to spend on projects of their choice. Precisely because ofth is unique s tatus of Kera la , the index of decentra l i sa t ionprepared by the CFC (which has to do with criteria such as whenthe SFCs were set up and the extent of action on their report,matters that have become secondary in a context where overRs.1000 crores are handed over every year as plan grants toLSGIs) does not do justice to Kerala.

11.11 The use of such cr i ter ia in the preparat ion of an index ofdecentralisation is in any case questionable, since it elevates formover substance. Any such index has to be based on substantivecriteria such as the proportion of actual devolution from the state

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government to LSGIs, or the magnitude of assets actua l lytransferred to LSGIs, since this is the essence of the process ofdecentralisation, as envisaged in the Constitutional Amendments.Looking only at the SFC recommended devolution, which hasin most states, for no convincing reason (and certainly not forany Constitutionally-specified reason), excluded plan funds fromits purview, is inadequate to start with. But not taking intoaccount the actual devolution even with regard to the non-planpart, but concentrating only on the state government’s formalresponse to the SFC recommendations, increases further theinadequacy of the index. It is in fact a symptom of the inadequacyof the index that a state like Kerala, with its unique record ofdecentralisation, performs so poorly according to it.

11.12 There is however a more basic sense in which Kerala’s remarkableessay in democrat ic decentra l i sa t ion which i s qua l i ta t ive lydifferent, conceptually, from the average picture among the Statesin India, has not elicited the response it deserved from the CFC.The CFC does “not find adequate justification in the demandthat a certain percentage of the funds transferred by the Statesto the panchayats and municipalities be provided by the FinanceCommission”. The reason is the following. On the one hand,the mere transfer of plan schemes to LSGIs should not lead toany additional expenditure liability on the States; on the otherhand the additional financial burden falling on the State forimplementing the SFC recommendations has to be built into theexpendi ture s t ream of the State which the CFC is a l readycognisant of. (And any transfer to LSGIs over and above SFCrecommendations is outside its purview anyway). It follows thenthat the CFC has to take no special note of the devolution toLSGIs by the State government. This argument might have somecogency in the “normal” situation, but not in the context of thedemocratic decentralisation experiment in Kerala. The reasonsare obvious, and are as follows.

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11.13 With the devolution of plan funds to LSGIs, there has been asignificant change in the composition of plan investment. Inparticular there has been a massive increase in road length. Thischange in composition is nothing to frown upon; on the contrary,if decentralised planning is really meaningful, then it must bereflected in some change in the composition of plan investment,for otherwise the need to shift away from paternalistic planningwould appear correspondingly weaker. Roads in particular, andsimilar investments in local infrastructure in general, require, asdiscussed in an ear l ier chapter, h igh leve ls of maintenanceexpenditure. I f p lan funds are not to be fr i t tered away onmaintenance expenditure (and the whole effort in Kerala at thepresent juncture must be to educate the people not to fritteraway plan outlays for current uses, for which the temptationwould be almost irresistibly high), then adequate provision mustbe made for maintenance. The argument can be advanced, andour Commission in fact has advanced it and accepted it in anearlier chapter, that the State government which has transferredthe plan outlay should also meet the maintenance expenditure,since if the same outlay had been spent through departments, itwould have provided for the maintenance of the assets anyway.Now, the CFC’s argument amounts to saying that if the stategovernment transfers plan schemes to LSGIs and meets theirmaintenance requirements , then i t s overa l l expendi tureobligations do not increase. But this presumption is incorrectsince the change in the composition of plan investment also raisesthe maintenance expenditure, and hence the overall expenditureobligation of the state government. It is certainly true that in sofar as this additional obligation gets reflected in the SFC report,it would be taken cognisance of by the CFC. But that would bealmost five years from now. Meanwhile, maintenance expenditureneeds have to be met immediately, since the roads constructed in1997-8, the first year of enhanced plan devolution, would bealready due for re-topping (a very expensive operation) in thecoming fiscal year itself; and subsequent fiscal years would only

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see an escalation in such expenditure. By the time the TwelfthCFC makes some arrangement to help the state, it would alreadyhave carried a big fiscal burden. The Eleventh CFC regrettably,in concentrating on the average picture, has provided l i tt lesuccour to a state like Kerala (the amount coming to the statefrom the CFC’s provision for civic services is too meagre relativeto the state’s requirement, which, to repeat, is highly specific).Our Commiss ion nonethe less has en jo ined upon the s ta tegovernment the task of meeting the maintenance expenditure infull. This is an obligation which cannot be shirked merely becausethe Eleventh Central Finance Commission chose not to recogniseits existence.

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CHAPTER 12

PROCEDURAL SAFEGUARDS

12.1 In the context of the considerable devolution of funds both Planand non-Plan suggested by this Commission, it is felt that strongprocedural safeguards are necessary both ways to ensure that theGovernment and the LSGIs perform their fiscal responsibilitiesfair and straight. The Government has to accept the financialentitlements of LSGIs and honour their due claim promptly. TheLSGIs have to show utmost diligence and care in utilizing pub-lic money. The Commission would be dwelling at length on is-sues related to fiscal responsibility and financial management ofLSGIs in the second part of the Report. However the Commis-sion feels that certain procedural safeguards be adopted immedi-ately and would recommend the following.

