FOR OFFICIAL USE ONLY REPORT OF THE FOURTH STATE FINANCE COMMISSION WEST BENGAL PART – I Abhirup Sarkar Professor Indian Statistical Institute, Kolkata Chairman Dilip Ghosh, IAS (Retd.) Ruma Mukherjie Member Member Swapan Kumar Paul, WBCS (Exe.) (Retd.) Member-Secretary FEBRUARY, 2016 BIKASH BHAVAN, SALT LAKE, KOLKATA Preface The Fourth State Finance Commission of West Bengal was set up towards the end of April 2013. However, it was not until October that it got an office space and some minimal support staff to become functional. The five months lying between April and October was spent on informal discussions with academicians and government officials to gather some initial information and form preliminary ideas which helped the Commission in its later deliberations. The Commission had initially started with two members; subsequently the member secretary was appointed in June, 2013 and another member in July, 2014. Apart from commenting on the overall working of local governments in West Bengal and the condition of state finance, the Commission had to undertake three broad exercises. First, the total sum of money to be devolved to the rural and urban bodies that the Commission were to recommend had to be arrived at. Second, given the total recommended sum going to the rural bodies, the Commission had to determine the sharing rule of this sum across the three tiers of Panchayati Raj Institutions, namely the Zilla Parishad, the Panchayat Samiti and the Gram Panchayat. Third, the distribution of devolution within each tier and within the urban bodies had to be decided upon. The Commission’s recommended devolutions to the rural and urban bodies were founded on three basic considerations: (a) the actual amounts devolved in the past as a percentage of the state’s own tax revenue, especially the pattern of devolution made in the recent past; (b) the magnitude and pattern of devolution by the Fourteenth Finance Commission to the local bodies of the state; and (c) the actual requirement of the local bodies for their smooth functioning. The principle adopted by the Commission is to ensure the required fund flow to the rural and urban bodies as far as possible subject to the availability of funds from the centre and from the state. In particular, while making its recommendations, the Commission has kept in mind the financial stringencies of the present government due to an inherited debt overhang. All these considerations have led the Commission to recommend a devolution that is both desirable and practicable. The distribution across the different tiers of rural bodies was primarily guided by the fact that the Fourteenth Finance Commission has devolved a large amount of funds to the Gram Panchayats, but absolutely nothing to the higher two tiers. Consequently, devolution to the lowest tier was kept to a minimum, distributing the rest between the two higher tiers. Horizontal allocation within any specific tier, on the other hand, was arrived at on the basis of a formula I which gave weights to population, area, backwardness and the degree of urbanization of the local bodies. The last criterion was chosen to take into account the special needs of Panchayat areas which are still officially classified as rural but exhibit urban characteristics. It was observed by the Commission that often assets acquired by local bodies are fast depreciated due to the lack of proper maintenance. The Commission, therefore, deliberated at some length as to whether a part of the funds going to the local bodies should be specifically directed towards maintenance as opposed to making them untied. For the rural bodies, the Commission, decided to keep the devolved funds untied because of the following reasons. The extensive visits of the Commission to selected Panchayati Raj Institutions spread over all the districts of the state (except Darjeeling Hill Area where elected bodies of local governments are not in place at present) revealed a lot of variations across the local bodies. Variations visible in economic dimensions implied that a backward rural body with a small menu of assets would require less money to spend on maintenance than its wealthier counterpart. Earmarking a certain percentage of funds for maintenance would not, therefore, serve the interest of the former. Variations were also visible with respect to the specific problems a local body would typically face every day. Among other things, geographical locations, demography and social history were found to play important roles in distinguishing one local body from another in terms of their needs. The Commission felt that since needs are diverse, the choice of items on which funds ought to be spent should not be centrally decided but should rest in the hands of the people at the grass root level. Devolution for urban bodies started on a different track. For urban bodies, their expenditure on service delivery as reported to the Commission constituted the primary benchmark for devolution. The use of different benchmarks for rural and urban bodies was necessary