14th Finance Commission Recommendations on Local Governments


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

The terms of reference (ToR) of the 14th Finance Commission was to recommend "the measures needed to augment the Consolidated Fund of a State to supplement the resources of the
Panchayats and Municipalities in the State, on the basis of the recommendations made by the
Finance Commission of the State."
Thus, the commission recommended on the basis of the recommendations of the State
Finance Commissions (SFCs), measures to supplement resources of duly constituted panchayats
and municipalities. These measures could be recommendations on both grants in aid as well as
suggestions for steps to be taken by the States in this regard. The measures are intended to add to
the resources of panchayats and municipalities and by implication there is no stipulation about
the criteria or the quantum of the grant that should be recommended.
                                                     Grants to Local Bodies
(i) Criteria for determination of grants to panchayats and municipalities
In the past, Finance Commissions have used two types of criteria for determining grants
to States for panchayats and municipalities. The first related to the need for resources and the
second related to the extent of devolution or decentralisation to local bodies by the States. We
have examined requests put before us to use an index or indices based on extent of devolution or
decentralisation for determining States' share of the grant for municipalities and panchayats. We
noted that there are several practical difficulties in considering an appropriate index or indices
for devolution, without assuming that there is an optimal model of devolution or decentralisation
that is uniformly applicable to all States, irrespective of their socio-political and institutional
context. Even assuming that such an index could be designed, it is not easy to assess the actual
level of devolution relative to the optimal level, due to the unavailability of accurate, reliable
information of the ground position.
Under the Constitution, the State legislature has the discretion to assign functions to
panchayats and municipalities. We note that the overall scheme of the Constitutional provisions
give primacy to the role of the States in this regard, by placing local government squarely in the
State list. We have noted significant diversity in the legal, institutional and financial aspects of
assignment of functions to panchayats and municipalities. In our view, neither the ToR nor the
Constitution permits the Finance Commission to play any role in the devolution of powers to
panchayats and municipalities or to promote a particular model of decentralisation.
 Therefore, the 14th FC considered it appropriate not to use an index or indices of devolution or decentralisation for the purpose of transfer of resources to States for panchayats and municipalities.
Population and area are criteria used by past Finance Commissions that reflect need for
resources. All the previous four Finance Commissions have used population and, barring the
FC-X, all others have used area. The measures recommended or the grants given are ultimately
intended to supplement the resources of panchayats and municipalities. The purpose of such
supplementing is to aid these institutions in their primary function to deliver basic civic services.
Therefore, we have used criteria that reflect needs in order to determine the grants to panchayats
and municipalities, namely population and area. The delivery of basic civic services is related to
the current population to be served within the administrative jurisdiction of the local body. Area
is also relevant from the viewpoint of the costs of delivering such services.
Therefore, the 14th FC recommend distribution of grants to the States using 2011 population data with weight of 90 per cent and area with weight of 10 per cent. The grant to each State will be divided into two - a grant to duly constituted gram panchayats and a grant to duly constituted municipalities, on the basis of urban and rural population of that State using the data of Census 2011.
The FC-XIII recognised the need to support the local bodies through a predictable and
buoyant source of revenue. It considered the demand by the States and local bodies for giving a
share from the divisible pool to the latter. As the legal opinion provided to the FC-XIII indicated
that this was inconsistent with the provisions of the Constitution, the Commission recommended
that the local bodies be transferred a percentage of the divisible pool of the previous year as
stipulated by it, after converting this share into grants-in-aid under Article 275 of the Constitution.
It had estimated this amount to be Rs. 87,519 crore for five years from 2010 to 2015.
The commision noted that States appreciated the fact that the FC-XIII had acknowledged the need for providing local bodies with a predictable, buoyant source of revenue and had recommended a grant which was equivalent to a specified percentage of the divisible pool. Most States have indicated that 5 per cent of the divisible pool should be given as grants to the local bodies. Four SFCs whose recommendation periods are coterminous with ours have sought support ranging from Rs. 270 crore to Rs. 1,20,992 crore for the five-year period, 2015-20. In terms of per capita per annum, this ranges from Rs. 195 a year to Rs. 1,211 a year.