12.212.212.212.212.2 LEGISLLEGISLLEGISLLEGISLLEGISLAAAAATIVE PROTIVE PROTIVE PROTIVE PROTIVE PROVISIONSVISIONSVISIONSVISIONSVISIONS

12.2.1 There should be new sections introduced in the Kerala PanchayatRaj Act, 1994 and the Kerala Municipality Act, 1994, to theeffect that LSGIs are entitled to nine percent of State’s own taxrevenue defined as the sum of the amounts received by way ofSales Tax, Excise, Motor Vehicles Tax, Stamp Duty, Basic Tax,Building Tax and other taxes and surcharge imposed by the Stateand reckoned on the basis of the latest accounts certified by theAccountant General.

12.2.2 Once this principle of general sharing of taxes is accepted andimplemented, simultaneously the existing assigned taxes of Ba-sic Tax, and Surcharge on Stamp Duty and the shared Motor

Vehicles Tax would move out of the financial domain of LSGIsand become state taxes. For this, appropriate amendments to theKerala Panchayat Raj Act, Kerala Municipality Act and KeralaMotor Vehicles Taxation Act and the relevant rules are needed.

12.2.3 This nine percent has to be split up into two groups viz., theGeneral Purpose Grant and Maintenance Grant, gett ing 3.5percent and 5.5 percent shares respectively. LSGIs should be freeto spend the General Purpose Grant for establishment expensesas well as for performing the obligatory and other functions;the Maintenance Grant should be used exc lus ive ly formaintenance and wel l -def ined re lated requirements only. I tshould be made non-divertible. Similarly the Plan funds shouldbe used exclusively for development purposes and again shouldbe totally non-divertible. While General Purpose Grant wouldbe released fully as per entitlement and would be allowed to betransferred to PD Accounts permitting unlimited carry over; forthe other two grants, unspent funds would lapse.

12.312.312.312.312.3 SAFEGUSAFEGUSAFEGUSAFEGUSAFEGUARDS AARDS AARDS AARDS AARDS AT GOT GOT GOT GOT GOVERNMENT LEVELVERNMENT LEVELVERNMENT LEVELVERNMENT LEVELVERNMENT LEVEL

12.3.112.3.112.3.112.3.112.3.1(1)(1)(1)(1)(1) F F F F Flololololow ofw ofw ofw ofw of Funds Funds Funds Funds Funds..... Now Plan Funds flow to LSGIs in four quar-terly instalments. For claiming each instalment the concernedLSGI has to make an application, to the Deputy Director in thecase of Village Panchayats, to the Heads of Department in thecase of Block Panchayats and Municipalities and to the Govern-ment in the case of District Panchayats and Corporations. Everytime an instalment is to be released prior general approval of theFinance Department is required. This system has been found tobe cumbersome and slow since there is considerable time lag be-tween the preferring of a claim and the actual crediting of fundsto the LSGI account. It often happens that funds cannot be ac-cessed when most needed.

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12.3.1.1 In respect of sponsored schemes, both Plan and Non-plan, thefunds flow to LSGI from the Heads of Department either directlyor through district level officers. Normally it is given in oneinstalment; but sometimes the release is made rather late in thefinancial year. Also, there is some communication gap betweenthe department and the LSGI on how exactly some of the fundscan be spent, with the result that there are substantial unspentfunds lying with LSGIs from sponsored schemes.

12.3.1.2 As per the existing system, LSGIs are permitted to carry over 25percent of their allotted Plan funds to the next financial year.This is justified on two counts:- Firstly due to delayed releasesthe last quarter get credited only towards the end of the financialyear with the result that it is not possible to spend it and carryoverbecomes inev i tab le ; secondly, the f i r s t ins ta lment of thesucceeding year also gets delayed as various procedures are to befollowed and this necessitates LSGIs to have carry over funds sothat their expenses during the early months of the financial yearcould be met. This system of carryover has not been very efficient.

12.3.1.3 The Finance Department has a letter of credit system in voguefor regulating expenditure by cheque drawing departments likethe Public Works, Irrigation and Forest Departments. Also thereis a pract ice of i s suing monthly and quarter ly ce i l ings forregulating the expenditure of major departments. These wereput in place for regulating outflows from the treasury. Drawingelements from these systems, in order to get over the problemsoutlined above, the Commission recommends an entitlementapproach in the case of Plan Grants, Maintenance Grants andGeneral Purpose Grants by the LSGIs. This would mean thatthe instalments would be automatically credited to the LSGIs.For the release of Plan Grants and Maintenance Grants, givingdue consideration to the need of the Government to manage theways and means position and to the right of LSGIs to get a freeflow of funds, the following procedure is recommended.

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(1) The Director of Panchayats (in the case of VillagePanchayats), the Commissioner of Rural Development (inthe case of Block Panchayats and District Panchayats) andthe Director of Municipalities in the case of Municipalitiesand Corporations) would be declared as the ControllingOfficers of these grants for the LSGIs serviced by them.

(2) These Controlling Officers would, as soon as the Budgetis passed, issue annual allotment letters giving LSGI-wiseallocation to the District Collectors. (Normally in the stateonly the Vote on Account is passed. However, since thewithdrawals would be allowed only on a quarterly basis,the question of exceeding the Vote on Account does notarise.)

