The Ministry of Finance has recently released an amount of Rs. 13,385.70 crore to 25 States in order to provide grants to the Rural Local Bodies. This sum acts as the first instalment of Tied grants for the fiscal year 2021-22, and it aligns with the recommendations of the 15th Finance Commission.
About Finance Commission (FC) Grants
The Union Budget allocates funds to local bodies, supplements state disaster relief funds, and compensates any revenue loss to states after devolution of taxes based on FC’s recommendation. The 73rd Constitutional Amendment, passed in 1992, mandates both the Central and State Governments to aid Panchayati Raj institutions in emerging as a unit of self-governance by allocating them the necessary funds, functions, and functionaries. For the period 2021-22 to 2025-26, the 15th FC recommended tied grants over Rs. 1 lakh 42 thousand crore to Panchayats for water & sanitation purposes.
Tied vs United Grant
The total grant-in-aid designated for Panchayati Raj institutions consists of 60% ‘Tied Grant’. These tied grants aim to guarantee the availability of extra funds to the rural local bodies, in addition to the funds allocated by the Centre for enhancing the sanitation and preserving the Open-Defecation Free (ODF) status, and provide drinking water, rain water harvesting and water recycling facilities under the Centrally Sponsored Schemes. The remaining 40% is the ‘Untied Grant’ that can be utilized at the discretion of the Panchayati Raj institutions for location specific needs, excluding salary payments.
Allocation of Resources
The states are obliged to transfer the grants to the Rural local bodies within 10 working days of receipt from the Union Government. Any delay greater than 10 days necessitates the State Governments to disburse the grants with interest.
Insights into the Finance Commission (FC)
The FC is a constitutional body established under Article 280 of the Constitution that decides the formula for tax distribution between the Centre and states, and among the states as per the constitutional arrangement and ongoing requirements. The President of India must constitute a FC every five years or earlier. The current, 15th FC was formed in November 2017, spearheaded by NK Singh, and its recommendations cover a period of five years (2021-22 to 2025-26).
Division of FC Grants
Grants allocated by the FC for Rural Local Bodies aim to facilitate the three-tier model of governance documented in the Constitution and ensure that these bodies are adequately funded. Approximately half of the FC Grants present in the Union Budget goes to village local bodies. Urban local bodies such as municipal councils receive the largest proportion of FC Grants post the grants to Rural Local Bodies and Post Devolution Deficit Grants to states. The central government also provides funds to State Disaster Relief Funds (SDRF) and the National Disaster Management Authority (NDMA), with assistance to SDRF being provided as per FC’s recommendation. About a third of the total revenue collected by the Centre is directly shifted to states as their share in the divisible pool. However, the FC also offers a mechanism for compensation of any loss incurred by states, known as post-devolution revenue deficit grants. This grant constitutes the second largest portion of FC transfers after the assistance to local rural bodies.
In addition to the four primary transfers under the FC Grants, the Centre also transfers significant sums from its own resources to states and vulnerable social groups. This includes a central pool of resources for north-eastern region and Sikkim, externally aided project grants and loans, schemes for north-east council, schemes under Article 275 (1) of the Constitution, and special central assistance to scheduled castes and tribal areas.