The commision notes that the local bodies need to spend not only on the provision of basic services to the people, but also require support for administrative infrastructure and capacity building. In deciding the quantum of the grant, we have given importance to stability and predictability of resources that should flow to the local bodies. We have taken a pragmatic view on supplementing the resources of panchayats and municipalities. We are proposing a level of support that will provide financial stability to the local bodies through assured transfers for planning and delivering of basic services smoothly and effectively.
the 14th FC  has worked out the total size of the grant to be Rs. 2,87,436 crore for the period 2015-20, constituting an assistance of Rs. 488 per capita per annum at an aggregate level. Of this, the grant recommended to panchayats is Rs. 2,00,292.2 crore and that to
municipalities is Rs. 87,143.8 crore. The grant assessed by the commission for each State for each year is fixed.
This will ensure stable flow of resources at predictable intervals. The grants recommended
by us should enhance resources available with gram panchayats and municipalities to enable
them to discharge their statutorily assigned functions.
the 14th FC has recommended grants in two parts - a basic grant and a performance grant
for duly constituted gram panchayats and municipalities. In the case of gram panchayats,
90 per cent of the grant will be the basic grant and 10 per cent will be the performance
grant. In the case of municipalities, the division between basic and performance grant will
be on a 80:20 basis.
(ii) Basic grants
The own resources of gram panchayats and municipalities are meagre. They are required,
as per the relevant statutes, to deliver a number of core services to their constituents. In addition,
they have been assigned numerous agency functions by Union and State Governments. However,
they depend on devolution from the State Government and grants from the State and Union
Governments for providing core services. The purpose of the basic grant is to provide a measure
of unconditional support to the gram panchayats and municipalities for delivering the basic
functions assigned to them under their respective statutes. The grant provided is intended to be
used to improve the status of basic civic services including water supply, sanitation including
septage management, sewerage and solid waste management, storm water drainage, maintenance
of community assets, maintenance of roads, footpaths and street-lighting, and burial and cremation
grounds.
The grants that the 14th FC recommend should go to gram panchayats, which are directly
responsible for the delivery of basic services, without any share for other levels. The commission expects  that the State Governments will take care of the needs of the other levels. The earmarked basic grants for gram panchayats will be distributed among them, using the formula prescribed by the respective SFCs for the distribution of resources. Similarly, the basic grant for urban local bodies will be divided into tier-wise shares and distributed across each tier, namely the municipal corporations, municipalities (the tier II urban local bodies) and the nagar panchayats (the tier III local bodies) using the formula given by the respective SFCs. The State Governments should apply the distribution formula of the most recent SFC, whose recommendations have been accepted.
 In case the SFC formula is not available, then the share of each gram panchayat as
specified above should be distributed across the entities using 2011 population with a weight of 90 per cent and area with a weight of 10 per cent. In the case of urban local bodies, the share of each of the three tiers will be determined on the basis of population of 2011 with a weight of 90 per cent and area with a weight of 10 per cent, and then distributed among the entities in each tier in proportion to the population of 2011 and area in the ratio of 90:10.
(iii) Performance Grants
Our analysis of the data on gram panchayat revenues provided to us by the States showed
that in one State the gram panchayats played an advisory role and had no powers to collect tax or
non-tax revenue and in four others they had powers to collect revenues but were not doing so. Of
the remaining States, two accounted for most of the revenues collected at the gram panchayat
level. For the local bodies to function effectively as institutions of local self-governance, it is
important that they augment their own sources of revenue.
A common issue raised by most SFCs is that their work was hampered by lack of reliable
data on receipts and expenditure at the local body level. The studies commissioned by us on
panchayats and municipal finances faced similar problems. We note that despite the last three
Finance Commissions raising the issue of reliable data and accounts and providing grants to
address the issue, not much has happened. In our opinion, this is not a satisfactory state of
affairs.