(3) At the district level, the District Collector would issueallotment letters to individual LSGIs. This is to be done infour quarterly instalments. This would mean that on thefirst day of April, July, October and January, the LSGIswould get as their entitlement in the treasuries one-fourthof the annual allotment. This system would negate the needfor claims, allotments and transfer crediting. Based on theallotment order of the District Collector funds wouldautomatically move into the account of the LSGIs. Fordischarging this function, District Collector would besupported by the Deputy Director of Panchayats, AssistantDevelopment Commissioner (General) and the JointDirector of Municipal Administration.

(4) In the interest of free flow of funds, even while facilitat-ing liquidity management and avoiding the possibility of ex-cessive lumping of expenditure, LSGIs would be authorizedto carry over a fixed percentage of funds from the quar-terly allotment as follows:

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From the first quarter 50 percent

From the second quarter 40 percent of the quarterly allotmentplus the carried over amount

From the third quarter 30 percent of the quarterly allotmentand the carried over amount

From the fourth quarter Nil

Even if the LSGIs were to use this flexibility to the maximumthe quarterly percentage of expenditure would not exceed thefollowing:

First quarter 25 percent

Second quarter 37.5 percent

Third quarter 40.0 percent

Fourth quarter 37.0 percent

This arrangement would restrict runaway expenditure towardsthe end of the financial year.

(5) In this system since the Plan Grants and MaintenanceGrants would be drawn against bills presented in thetreasuries the question of carrying over any amount atthe end of the financial year does not arise. In otherwords, unspent funds would lapse on the 31st of March.

(6) The District Collector would issue two sets of allotmentsto each LSGI. The first set can be called “regularallotment” to be issued just before the beginning of theyear immediately after the Budget is approved. Against

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this ‘regular allotment’ expenditure can be permittedsubject only to the condit ion that the maximumpermissible amount should not exceed one-third of thequarterly allotment in the first month and two-third ofthe quarterly allotment in the first two months together.This is to regulate too much of outflow from the treasuryin any given month.

(7) The second allotment can be called “authorization to usecarryover funds”. This is also to be done quarterly.However this would not be automatic and a system ofcertification by the LSGI Secretary and elected head withcounter signature from the Treasury Officer would beinsisted on. This authorization could be given within afortnight of LSGI submitting their utilization certificates.

In order to curb the possibility of false claims, invariably,false certification should be treated as a crime resultingin prosecution and loss of job for the persons certifying.

(8) For the Treasury to monitor drawal of funds againstallotments a kind of appropriation account needs to bemaintained.

12.3.1.4 For devolut ion of the Genera l Purpose Grant , a month lyallotment is suggested; i.e. 12 equal monthly instalments wouldbe automatically credited on the first of each month. The aboveprocedure may be followed mutatis mutandis, with the onlydifference being that there will be no requirement to spend aprescribed minimum of funds and there would be no lapsing offunds. Also the LSGI would be able to transfer credit i t sallotment to its Personal Deposit account in the treasuries assoon as it is received.

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The Eleventh FThe Eleventh FThe Eleventh FThe Eleventh FThe Eleventh Finance Commission grant could be given in oneinance Commission grant could be given in oneinance Commission grant could be given in oneinance Commission grant could be given in oneinance Commission grant could be given in oneinstalment in the first quarter of the year in the same mannerinstalment in the first quarter of the year in the same mannerinstalment in the first quarter of the year in the same mannerinstalment in the first quarter of the year in the same mannerinstalment in the first quarter of the year in the same manneras above. LSGIs can transferas above. LSGIs can transferas above. LSGIs can transferas above. LSGIs can transferas above. LSGIs can transfer-cr-cr-cr-cr-credit the amount. Redit the amount. Redit the amount. Redit the amount. Redit the amount. Releases ineleases ineleases ineleases ineleases insubsequent years could be linked to expenditure.subsequent years could be linked to expenditure.subsequent years could be linked to expenditure.subsequent years could be linked to expenditure.subsequent years could be linked to expenditure.

The elaborate procedures explained above would ensure thatThe elaborate procedures explained above would ensure thatThe elaborate procedures explained above would ensure thatThe elaborate procedures explained above would ensure thatThe elaborate procedures explained above would ensure thatthe objective of liquidity management of government is fullythe objective of liquidity management of government is fullythe objective of liquidity management of government is fullythe objective of liquidity management of government is fullythe objective of liquidity management of government is fullymet even while simplifying the mechanism of flow of funds.met even while simplifying the mechanism of flow of funds.met even while simplifying the mechanism of flow of funds.met even while simplifying the mechanism of flow of funds.met even while simplifying the mechanism of flow of funds.

12.3.212.3.212.3.212.3.212.3.2 (2)(2)(2)(2)(2) CalculaCalculaCalculaCalculaCalculat ion oft ion oft ion oft ion oft ion of ent i t lements ent i t lements ent i t lements ent i t lements ent i t lements : For the purpose ofcalculating the share of taxes due to the local governments, theaccounts of the year previous to the last one should be taken sothat the accounts certified by the Accountant General can beused.

12.3.312.3.312.3.312.3.312.3.3 3)3)3)3)3) Assessment of maintenance requirementAssessment of maintenance requirementAssessment of maintenance requirementAssessment of maintenance requirementAssessment of maintenance requirement :Government should carry out a proper survey of as se t stransferred to LSGIs as well as assets owned by them. Andus ing th i s data i t should ca lcu la te Standard SpendingAssessment for maintenance purposes for each LSGI as perexisting norms. Thereafter allotments of maintenance grantscan be made in proportion to the assessed amount, accordingto the availability of funds.

