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INTRODUCTION

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.

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.

(i) Capital Finance Account,

(ii) Capital Formation by types of Assets,

(iii) Capital Formation by types of Assets,

(iv) Income Outlay Account as they are prepared at state and national level.