Therefore, the 14th FC is providing performance grants to address the following issues: (i)
making available reliable data on local bodies' receipt and expenditure through audited
accounts; and (ii) improvement in own revenues. In addition, the urban local bodies will
have to measure and publish service level benchmarks for basic services. These performance grants will be disbursed from the second year of our award period, that is, 2016-17 onwards, so as to enable sufficient time to State Governments and the local bodies to put in place a scheme and mechanism for implementation.
Performance grant - rural
To be eligible for performance grants, the gram panchayats will have to submit
audited annual accounts that relate to a year not earlier than two years preceding the year
in which the gram panchayat seeks to claim the performance grant. It will also have to
show an increase in the own revenues of the local body over the preceding year, as reflected
in the audited accounts. To illustrate, the audited accounts required for performance grants in 2016-17 will be for the year 2014-15; for performance grants in 2017-18, the audited accounts will be for the year 2015-16; for performance grants in 2018-19, the audited accounts will be for 2016-17; and for performance grants in 2019-20, the audited accounts will be for 2017-18.
The underlying objective of the grant is to initiate action at the grassroots level for
compilation of data so that all stakeholders have access to reliable information for decision making. At the same time, it enhances accountability of the local self-government institutions to the public. the 14th FC is conscious that the revenue generation by gram panchayats is at different levels.
Therefore, the 14th FC is of the opinion that it may be better that the detailed procedure for disbursal of the performance grant to gram panchayats based on revenue improvement be designed by the State Governments concerned, keeping in view the two conditions given above. The operational criteria, including the quantum of incentive to be given, is left to the discretion of the State Governments. In case some amount of the performance grant remains after disbursement to the eligible gram panchayats, this undisbursed amount should be distributed on an equitable basis among all the eligible gram panchayats. The scheme for disbursement of the performance grant will be notified by the State Governments latest by March 2016, in order to enable the preparation of the eligibility list of local bodies entitled to them. The concerned Ministries of the Union Government will also be informed in order to facilitate release of the instalment of performance grants.
Performance grant - urban
As in the case of the performance grant for gram panchayats, a detailed procedure for
the disbursal of the performance grant to urban local bodies would have to be designed by
the State Government concerned, subject to certain eligibility criteria. To be eligible, the
urban local body will have to submit audited annual accounts that relate to a year not
earlier than two years preceding the year in which it seeks to claim the performance grant.
It will also have to show an increase in own revenues over the preceding year, as reflected in these audited accounts. In addition, it must publish the service level benchmarks relating
to basic urban services each year for the period of the award and make it publically available.
The service level benchmarks of the Ministry of Urban Development may be used for this
purpose. The improvement in revenues will be determined on the basis of these audited
accounts and on no other basis. For computing the increase in own revenues in a particular
year, the proceeds from octroi and entry tax must be excluded. In case some amount of the
performance grant remains after disbursement to the eligible urban local bodies, the
undisbursed amount should be distributed on an equitable basis among all the eligible
urban local bodies that had fulfilled the conditions for getting the performance grant.
 These guidelines for the disbursement of the rural and urban performance grants
will remain in force for the period of our award.
 The commision recommend that the Union Government accept the detailed procedure prepared by the State which incorporates our broad guidelines without imposing any further conditions.
 
Trust-Based Approach to Release of Grants
The 14th FC recognise that there is a need to trust and have respect for local bodies as institutions
of local self-government. Hence, the commission recommend that no further conditions or directions other than those indicated by us should be imposed either by the Union or the State Government for the release of funds.
The grants recommended by the commission shall be released in two instalments each year in June and October. This will enable timely flows to local bodies during the year, enabling
them to plan and execute the works better. We recommend that 50 per cent of the basic
grant for the year be released to the State as the first instalment of the year. The remaining
basic grant and the full performance grant for the year may be released as the second
instalment for the year. The States should release the grants to the gram panchayats and
municipalities within fifteen days of it being credited to their account by the Union
Government. In case of delay, the State Government must release the instalment with interest paid from its own funds.