12.3.412.3.412.3.412.3.412.3.4 4)4)4)4)4) SeSeSeSeSeparparparparparaaaaate Budgte Budgte Budgte Budgte Budget Documentet Documentet Documentet Documentet Document. Through an appropriateentry in the Kera la Panchayat Raj Act and the Kera laMunicipality Act, it should be ensured that Grants-in-Aid toLSGIs are shown in a separate budget document. It should showLSGI-wise distribution of funds in respect of three streams ofGrants-in-Aid – Plan, Maintenance and General Purposes. Inthe case of other kinds of Grants-in-Aid, for pensions, as wellas noon feeding in schools, the al locations may be shownindicating the entitlements of different types of LSGIs andformulae for devolving funds to individual LSGIs.

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12.4 RESTRICTIONS ON CREARESTRICTIONS ON CREARESTRICTIONS ON CREARESTRICTIONS ON CREARESTRICTIONS ON CREATION OF NEW STTION OF NEW STTION OF NEW STTION OF NEW STTION OF NEW STAFFAFFAFFAFFAFF

12.4.1 In the context of transfer of responsibilities it is only naturalthat LSGIs would be demanding creation of more posts both forinstitutions/offices transferred to them as well as for expandingtheir traditional staff strength. The Government may also wantto create new staff for the institutions/offices transferred toLSGIs either on normative considerations or in response topressures from employees or LSGIs. The Commission would liketo re i terate the pr inciple enunciated by the Committee onDecentralisation of Powers that there should not be any netaddition to the staff due to decentralisation of functions andpowers.

12.4.2 An analysis of the State finances shows that there is need forutmost care and caution in expanding the staff strength in viewof the severe financial crunch. For practical reasons, salaries andpensions end up as the first charge on government revenues andwhen the revenues are not enough, borrowing is resorted to meetthese commitments. This has dangerous implications; for, it fullyeats away the allocations for maintenance, which is so essentialfor the optimum use of the good social infrastructure, whichKerala has built up over the years. Therefore there is every reasonto economize on creation of staff and allot more resources forthe upgradation and upkeep of the assets created.

12.4.3 Of course the transferred staff are paid for by the Government;but if the staff costs increase the first squeeze will be on fundsrecommended to be earmarked to LSGIs for maintenance andprobably even for Plan purposes. Also, in the not too distantfuture, LSGIs would have to take on the full responsibility ofmeeting the establishment costs. So too much of staff can laterprove to be a burden for the LSGIs themselves. In this contextthe Commission would put forward certain basic suggestions tocontain the salary and related commitments.

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12.4.4 Firstly any proposal by Government to create staff in institutions/offices transferred to LSGIs should be formulated in consultationwith the concerned LSGIs. Secondly it would be advisable to letthe LSGI bear the additional cost due to the staff creation.Thirdly i t is necessary to have an independent inst itutionalmechanism to thoroughly analyse proposals for staff creationeither from LSGIs or Government, relating to both own staff aswell as transferred staff. What is required is a kind of ExpenditureOmbudsman. Since Kerala already has an excellent organisationin the form of a multi-member Ombudsman created with theprimary responsibility of controlling maladministration in LSGIs,it is felt that this body could take on the responsibility of vettingall proposals for staff creation. Since unnecessary expenditureon staff is a kind of maladministration there is logical justificationfor the Ombudsman to handle th i s ta sk . There fore theCommission would recommend that Ombudsman for LSGIs beauthorised to approve every proposal for creation of staff eitherf rom LSGIs or f rom Government , in ins t i tut ions/of f i cestransferred to LSGIs or in the original offices/institutions ofLSGIs. The approval could be based on the reasonableness ofthe request with reference to need and existing norms, sustainedaffordability of the proposal on the part of the State Governmentas we l l a s LSGIs , impl ica t ions for future , poss ib i l i ty forredeployment from other local governments or from Government,possibility of out-sourcing, potential for streamlining existingwork etc. The Council of Ministers could then take an informeddecision based on the recommendations of the Ombudsman. Thisinst itutional mechanism would ensure that while absolutelyunavoidable posts get created, there would be an effective checkon uncontrolled, ad-hoc expansion of bureaucracy. It could bringreliability in staff creation and over a period of time give push toef f i c iency and economy in the adminis t ra t ion of LSGIresponsibilities.

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12.4.5 Alongside, Government may set up a one-time Local GovernmentStaff Commission, which could go into the question of scientificrea l locat ion of s ta f f among LSGIs and redeployment f romgovernment to LSGIs subject to the condition that no creationof staff would be recommended. In the latter report it couldtake off from where the Committee on Decentralisation of Powershas stopped and fully operationalise the principle of “work andworker going together ”. It could also suggest measures forimproving of f i ce management through the use of moderntechniques and technologies as well as through retraining theexisting staff. It could explore the possibility of outsourcingcertain kinds of work as also pooling of human resources foraccess by a group of LSGIs. This Staff Commission could giveits recommendations in about a year.

12.5 SAFEGUSAFEGUSAFEGUSAFEGUSAFEGUARDS AARDS AARDS AARDS AARDS AT LSGI LEVELT LSGI LEVELT LSGI LEVELT LSGI LEVELT LSGI LEVEL

1. All LSGIs should have a maintenance plan, which will spell outboth the maintenance needs and the intended expenditure foreach item.

