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Local Bodies


Total economy as per System of National Accounts (SNA) is divided into 5 institutional sectors, namely, general government sector, financial corporate sector, non-financial corporate sector, household sector and NPISH (Non-Profit Institutions Serving Households). however while compiling National accounts statistics in India, these institutional units in the economy are grouped into 3 sectors (i) Public Sector (ii) Private sector and (iii) Household Sector. Local bodies are part of the general government and hence covered in public sector. Local government institutions have always existed in India in one form or another since ancient times. After independence the government of India gave due weightage to the principles of local self governance and number of improvements were introduced in this regard.

SNA 2008 describes Local Bodies as separate institutional units. In principle, it says that “local government units are institutional units whose fiscal, legislative and executive authority extends over the smallest geographical areas distinguished for administrative and political purposes. The scope of their authority is generally much less than that of Central Government or State governments, and they may, or may not, be entitled to levy taxes on institutional units resident in their areas. They are often heavily dependent on grants or transfers from higher levels of government, and they may also act as agents of central or regional governments to some extent. However, in order to be treated as institutional units they must be entitled to own assets, raise funds and incur liabilities by borrowing on their own account; similarly, they must have some discretion over how such funds are spent. They should also be able to appoint their own officers, independently of external administrative control. The fact that they may also act as agents of central or state governments to some extent does not prevent them from being treated as separate institutional units provided they are also able to raise and spend some funds on their own initiative and own responsibility.”

As they are the government units that are in closest contact with the institutional units resident in their localities, they typically provide a wide range of services to local residents, some of which may be financed out of transfers from higher levels of government. Units supplying goods and services on a market basis are treated as unincorporated enterprises within local government. Units supplying services such as education or health on a non-market basis remain an integral part of the local government unit to which they belong.

Finance Commission Recommendation Regarding to Local Bodies:

Article 243-I gives powers to the Finance commission to review the financial position of local bodies and suggest measures to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities which will enable them to fulfill the role envisaged for them in the Constitution. So from X Finance commission onwards several recommendations to strengthen local bodies were suggested.

FC-X recommended a grant of Rs. 100 per capita of rural population as per the 1971 Census to PRIs, which worked out to a total of Rs. 4380.93 crore. In the case of urban local bodies (ULBs), the Commission recommended an amount of Rs. 1000 crore. The aggregate grant of Rs. 5380.93 crore represented 1.38 per cent of the divisible pool as estimated by them.

The Terms of Reference of FC-XI had two specific references to local bodies:

i) A reference to the measures needed to augment the consolidated funds of states to supplement the resources of panchayats and municipalities on the basis of the recommendations made by the Finance Commissions of the concerned states.

ii) A reference reiterating the need to take into account the recommendations of the State Finance Commissions (SFCs). Where such recommendations were not available, the Commission was directed to make its own assessment about the manner and extent of augmentation of the consolidated fund required.

FC-XI recommended a grant of Rs. 8000 crore for PRIs and Rs. 2000 crore for ULBs for the five-year period starting 2000-01. The aggregate grant of Rs. 10,000 crore represented 0.78 per cent of the divisible pool as estimated by them. These grants were Specific state-wise amounts earmarked for maintenance of accounts (Rs. 98.60 crore) and creation of a data base of the finances of local bodies (Rs. 200 crore).

The Terms of Reference of FC-XII had a single reference relating to the measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and municipalities on the basis of recommendations made by the Finance Commissions of the concerned states. FC-XII recommended a sum of Rs. 20,000 crore for the PRIs and Rs. 5,000 crore for municipalities for the five year period starting 2005-06. The aggregate grant of Rs. 25,000 crore represented 1.24 per cent of the divisible pool as estimated by them. FC-XII noted that the recommendations by FC-XI relating to maintenance of accounts and audit of local bodies had still to be implemented. FC-XII noted the importance of building data bases and maintenance of accounts by local bodies and urged that part of their support be earmarked by the State Governments for this purpose.