Central to the trust-based approach adopted by us is the understanding that the local
bodies will discharge their statutory functions with all due care. The publishing of service level
data and preparation and audit of accounts will provide the necessary transparency and
accountability in this regard. The commission recommend that stern action should be ensured if irregularities in the application of funds are noticed or pointed out.
                                            Strengthening Role of SFCs
During our interaction with the States, local bodies and SFCs we noticed that there is
wide variation in the assignment of functions, funds and functionaries across States. Given this
diversity of functional assignments to local bodies across States, it is not feasible for the Finance
Commission to carry out a detailed assessment of the finances of local bodies in each State nor
has such a role been assigned to it under the ToR or the Constitution. The Constitution envisages
that the needs of local bodies within the State shall be assessed in detail by the SFC, which will
recommend the required transfer of resources from the State to them. Therefore, it is appropriate
that the needs of local bodies are assessed in detail by the SFC.
The SFC chairpersons have pointed out that despite the passage of time, SFCs in many
States continue to work with a lot of disadvantages. Given the considerations set out in the
preceding paragraph, we are of the opinion that there is a need for States to facilitate the effective
working of SFCs. Therefore, the commission recommend that the State Governments should strengthen SFCs. This would involve timely constitution, proper administrative support and adequate resources for smooth functioning and timely placement of the SFC report before State legislatures, with action taken notes.
                           Measures to Augment the Consolidated Fund of States
The ToR mandates us to identify and recommend measures needed to augment the
Consolidated Fund of States. In addition to the grants that we have recommended, we have
suggested the actionable measures that the State Governments and the local bodies can take to
improve their own revenues, based on our examination of SFC reports. There is certainly a need
to streamline revenue administration in the States in order to improve own resources of panchayats and municipalities.
States have classified levies assigned to local bodies as compulsory or optional. However,
the classification is different across States. Per capita income from both tax and non-tax sources
also varies widely. In the case of own revenue collections by local bodies, the bulk of overall
collections were accounted for by local bodies in a few States.
 The commission notices that there is considerable scope for the local bodies to improve revenues from own sources by taking steps as recommended by the SFCs and the Finance Commissions. In our view, States need to take the measures illustrated below to further augment the resources at the State and local bodies' level.
                                                        Tax measures
(i) Property tax
 Property tax is recognised as the major source of revenue for local bodies the world over.
However, we noted from the SFC reports that local bodies in a few States have not been given the powers to levy this tax so far; legislations for this purpose have either not been passed or still
remain under consideration of those State Governments. In some other States, the panchayats
are unable to levy this tax because the necessary regulations have not been framed. In most
States where tax is being levied, the rates have not been revised periodically. The list of taxable
properties is not being updated and a large number of properties remain outside the tax net.
A few SFCs have also pointed out that the tax is levied on annual rental value, which
leads to lower buoyancy. Often State Governments have issued orders staying the adoption of
revised assessment lists or have reduced the rental values. A few SFCs have pointed out that
there is a need to review the exemptions that have been granted.
The study on municipal finances commissioned by us showed that the revenues from
property tax of 478 sampled municipalities had risen from Rs. 5,555 crore in 2007-08 to Rs.
10,192 crore in 2012-13. The study indicates that the per capita revenue from property tax varied
from Rs. 42 to Rs. 1,677 across States. The study on panchayat finances observed that nearly half
of the States reported nil collections from property tax while the others reported low collections.
The study has underlined that the potential for collection of property tax has not been fully
tapped and suggested that panchayats can raise much more revenues even at the modest rates
applicable to the existing tax base. In the view of the commission, States need to ensure property tax reforms including objective determination of the base and its regular revision to adjust for inflation, strengthening of mechanisms for assessment, levy and collection and improving billing and collection efficiency.
Review of SFC reports shows that States use different methods for the levy of property
tax. However, we have noted that there is a convergence of views in SFC reports that property tax should be levied on plinth area basis. We endorse the views of the SFCs that all the State
Governments should empower the panchayats and municipalities to levy property tax on this
basis.