2. In order to prevent inflating of expenditure by writing outcheques which are cashed after the end of the financial yearit is suggested that all cheques issued by local governmentafter 31st December should carry a stamped statement to theeffect that the cheques would be valid only up to 31st of Marchof that financial year.

3. Unpermitted diversion of funds should invite automatic penaltyby way of interest at 2 percent per month for the funddiverted and should be recovered from the personsresponsible.

4. All LSGIs should have a single account for crediting all their

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entire collected income other than grants-in-aid from Stateor Central Government or other agencies.

5. In respect of Maintenance Grants and Plan Grants, the existingPD Account system where funds are drawn by cheques maybe replaced by a system where Bills are prepared andpresented with appropriate certification regarding thebonafides and admissibility of the Bill. For the sake ofconvenience, to help easy distinguishing of Bills presented byvarious LSGIs it is suggested that separate colours could beused for Village Panchayats, Block Panchayats, DistrictPanchayats, Municipalities and Corporations.

12.6 COMMITTEE TO FOLLOWCOMMITTEE TO FOLLOWCOMMITTEE TO FOLLOWCOMMITTEE TO FOLLOWCOMMITTEE TO FOLLOW-UP A-UP A-UP A-UP A-UP ACCEPTEDCCEPTEDCCEPTEDCCEPTEDCCEPTEDRECOMMENDRECOMMENDRECOMMENDRECOMMENDRECOMMENDAAAAATIONSTIONSTIONSTIONSTIONS

12.6.1 Once the recommendation of the Commission are accepted byGovernment, there has to be a system of quickly operationalisingthem, at any rate within three months. There would be need foramending Acts and Rules and issue of orders by Local SelfGovernment Department , Finance Department and otherDepartments. This process takes a lot of time. As has been pointedout, many of the accepted recommendations of the First StateFinance Commission are yet to be operationalised.

12.6.2 Therefore the Commission would recommend the setting up ofan Empowered Committee under the Chief Secretary consistingof the following members:

1 . Secretary (Finance)

2. Secretary (Law)

3. Director of Panchayats

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4. Director of Municipal Administration

5. Secretaries of Departments which have to carry out therecommendations

6. Secretary (LSGD)_ - Convener.

12.6.3 This Committee would have the task of preparing amendmentsto Acts and Rules and monitoring the issue of notifications andgeneral orders. It should prepare the Action Taken Report to besubmitted to the Legislature. This Committee could be servicedby the SFC Cell of the Finance Department.

12.712.712.712.712.7 SFC CELLSFC CELLSFC CELLSFC CELLSFC CELL

12.7.1 The first SFC had recommended setting up of a Special Cell andaccordingly as per G.O.(MS)564/97/Fin dated 4-6-1997 a Cellhas been set up in the Finance Department. Unfortunately thisCell has not been able to discharge its functions very effectivelywith the result that there have been delays in operationalisingthe recommendations of the first SFC. The fact that the secondSFC had really to struggle and spend a lot of time to get thedata and details, which could have been gathered and analysedregular ly by the SFC Cel l without much di f f icul ty, furtherreinforces the need to have a small but efficient regular set up.

12.7.2 Accordingly the Commission recommends the setting up of a cellunder the joint control of Secretary (Finance) and Secretary(LSGD) consisting essentially of an officer from the FinanceDepartment and an officer from the Panchayat and MunicipalWings of LSG Department , an of f icer f rom the Stat i s t ica lDepartment competent in use of Computers and analysis of data.This could be supported by a small team consist ing of twoministerial staff, two Data Entry Operators, one Stenographer

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and the required class IV staff, driver etc. The Commission wouldlike to underline the fact that it is not suggesting any level forthe posts. It is felt that the accent should be on the quality of theperson rather than his rank in the official hierarchy.

12.7.3 The mandate of this Cell would be –

(i) Follow up the accepted recommendations of the FirstFinance Commission and co-ordinate them to their logicalconclusions.

(ii) Process the recommendat ions of the Second FinanceCommiss ion for dec i s ion a t appropr ia te l eve l s andoperationalise them fully.

(iii) Design formats for monitoring resource mobilization atthe local level and resource flow from Government to theLSGIs, obtain periodical reports in the formats, collatethem, analyse them and prepare monthly statements andannual reports. This monitoring system could be used byLSGD for taking necessary remedial act ion whereverrequired.

(iv) Play the nodal role in organizing training programmesfor LSGIs in respect o f recommendat ions of th i sCommiss ion re la t ing to new sys tems of Budget ing,Accounting, Auditing etc.

(v) Serve as a resource center on local government finances.

(vi) Search, collect and store information on local governmentfinances from both within the State and outside the State.

(vii) Create a data bank for the use of future State and CentralFinance Commissions.

