Developing A Quantitiative Framework For Determining Devolution Of Funds From The State Government To Local Bodies

This paper is concerned with devising an approach to intergovernmental transfers, from State Governments to Urban Local Bodies. Our approach will comprise of five cardinal principles abbreviated as PEACE: (a) Political Feasibility (b) Equity (c) Adequacy (d) Computational Transparency and (e) Efficiency. This approach consists of two parts: One, need-based transfers and two, efficiency-based transfers. For the first, we need information on certain characteristics, which are available only at the district level e.g. income levels, indicators of backwardness, etc., while certain others are only available at the level of ULB such as area population. Given the difficulty involved in reconciling the characteristics at the district level and those at the local government level we have adopted a three-stage strategy to operationalise our approach to devolution of finances. Stage 1: We use some specially selected criteria in combination with estimated shares for each district to arrive at the disbursement to each district. Stage 2: Having obtained the disbursement for each district we then seek to employ certain other criteria to determine disbursement among each class of urban local governments, whether MC or MC-A or MC-B or MC-C. Stage 3: Finally, we develop a method for distribution of funds to each ULB within a class of ULB. Efficiency-based transfers looks at efficiency of each ULB in terms of: (a) Its fiscal balance and changes in it from year to year (b) Recovery of property tax arrears (c) Expenses on administration and (d) Provision of public goods. The devolution scheme developed above has been tested for almost 250 ULBs of Maharashtra and found to be very useful in estimating devolution for each local body. However, the scheme is robust enough to be applied to other states, with, of course, the proviso that sufficient data on the selected criteria are available.