Anticipating the Unintended #20: State Finance Commissions, New World Order & COVID-19, Sunset Rules, Derangement of India’s fuel prices, and more

Anticipating the Unintended is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?


PolicyWTF: ‘Everyone Wants Decentralisation, But Only up to Their Own Level’

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

This quote, attributed to one of India’s most respected economists, Raja Chellaiah (1922-2009), comes to life while discussing this week’s PolicyWTF — the sorry state of State Finance Commissions.

Now, the Union Finance Commission has garnered a lot of attention in recent years. Its recommendation on sharing the tax divisible pool between the union and the states is keenly followed in policy circles. Historically too, successive Union Finance Commissions have made their mark as institutions of repute.

Similarly, after the 73rd and 74th amendments to the constitution (1992), each state was supposed to constitute a State Finance Commission (SFC) every five years to decide on sharing resources between the state and all its local governments. But I bet that you would have not heard about the deliberations and recommendations of your state’s own finance commission.

So here’s the story, courtesy an excellent NIPFP working paper by Manish Gupta and Pinaki Chakraborty:

  1. By 2015-16, all states should have constituted their fifth SFC according to the constitutional terms. But turns out that only 13 states had done so, even by 2019.
  2. The average delay in submitting recommendations for SFCs is 16 months!
  3. The quantum of transfers devolved to all local bodies combined is extremely small. The all-state average recommended devolution as a per cent of states’ own revenue receipts varies between 9.6 and 13.7 per cent in the period 2010-11 to 2018-19.
  4. Unlike the Union Finance Commission, members of SFCs are often serving bureaucrats and politicians. This hampers its role as an autonomous body balancing the interests of both state and local governments.
  5. If some SFCs recommend a larger quantum of devolution to local governments, these recommendations get summarily rejected by state governments.

One might argue that the original PolicyWTF here is the 73rd/74th amendment itself. These amendments left the devolution of funds and functions to local governments at the discretion of the state government. And public choice theory will tell you that no government wants to reduce its own powers. Hence we have enfeebled local governments. State governments want decentralisation from the union government but will do little to devolve their own functions and funds to local governments.

Under such conditions where local governments have little taxation powers, the role of SFCs becomes even more important. So the next time you crib about the potholes on your street or the erratic power supply, look up what your latest SFC is up to.

PS: One state stands out in terms of the quantum of its devolution to local bodies: Karnataka. As much as 40% of its own revenue receipts are devolved to local bodies. Perhaps there is a ‘Karnataka Model of Governance’ here.

Read the full edition here.

Disclaimer: The views expressed in this newsletter belong to the author and do not represent the Takshashila Institution’s view.