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SUMMARY OFR E C O M M E N D A T I O N S

1 The important recommendat ions of the Second SFC aresummarised below:

22222 DEVDEVDEVDEVDEVOLOLOLOLOLUTION OF FUNDSUTION OF FUNDSUTION OF FUNDSUTION OF FUNDSUTION OF FUNDS

(1) Government may devolve to the LSGIs, Plan funds (excludingstate sponsored schemes) not less than one-third the annualsize of the State Plan as fixed by the Planning Commission.This Fund is to be used by LSGIs for planning andimplementing locally relevant projects. The sectoral ceilingsif any within this grant may be fixed by Government fromtime to time. (Para 6.3)

(2) Five and a half percent of the annual own tax revenue ofthe State Government may be devolved to the LSGIs asGrant-in-aid for maintenance of assets under the controlof the LSGIs including the transferred assets. Thispercentage may be determined on the figures certified bythe Accountant General, which normally relates to thefinancial year two years before the Budget year. Allexpenses related to running of institutions except wages,supply of medicines to health institutions, educationalconcessions / scholarships to students, supply of books,equipments and consumables to schools and conducting noon-feeding in schools, shall be borne by the LSGIs. This shouldinclude payment of rents, repair of equipment includingvehicles, and meeting of telephone charges and vehicleoperating expenses. (Para 7.5.2)

(3) Three and a half percent of the own tax revenue of theState Government based on the figures certified by theAccountant General could be devolved to LSGIs as GeneralPurpose Grant in lieu of assigned taxes, shared taxes andvarious statutory and non-statutory grants-in-aid, bothspecific purpose and general purpose. This grant-in-aid wouldsubsume under it Basic Tax Grant, Surcharge on Stamp Duty,Vehicle Tax Compensation, Rural Pool Grants, the specificpurpose and general purpose grants to Urban Local Bodiesand all other non-plan grants-in-aid devolved to LSGIs fromthe Local Self Government Department. (Para 8.11)

3 The Eleventh Finance Commission grants to LSGIs should bepassed down as such, over and above the grants suggested above.(Para 11.9)

4 For the above three streams of grants-in-aid the devolutionformula and the distribution formula are as suggested below:

(a)(a)(a)(a)(a) Plan GrPlan GrPlan GrPlan GrPlan Grant-in-Aidant-in-Aidant-in-Aidant-in-Aidant-in-Aid. The existing devolution formula aswell as the distribution formula may continue. However upto ten percent of the non-SCP/TSP Funds may be distributedas an incentive for increased own revenue mobilization bythe Village Panchayats and the Urban Local Bodies. Theactual percentage to be distributed as incentive grant-in-aidshould be the same as the percentage of Village Panchayatsand Urban Local Bodies showing an increase in own revenue.And this amount could be shared as per the formula givenbelow: (Para 6.11)

θi = ri . P i / ∑ ri . Pi

θi – share for LSG1 i

ri – percentage increase in its revenue

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Pi – Population of the LSGI i

The date of effect of the incentive system may be indicated toLSGIs well in advance.

(b) Maintenance GrMaintenance GrMaintenance GrMaintenance GrMaintenance Grantantantantant. The maintenance grants should bebased on the current cost of replacement and the initial norms(which has to be updated periodically) may be as follows: (Para7.5.11)

i. Maintenance of buildings constructed before1-4-1967. 3% of capital cost

ii. Maintenance of buildings constructed after1-4-1967 2% of capital cost

iii. Current construction cost. Rs.400/- per Sq.ft.

iv. Frequency of resurfacing of black-top/WBMRoads Once in five years

v. Annual repair expenditure of Blacktop roads. Rs.25,000/- per K.M.

vi. Annual repair expenditure of WBM roads. Rs.23,000/- per K.M.

vii. Annual repair expenditure of unsurfaced roads. Rs.2,000/- per K.M.

viii.Cost of re-surfacing black-top roads(3.8 Metre width) Rs.1.65 lakhs per K.M.

ix. Cost of resurfacing WBM roads(3.8 Metre width) Rs.1.84 lakhs per K.M.

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6 The distribution of the maintenance grant could be as follows:(Para 7.5.12)

(1) On the basis of a price index work out what Rs.140 croresat 2000-2001 prices would amount to for the year for whichthe provision is being made. The deflator for the construc-tion sector can be utilized for this purpose.

(2) One-seventh of this amount may be kept aside for the Dis-trict and Block Panchayats and divided between them in theratio 19 : 1. The share of the Block Panchayat should bedivided equally among them. As regards District Panchayats,half the share should be divided according to the ratio ofdistribution of the transferred village roads and other dis-trict roads and the other half based on norms for repair ofnon-road assets in their control (other than those createdafter 1995).

(3) Seven-eighth of the share of the Village Panchayats andMunicipalities is to be distributed among the VillagePanchayats, Municipalities and Corporations in the same ra-tio as VTC is currently divided; one-eighth of the share ofthe Village Panchayats and Municipalities should be distrib-uted according to the maintenance needs of non-road as-sets, own and transferred, (other than those created after1995) - as determined by norms.

(4) The division formula mentioned above needs to be correctedby a series of iterations.

(5) The remaining portion of the maintenance grant i.e. the ex-cess over Rs.140 crores at 2000-01 prices may be distrib-uted exactly in the same manner as Plan Grant-in-aid.