The Commission suggest that the existing rules be reviewed and amplified to facilitate the levy of property tax and the granting of exemptions be minimised. The assessment of properties may be done every four or five years and the urban local bodies should introduce the system of self-assessment. We recommend that action be taken by the States to share information regarding property tax among the municipalities, State and Union Governments.
Use of Land-based Instruments
Some SFCs have observed that the urban local bodies do not have a systemic approach to
listing of vacant lands. Therefore, such lands often go untaxed and the vacant land tax is demanded only when owners approach authorities for approval of building plans. The SFCs have observed the need to rationalise the rates of taxes on vacant land and have suggested that the tax be fixed as a percentage of the tax on buildings, depending on the class of the city. In our view, this tax, if administered properly, has the potential to earn large revenues for the urban local bodies.
The commission suggested that the levy of vacant land tax by peri-urban panchayats be considered. In addition, a part of land conversion charges can be shared by State Governments with municipalities and panchayats.
Some SFCs have observed that betterment tax is available to both gram panchayats and
municipalities as an optional tax. In rural areas, the tax was linked to the improvement in property
under schemes carried out by the gram panchayat. As such works were generally small, these did
not result in any appreciable improvement in the value of the property and so the tax realised
does not increase substantially. The urban local bodies were generally not levying this tax, even
though they are allowed to.
The commission, therefore, recommend that the States should review the position and prepare a clear framework of rules for the levy of betterment tax.
(ii) Advertisement tax
The reports of some SFCs revealed the fact that panchayats reported low income from
advertisement in cases where it was being collected by the district administration for passing on
to the panchayats. Even in cases where the panchayats were empowered to collect the tax, most
of them were not doing so. In the case of urban local bodies, the tax had two components - tax on
hoardings and the tax on advertisements on buses, cars, lamp posts and compound walls. The
SFCs also pointed out that in some States, relevant legislation allowed the municipal corporations
to collect advertisement tax, but did not give powers to the Tier II and III municipalities to levy
the tax.
 The commission is of the view that there is no reason why the incomes of local bodies from advertisement tax cannot increase significantly. In this context, we suggest that States may like to consider steps to empower local bodies to impose this tax and improve own revenues from this source.
(iv) Entertainment tax
The study on municipal finances indicates that the collection of entertainment tax reported
by urban local bodies was low. Three States accounted for most of the collections reported by the
States. The study suggests that States should exploit entertainment tax effectively through improved
methods of levy and collection. In our view, the entertainment tax legislation and rules in States
require a comprehensive review. Newer forms of entertainment such as boat rides, cable television
and internet cafes should be brought into the entertainment tax net and no exemptions should be
given without compensating local bodies for the loss.
The commission, therefore, recommend that States review the structure of entertainment tax and take action to increase its scope to cover more and newer forms of entertainment.
(v) Tax on professions, trades, callings and employments
Article 276 of the Constitution provides for the levy of a tax on professions, trades, callings
and employments for the benefit of the State or local bodies at a rate not exceeding Rs. 2,500 per
tax payer per annum. The States, SFCs and local bodies have expressed the view that this tax can
be a major source of income for the local bodies if the ceiling can be raised periodically and the
tax can be collected efficiently.
At present, twenty-one states impose professions tax through various laws, adhering to
the limit of Rs. 2,500. The coverage of the tax varies - it is generally applicable to all persons
engaged in any employment or in any profession in some States, but only to certain specified
professions in others. In some States, the tax is levied and collected by the State Government
alone, while in others such as Kerala and Tamil Nadu, local bodies also levy and collect the tax
under the State legislation. In our view, the low contribution of professions tax to the revenues of
the State is largely due to poor collection mechanisms and enforcement at the State level as well
as the low limit fixed. The FC-XI had suggested that the rates should be suitably revised to bring
them nearer to the ceiling prescribed under the Constitution. They further recommended that the
ceiling had been fixed in 1988 by amending the Constitution and needed suitable enhancement.
The Commission suggested that Parliament should be empowered to fix this ceiling without
going in for a Constitutional amendment each time. Even after fourteen years, no action has been
taken to enhance the ceiling on professions tax.