partly because unlike the rural bodies, the list of services to be provided by the urban bodies is well- defined so that the expenditure incurred on these services is easily discernable. Moreover, the data on actual expenditure as reported to the Commission seemed more consistent for municipalities and municipal corporations than for the rural bodies. The primary benchmark amount, as obtained from the reported expenditure, was adjusted in view of the increased fund flows from the Centre through Fourteenth Finance Commission grants. Devolution across urban bodies followed a formula which puts weights on area, population and backwardness to determine the individual devolution of each urban unit of local governance. Finally, a part of the urban devolution has been earmarked as maintenance grants which can be used only to maintain II existing assets and to meet liabilities arising out of user charges like electicity tariffs. The Commission has recommended some additional devolution, for both urban and rural bodies, as performance grant. Eligibility for performance grants entails timely use of central funds as well as maintenance of updated and audited accounts. The Commission decided not to set satisfactory own fund generation as a criterion of eligibility partly because the capacity or ability of tax and non–tax revenue generation widely varies across local bodies and partly because the upper two tiers of Panchayat do not have the power to tax its residents. The members of the Commission would like to thank a large number of individuals. A complete list of these wonderful people and institutions is delegated to a separate page of this report. Here we mention some who have been particularly helpful and encouraging. First and foremost, the Commission would like to thank the honourable Chief Minister of West Bengal Smt. Mamata Bandyopadhyay and the honourable Finance Minister of West Bengal Dr. Amit Mitra for giving its members the opportunity to work for the Finance Commission and enhance their understanding of the West Bengal Economy in general and rural West Bengal in particular. Shri Utpal Chakraborty, WBCS (Exe), Research Officer of the Commission, with an inexorable energy and dedication, prepared the first draft of a major portion of this report. Indeed, without his incessant hard work and persuasion this report could never have been completed. No amount of thanks would be adequate to acknowledge his contribution. Thanks must go to Professor Achin Chakraborty and Dr. Subrata Mukherjee of the Institute of Development Studies Kolkata (IDSK) and Dr. Chiranjib Neogi of the Indian Statistical Institute (ISI) who played very important roles in preparing the entitlement tables. The members of the Commission would like to thank Professor Sugata Marjit, Vice Chancellor of Calcutta University and Professor of Economics at the Centre for Studies in Social Sciences, Calcutta (CSSSC) along with his team members Dr. Tushar Nandi also of CSSSC and Dr. Jayanta Dwibedi of BKC College for helping the Commission with their penetrating analysis of the current state of West Bengal Finance. The Commission owes thanks to Dr. Sandip Mitra of the ISI and his team members for their insightful account of the problems of auditing and monitoring of local governments in West Bengal and to Dr. Chiranjib Neogi and Professor Amita Majumdar of the ISI for their excellent report on Municipalities of West Bengal. The Commission III would also like to thank Professor Achin Chakraborty and his team members from IDSK for their perceptive study of West Bengal Panchayats. The members would like to thank Professor Dilip Mukherjee of Boston University, Professor Pranab Bardhan of UC Berkeley and Profesor Maitreesh Ghatak of the London School of Economics for helpful conversations and advice at various stages of work of the Commission. The Commission would like to thank the P&RD and MA Departments of the state government for facilitating, through their satellite channels and conference facilities, the Commission's interactions with the rural and urban local bodies. These Departments are also to be thanked for assisting the Commission in collecting the data from the local bodies. In a similar vein, thanks would go to the Department of Science and Technology of the Government of West Bengal for providing the Commission satellite data on areas of local bodies. Last but not the least, the members record their appreciation for the support staff of the Commission whose excellent services made the work environment conducive and gracious. Abhirup Sarkar Chairman IV ACKNOWLEDGEMENTS The Fourth State Finance Commission in the course of preparation of its report got valuable help and co-operation from the following persons and organisations. The Commission is grateful to them: 1. Smt. Mamata Banerjee, Chief Minister, West Bengal 2. Dr. Amit Mitra, Minister-in-Charge, Finance & Excise, Commerce and Industries, West Berngal 3. Shri Subrata Mukherjee, Minister-in-Charge, Panchayats and Rural Development, Public Health Engineering, West Bengal 4.