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c)c)c)c)c) GenerGenerGenerGenerGeneral Pural Pural Pural Pural Purpose Grpose Grpose Grpose Grpose Grantantantantant. The Government may deter-mine as a one-time exercise, the share of District Panchayatsand Block Panchayats in the General Purpose Grant, basedon normative assessment of their establishment cost andoffice expense requirements. The remaining amount may bedistributed as follows: (Para 8.13)

Village Panchayats 78.5 percentage

Municipalities 8.5 percentage

Corporations 13.0 percentage

7 The inter se d i s t r ibut ion among the Munic ipa l i t i e s andCorporations should be entirely on the basis of population. Asregards Village Panchayats, a corpus of Rs.10 crore may be setapart and be used as per a gap filling formula – to fill the gapbetween obl igatory expenditure (reckoned as establ ishmentexpenses, street light and water supply charges) and the revenueusable for these purposes (calculated as the sum of own collectedrevenue and the share of the Village Panchayat from the GeneralPurpose Grant). The entire gap could be filled in the case ofSecond and Third Grade Village Panchayats, 50 percent of thegap in the case of First Grade Village Panchayats and 25 percentof the gap in the case of Special Grade Panchayats. The remainingportion may be distributed according to the population criterion.(Para 8.14)

8 In order to avoid hardships during trans i t ion per iod, i t i srecommended that no Vi l l age Panchayat or ULB shouldexperience a real shortfall in its receipts on account of thesetransfers compared to the previous year. (Para 8.16)

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d) EFC GrEFC GrEFC GrEFC GrEFC Grants:ants:ants:ants:ants: Eleventh Finance Commission grants maybe devolved on the basis of the population criterion in oneinstalment. (Para 11.9 & 12.3.1.4)

99999 OWN RESOUROWN RESOUROWN RESOUROWN RESOUROWN RESOURCE MOBILISCE MOBILISCE MOBILISCE MOBILISCE MOBILISAAAAATION BTION BTION BTION BTION BY LSGIY LSGIY LSGIY LSGIY LSGIsssss

(1) For Property Tax the recommendations of the First SFCmay be operationalised and the following scheme issuggested for classifying buildings and fixing the tax. (Para9.4.1.1)

(i) Location Zone – Four Zones.

(ii) Type of building –

(a) Ordinary building.

(b) Medium type building.

( c) Luxury building.

(iii) Type of use: - (a) Commercial use.

(b) Non-commercial use.(iv) The relative weights for the Zones could be

1 : 1.5 : 2 : 2.5

(v) The relative weights for the type of buildingcould be – 1 : 1.5 : 2

(vi) The relative weights between non-commercialand commercial use could be – 1 : 3

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(vii) Deduction for age and owner occupation may beas provided for in the Kerala Municipality Act.

(2) On no account should there be a cap on increase or a limitto decrease when the new system is introduced. (Para9.4.1.2)

(3) A dual system of numbering is suggested so that incom-plete buildings can get a provisional number and theircompletion tracked properly. (Para 9.4.1.3)

(4) Presumptive Profession Tax may be introduced to bringcertain self employed occupational groups into the tax net.(Para 9.4.2)

(5) Entertainment Tax may be introduced for Cable andInternet. (Para 9.4.3.1)

(6) In the case of Advertisement Tax the Government mayfix the minimum rates for taxation for different kinds ofadvertisement for different types of locations by issuingAdvertisement Tax Rules, which could set out the guide-lines for LSGIs to assess the tax. (Paras 9.4.4(4) (i)&(ii))

(7) There should be a system of authenticating advertisementsto avoid unauthorized advertisements. Penal provisions forunauthorized advertisement should be at least five timesthe normal tax. (Para 9.4.4 (4) (iii))

(8) Conversion Tax may be realized at the rate of five percent of the capital value in the case of conversion of paddylands. Half this rate may be made applicable for other kindsof conversions. In the case of conversions without prior

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permission a severe penalty of ten times the ConversionTax should be realized in the case of conversion of paddyland and an amount equivalent to the Conversion Tax couldbe realized in other cases. (Paras 9.4.5.1 & 9.4.5.2)

(9) The Service Tax should be made compulsory and be linkedto the cost of performing obligatory functions andcalculated as a percentage of Property Tax. (Para 9.4.6(6))

(10) The ceiling on Surcharges may be removed. (Para 9.4.7 (7))

(11) In the case of Non-tax Revenue the Government shouldfix the minimum fees for various kinds of licences in thecase of Munic ipa l it ies and Corporat ions throughnotification. In the case of Village Panchayats only theminimum amount may be fixed in the rules. (Para 9.5.4 (i))

(12) In the case of licences and permits, which are renewedperiodically, 25% of the licence fee may be collected asfine for delay beyond a grace period of ten days; thispenalty may be increased by 25% for every additionalfortnight of delay. (Para 9.5.4 (iii))

(13) There must be compulsory display by LSGIs at the pointof realisation of revenue like markets, sand mining areaetc. and in the case of auctions a district level public noticeshould be given in December about all the forthcomingauctions. (Para 9.5.4 (iv) & (v))

(14) For trade l icences the present practice in Vil lagePanchayats of calculation based on turnover may be doneaway with and for both Village Panchayats and Urban Local

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Bodies, Government could notify the minimum rates foreach trade with separate rates in each category for small,medium and large establishments. (Para 9.6.1)

(15) A separate numbering system should be adopted for tradeestablishments. (Para 9.6.1.5)

(16) The following fees may be enhanced.

(i) Building fee for Theatres. (Para 9.6.2)

(ii) Licence fee under the Kerala Places of Public Resort Act.