In our view, professions tax could be one of the important sources of revenue for local
bodies, if they are allowed to levy and collect it under the State legislations within the ceilings set by the Parliament. To arrive at a reasonable estimation of the ceiling for professions tax we
considered three methods. First, was to index the ceiling on professions tax to the annual growth
rate of per capita nominal GSDP. The second method was to consider the historic growth of
professions tax in between 1935 and 1988 and from 1950 to 1988 using compound annual growth rate for the two periods as well as the trend growth rate from 1935 to 1988. The third method was to index it to the per capita emoluments of public sector employees. These methods yielded different estimates for the ceiling.
Therefore, taking into consideration all factors, the commission recommend raising the ceiling from Rs. 2,500 to Rs. 12,000 per annum. We further recommend that Article 276(2) of the Constitution may be amended to increase the limits on the imposition of professions tax by States. The amendment may also vest the power to impose limits on Parliament with the caveat that the limits should adhere to the Finance Commission's recommendations and the Union Government should prescribe a uniform limit for all States.
Non-Tax Measures
We noted that the SFC reports have identified the main issues that affect the income of
gram panchayats from non-tax revenue sources. First, certain productive assets such as village
ponds and orchards, which can generate revenues, have not been assigned to the gram panchayats in some States. Similarly, in some States, gram panchayats do not get incomes from market fees because these are assigned to market committees. Second, rates of fees have not been revised for several years, in some cases for more than five to six decades. Thirdly, in certain States the rural local bodies were unable to collect tolls, fees and duties as the rules for this purpose had not been framed and notified. To improve incomes by obtaining better rates, one SFC suggested that the annual sale value should be determined before auctioning common resources such as fisheries, ponds, ferries, markets and halls for rent.
In this context, the commission recommend that State Governments take action to assign productive local assets to the panchayats, put in place enabling rules for collection and institute systems so that they can obtain the best returns while leasing or renting common resources.
The study on municipal finances pointed out that the urban local bodies are reporting an
increase in user charges collected. However, the study suggested that the user charges need
rationalisation and also need to be linked with improvement in service levels. We noted that the
SFCs have observed that there was a need in urban areas to rationalise and collect charges for
basic services provided and that the charges should be so fixed such that the local body is able to
recover at least the operation and maintenance cost of the services from the beneficiaries. The
SFCs have also stressed on the need to review and periodically update the charges and fees for all the services being provided by the local bodies. Some SFCs have pointed out the need to educate elected representatives, local body functionaries as well as the general public on the importance of own revenues for local bodies and the need to pay for improved delivery of public services.
The commission recommend that the urban local bodies rationalise their service charges in a way that they are able to at least recover the operation and maintenance costs from the beneficiaries.
Income from cess or royalty on minor minerals
Royalty or cess on royalty on minor minerals is shared by some States with local bodies,
mainly panchayats. In one State, the royalty on sand had been removed and regulation of sand
mining had been entrusted to panchayats. In a few States where royalties were shared, SFCs
have observed that the full amounts of the share were not being released to the local bodies.
Another SFC noted that the revenues from royalty on minor minerals had not grown in proportion to the increase in the consumption of materials. The SFC of another State pointed out that only Class C municipalities were allowed a share of the cess on royalty.
The commission is of the view that mining puts a burden on the local environment and
infrastructure, and, therefore, it is appropriate that some of the income from royalties be
shared with the local body in whose jurisdiction the mining is done. This would help the
local body ameliorate the effects of mining on the local population.
Service charges on government property
Article 285(1) of the Constitution exempts all properties of the Union Government from
all taxes imposed by a State or any other authority within a State, unless Parliament expressly
provides for such levy by law. The FC-XI had recommended that all government properties of
the Union as well as the States should be subject to levy of user charges which should be regulated by suitable legislations. The FC-XIII had urged that the Union Government and the State Governments issue executive instructions that all their respective departments pay appropriate service charges to the local bodies. In a number of States, local body representatives pointed out that the local bodies needed to be compensated for the civic services they provided. In this context, the commission recommend that the Union and State Governments examine in depth the issue of properly compensating local bodies for the civic services provided by them to government properties and take necessary action, including enacting suitable legislation, in this regard.