In continuance with earlier Finance Commission, XIII FC indicated that data on financial and operational performance of all local bodies continues to be of poor quality. Notwithstanding substantial progress by local bodies in a few states on this account, the data remains cross-sectionally unreliable for the determination of local body grant amongst states. To strengthen the state and district level income estimates XIII FC recommends the preparation of local body accounts by collecting data on receipts and payments.

Importance of Local Body Accounts: -After so many years of the evolution of urban and rural local bodies, the local body accounts till date are in their nascent stage unlike the well established national accounts. At present the total number of rural local bodies is around 2.4 lakh and that of urban local bodies is around four thousands in the country. Keeping in view the vast number of local bodies and the functions assigned to them local bodies’ accounts are indispensible for measuring their contribution in GDP. However due to lack of adequate data the original contribution of local bodies in the general government account could not be properly captured so far. Estimates are based on some benchmark indicators. Further, it is not possible to determine the expenditure incurred by the PRIs as they do not maintain proper accounts that could capture these details.

Presently there is a lot of demand for the economic cum purpose classification of accounts of local bodies. Such a classification would give an idea on their functioning, sources of funds as well as the details of their utilization. State domestic product can change drastically once the firm estimates of local bodies are taken into account. The states are in the process of calculating the district domestic products and domestic product at intermediate level as well but this is possible only if local body accounts are analyzed The data if collected will facilitate in preparation of following accounts: (i) Capital Finance Account (ii) Capital Formation by types of Assets, (iii) Estimates of net Product, and (iv) Income Outlay Account as they are prepared at state and national level.

Coverage of Local bodies: - In India local government is the third level of government in addition to the state and central governments. Local bodies in India can be categorized in two main types (i) rural and (ii) urban. These are the representative bodies as the members are elected from among and by the people. To achieve democratic decentralization and provide constitutional endorsement of local self governance 73rd and 74th Constitutional Amendment Acts were introduced in the early 1990's. These amendments confer authority on legislatures of States to endow respectively rural and urban local bodies with such powers and functions as may be necessary to enable them to act as institutions of self – government. Article 243B spells out about the constitution of Panchayat, it says, there shall be constituted in every State, Panchayats at the village, intermediate and district levels in accordance with the provisions of this Part there shall be constituted in every State,— (a) a Nagar Panchayat (by whatever name called) for a transitional area, that is to say, an area in transition from a rural area to an urban area; (b) a Municipal Council for a smaller urban area; and (c) a Municipal Corporation for a larger urban area. Besides these there are certain other bodies also at the local and regional levels which cater to the development needs of the area such as Delhi Development Authority, Autonomous District Council etc. which have to be dealt separately. For the purpose of devolution of powers, the Panchayats and Municipalities have been charged with the responsibility of preparing and implementing plans for economic development and social justice including those in relation to matters listed in the Eleventh and Twelfth Schedules (Annexure-3) of the Constitution. The central objective of these amendments is the decentralization of planning and decision making procedures. It also has the implicit intention of removing centralized notions of control and monopoly over development of resources.

Function of Local Bodies: - The Panchayats have been entrusted with the implementation of schemes for economic development and social justice including those in relation to the matters listed in the Eleventh schedule. The Municipalities have been entrusted with the implementation of schemes for economic development and social justice including those in relation to the matters listed in the Twelfth schedule. At present 29 and 18 subjects are identified in 11th and 12th schedule (Annexure-3) to be transferred to panchayats and municipalities respectively. The functions of Rural and Urban local bodies are both judicial and administrative. Main functions of local bodies are discussed as follows:

· Providing drinking water, sanitation and family welfare

· Education and Health promotion , markets and fairs organization and running different poverty alleviation programmes

· Registration of Birth and deaths

· Urban Planning and town planning

· Regulation of land-use and construction of buildings

· Planning for social and economic development

· Slum improvement and up gradation

· Provision of urban amenities and facilities such as parks, gardens, playgrounds

· Public amenities including street lighting, parking lots, bus stops and public conveniences.

These and other works as mentioned in 11th and 12th schedule have to be necessarily performed, for which budgetary provisions have to be made.