(Para 9.6.4)

(iii) Licence fee for Private Markets. (Para 9.6.3)

(iv) Licence fee for Private Slaughterhouses. (Para 9.6.5)

(v) Licence fee for Brokers, Commission Agents, Weighmen

and Measurers. (Para 9.6.6)

(vi) Licence fee for Butchers, Fishmongers, Poulterers. (Para

9.6.8)

(vii)Licence fee for premises where animals are kept for com-

mercial purposes. (Para 9.6.7)

(viii)Market fee. (Para 9.7.1)

(ix) Gate fee for public halting and parking places. (Para

9.7.2)

(x) Gate fee for slaughterhouses. (Para 9.7.3)

(xi) User charges for burial grounds, burning ghats and elec-

tric crematoria. (Para 9.9)

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(17) The meat stalls and the right to fish in water bodies may beauctioned every year by the concerned LSGIs after giving duepublicity. (Para 9.8)

(18) Village Panchayats may auction the right to set up temporaryshops in public land just as Urban Local Governments are doingso under Section 376 of the Kerala Municipality Act. (Para 9.11)

1010101010 FOLLOW UP OF FIRST SFC RECOMMENDFOLLOW UP OF FIRST SFC RECOMMENDFOLLOW UP OF FIRST SFC RECOMMENDFOLLOW UP OF FIRST SFC RECOMMENDFOLLOW UP OF FIRST SFC RECOMMENDAAAAATIONSTIONSTIONSTIONSTIONS

(1) Rules for levy of Advertisement Tax in Village Panchayats andULBs may be issued immediately. (Para 5.6 (5))

(2) Steps to finalise minimum land value for use in registeringsales may be completed at the earliest. (Para 5.6 (7))

(3) Tax mapping may be done immediately and unique premisesnumbering system introduced. (Para 5.6 (10))

(4) A single financing agency for LSGIs may be set up by mergingKUDFC and the Rural Development Board. (Para 5.6 (11))

(5) 50% of building exemption fees and regularization fees maybe given to the concerned Village Panchayats and ULBs. (Para5.6 (12))

(6) The question of Village Panchayats and ULBs levying daily feefor use of poramboke may be examined and decided by Gov-ernment without further delay. (Para 5.6 (13))

(7) Rationalisation of revenue village and Village Panchayat/ULBboundaries may be done in such a way that no revenue villagewould lie within more than one Village Panchayat or ULB. (Para5.6 (14))

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(8) Shortfall in devolution of assigned and shared taxes vis-à-visthe accepted level may be made good by Government. (Para5.6 (16))

1111111111 PROCEDURPROCEDURPROCEDURPROCEDURPROCEDURAL SAFEGUAL SAFEGUAL SAFEGUAL SAFEGUAL SAFEGUARDSARDSARDSARDSARDS

(1) Necessary amendments to the Kerala Panchayat Raj Act andthe Kerala Municipality Act may be made to specify the mini-mum shares of LSGIs, of the Plan Grant, Maintenance Grantand General Purpose Grant. (Paras 12.2.1 & 12.2.2)

(2) LSGIs should get automatic allocations at the beginning ofevery month. (Paras 12.3.1.3 & 12.3.1.4)

(3) A survey of assets transferred to LSGIs as well as assetsowned by them may be carried out to calculate the standardspending assessment for maintenance purposes and the resultof the study should be utilized for devolution of maintenancefunds. (Para 12.3.3 (3))

(4) A separate Budget document indicating LSGI-wise distributionof the three streams of grants-in-aid and grants-in-aid forpensions and noon feeding may be prepared. For other grants-in-aid, district-wise figures may be indicated along with formulafor devolving them to individual LSGIs. (Para 12.3.4 (4))

(5) A legislative provision may be introduced for indexing non-tax revenue items, and taxes like Property Tax, AdvertisementTax and Service Tax. Two-yearly revisions are recommendedfor non-tax licence items and Advertisement Tax based onConsumer Pr ice Index for non-manua l workers forThiruvananthapuram in the case of Urban Local Bodies andConsumer Price Index for agricultural labourers for the statein the case of Village Panchayats; four-yearly revision may be

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done for Profession Tax and Service Tax. (Paras 9.4.2 & 9.5.4)

(6) All proposals for staff creation should be cleared by theOmbudsman. (Para 12.4.4)

(7) A Local Government Staff Commission may be set up to sug-gest redistribution of staff among LSGIs as well as from Gov-ernment to LSGIs. (Para 12.4.5)

(8) All LSGIs should prepare annual maintenance Plans. (Para 12.5(1))

(9) Unpermitted diversion of funds should be penalized by charg-ing a penalty of two percent per month from the persons re-sponsible. (Para 12.5 (3))

(10) Village Panchayats, Municipalities and Corporations should havea single account for crediting all their own collected revenues.(Para 12.5 (4))

(11) In the case of Plan Grant-in-aid and Maintenance Grant-in-aid, bill system of drawing from treasuries should be intro-duced in the place of PD Accounts. (Para 12.5 (5))

(12) An Empowered Committee under the Chief Secretary may beset up to follow-up the accepted recommendations and imple-ment them fully. (Paras 12.6.2 & 12.6.3)

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12 A Cell under the joint control of Finance and Local Self Gov-ernment Departments may be created for concurrent monitor-ing of all financial matters of LSGIs. (Paras 12.7.2 & 12.7.3)

PRPRPRPRPRABHAABHAABHAABHAABHAT PT PT PT PT PAAAAATNAIKTNAIKTNAIKTNAIKTNAIKChairman

K.M. ABRK.M. ABRK.M. ABRK.M. ABRK.M. ABRAHAMAHAMAHAMAHAMAHAM S.M. VIJS.M. VIJS.M. VIJS.M. VIJS.M. VIJAAAAAYYYYYANANDANANDANANDANANDANANDMember Member

Thiruvananthapuram8th January, 2001

255