 
The commission is of the view that the local bodies are not able to meet even a fraction of their expenditure on providing basic services and have largely become dependent on the transfer of one fund or another. While the commission has sought to incentivise additional resource mobilisation through the performance grants, there is a need for the States to empower the local bodies to collect tax and non-tax receipts. To implement the measures outlined above, the State Governments may have to bring in necessary legislations as appropriate. In some cases, the State Governments may need to frame rules and fix rates of levy to allow the local bodies to effectively tap the existing sources of revenues. Alternatively, the local bodies may be given powers to decide the rates themselves, subject to a floor and ceiling rate set by the State. Besides, the State Government should not provide exemptions to any entity from the tax and non-tax levies that are in the jurisdiction of local bodies. In cases where the grant of such an exemption becomes necessary, the local bodies should be compensated for the loss.
Issue of Municipal Bonds
The resource requirements of local bodies for the delivery of basic services and creation
of infrastructure are too large and no single source may be able to provide all the funds needed
for this. In this context, we note that the Finance Commission's role is only to supplement the
resources of the panchayats and municipalities, not substitute them. It is for the local bodies,
particularly the urban local bodies, to take appropriate action, with the support of the State
Governments, to augment their own revenue sources and also explore sources of borrowings,
including issuance of bonds for meeting huge requirements for provision of basic civic services
and creation of urban infrastructure.
The study on municipal finances points out that only ten States reported borrowings by
urban local bodies. Of the Rs. 920 crore borrowed by them in 2012-13, Rs. 854 crore was borrowed by municipal corporations. Of these, municipal corporations in Madhya Pradesh and Maharashtra accounted for Rs. 548 crore. The study observes that market or institutional borrowings are less popular among urban local bodies. The study recommends that State Governments should remove restrictions on the borrowing powers of urban local bodies and give them freedom to mobilise resources, based on their credit ratings.
The commission notes that the market for municipal securities has grown slowly but noticeably after the Corporation of Ahmedabad issued bonds. Since 1998, local bodies in other cities like Nashik, Nagpur, Ludhiana, and Madurai have accessed the capital markets through municipal bonds. In most cases, bond proceeds have been used to fund water and sewerage schemes or road projects. Tamil Nadu and Karnataka have experimented with pooled financing with an intermediary, set up by the State, borrowing for the purpose of on lending to small municipalities which may not be able to access the capital market on their own.
In India, the market for municipal bonds is insignificant and the municipal bonds
have played a limited role as a source of finance for funding urban infrastructure projects.
The commission recommend that local bodies and States explore the issuance of municipal bonds as a source of finance with suitable support from the Union Government. The States may allow the larger municipal corporations to directly approach the markets while an intermediary could be set up to assist medium and small municipalities who may not have the capacity to access the markets directly.
                                                        Excluded Areas
After detailed deliberations on the existing provisions in the Constitution and the ToR,
we conclude that we cannot recommend grants to areas where Part IX and Part IX A do not apply, and also where the States have not enacted laws for establishing duly-elected panchayats and municipalities.
Areas under Schedule VI in Meghalaya, Mizoram, Tripura and Assam, the areas in the
hill districts of Manipur, rural areas of Nagaland and Mizoram will remain outside the ambit of
the measures we have recommended for panchayats and municipalities. However, we note the
weight of the argument put before us by the concerned States that these areas are in pressing need of assistance. We note that the Constitution mandates the Union Government to play a direct role in supporting the development of these areas. However, going by the quantum of the assistance given over the years to these regions by the Ministries in Union Government, we note that the intervention of the Union Government under the proviso to Article 275(1) has been very limited.
The commission urge the Union Government to consider a larger, sustained and more effective direct intervention for the upgradation of administration as well as development of the areas covered under the proviso to Article 275(1) and excluded from the consideration of Finance Commissions in the ToR, in order to bring such areas on par with other areas.
 

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