REPORT OF THE THIRD STATE FINANCE COMMISSION RAJASTHAN (FOR 2005-2010) JAIPUR FEBRUARY, 2008 PREFACE Urban Local Bodies and PRIs have now acquired constitutional Status after the enactment of Constitution (Seventy third) Amendment Act' 1992 (which will be referred hereinafter as Amendment Act 1992).The Amendment Act' 92 in Part IX and IX 'A" of the Constitution of India has made mandatory provision in Article 243-I for constituting of a Finance Commission by the Government of the State to review the financial position of the Panchayats and to make recommendations to the Governor as to : (a) the principles which should govern - (i) the distribution between the State and the Panchayats of the net proceeds of the taxes, duties, tolls and fees leviable by the State which may be divided between them under this Part and the allocation between the Panchayats at all levels of their respective shares of such proceeds . (ii) the determination of the taxes, duties, tools and fees which may be assigned to, or appropriated by, the Panchayats. (iii) the grants-in-aid to the Panchayats from the Consolidated Fund for the State. (b) the measures needed to improve the financial position of the Panchayats. (c) any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the Panchayats. Article 243 (y) also makes similar provisions analogous to Article 243-I for constituting a Finance Commission to review the financial position of the Municipalities and make recommendations to the Governor as in the case of Panchayats of the State. Under the above constitutional provisions, the Governor of Rajasthan has constituted the present Third State Finance Commission on 15th Sept., 2005. I am grateful to the State Government for reposing confidence in me by appointing me as the Chairman of Third State Finance Commission entrusting me the onerous duties and responsibilities of Third State Finance Commission. The Commission has submitted its report to H.E. The Governor of Rajasthan on 27.2.2008. Prior to the enactment of the Constitution- (Seventy-third) Amendment Act' 92 there was no regular or occasional system to review the financial position of the Panchayats and Municipalities which are the basic units of the Local Self Governance conceived on the principles of Democratic Decentralisation. We had the privilege being the Third State Finance Commission to peruse the report of the State Finance Commission's (First) and State Finance Commission (Second) headed respectively by H'ble Shri K.K. Goyal and Shri Heera Lal Devpura. We have been immensely enriched and benefited by the same. We have submitted this report of the Third Commission after examining in detail the financial position of the various tiers of PRIs and various tiers of ULBs of Rajasthan. In our report we have made concrete suggestions to raise the revenues of the PRIs and ULBs. The Ho'ble Chief Minister in the last four years has made Herculean efforts by declaring various policy initiatives in the last four budgets and by concretely taking steps as per the declared policy initiatives which has ultimately resulted in the surplus budgets in the year 2006-07 and 2007-08. It is well known that due to huge investments made in the basic infrastructure of Rajasthan in the last four years, the State has come out from the category of the "Bimaru State" and has joined the league of important developing States of India. The basic principles which the Commission has continuously kept in view are as under: 1. The fiscal need or revenue adequacy principle of fiscal federalism states that to ensure better accountability of any level of government, its ability to raise revenues from its own sources should match as closely as possible with its expenditure needs. 2. The strength of a local government system vitally depends upon the extent of finances available to them to effectively tackle their assigned responsibilities The Commission has examined the financial position of the PRIs and ULBs from the angle of the above principles and have made many recommendations and suggestions to take policy initiatives to substantially increase and to mobilize the own tax and non tax resources of PRI's and ULBs. The efforts of the PRIs and ULBs in this regard will see the light of day if they are fully backed and inspired by the State Government in all respects incentivising these institutions to achieve the target. The Commission has suggested ways and means in its report to enhance own income of PRIs as well as ULBs so as to make Rajasthan as a premier state in the overall scenario of the developed states of India Maharastra, Karnataka, Kerala and Gujrat, Though this Commission was constituted at one go by the State Government, yet the Commission became fully functional only after four month's period i.e. Feb., 2006, The biggest hindrance which this Commission has faced is similar to the one faced by its predecessor Commissions i.e. lack of proper personnels on deputation from the State Government. In absence of the same, the Commission was forced to engage persons on contract who were frequently changed by the agency through which they were recruited. The Third State Finance Commission of Rajasthan also faced the same difficulties as regards authentic data of income and expenditure, particularly of the Gram Panchayats, which are numbering 9189 in Rajasthan. After great efforts this Commission could collect data for 1198 Gram Panchayats of various districts to which a reference has been made in our report also. For eliciting information and relevant data from each tiers of PRIs and ULBs a prepared questionnaire to which they were expected to respond was sent. Such questionnaires were also sent to all the ULBs of Rajasthan numbering 183 and all the 32 Zila Parishads and 237 Panchayat Samities and 9189 Gram Panchayats. The questionnaires to Gram Panchayats were sent through the Panchayat Samities and through B.D.O. and they were requested to collect relevant information from Gram Panchayats falling in their jurisdiction. This process for collection of data from PRIs and ULBs took too much time, but in the matter of ULBs, the collection of data was facilitated directly by all the tiers of ULBs along with Director of Local Bodies. The methodology adopted by the Commission included collection of information and material and analysis thereof, inviting suggestions from concerned personnel, meetings and discussions with eminent and experienced persons, inviting memorandum from the Departments of Panchayati Raj, Finance Department and Local Self Government, visits to 10 districts and discussions with the elected representatives and officers of PRIs and ULBs etc. I take this opportunity to express my gratitude to H.E. the Governor of Rajasthan Smt. Pritibha Patil (now President of India) and Chief Minister Smt. Vasundhara Raje for entrusting this constitutional assignment to me. I am also thankful to Shri Kalu Lal Gurjar (Minister for Panchayati Raj); Sh. T. Srinivasan, Sh. Rajiv Maharshri, Sh. Ram Lubhaya, Sh. Lalit K. Panwar, Sh. D.B. Gupta, Sh. Subhash Garg & Sh. Tanmay Kumar (All IAS) Sh. M.L. Mehta, Ex. Chief Secretary, Sh. D.R. Mehta, Ex. Chairman of SEBI, Sh. L.C. Gupta, IAS (R) & Sh. Bhagirath Sharma, IAS (R) for their very valuable suggestions given during the course of discussions. I am highly thankful to the Member Secretary of the Commission Shri Ramavtar Raghuvanshi for his untired zeal and herculean efforts to see that the report of the Third State Finance Commission becomes highly relevant and meaningful in the context of State Government's efforts for a Resurgent Rajasthan which has come out of the category of the "Bimaru State" into the category of a developing state. In the preparation of the report I received the unstinted co- operation of the entire staff of the Commission who have made their contribution in a variety of ways. I record my appreciation for the contribution that they have made. I would be failing in my duty if I do not bring on record the help of Dr. O.P. Bohra of NIRD rendered in finalising the report. Shri Kana Ram Sharma helped in computer typing very efficiently. I gratefully acknowledge the appreciable service rendered by Shri Shanti Lal Jain, Dy. Director Statistics (R) and his team in collecting and analysing the data. I do hope, the report of the Commission will be helpful in improving the finances of the PRIs and ULBs and will contribute to the betterment of their functioning in keeping with the aspirations of the people and the people's representatives. Jaipur (MANIK CHAND SURANA) Feb. 27, 2008 CONTENTS CHAPTER Page No. I Introduction 1-18 II Panchayati Raj Institutions in Rajasthan 19-99 III (A) Urban Local Bodies In Rajasthan 100-133 (B) Municipal Laws in Rajasthan - Evolution and 134-144 Status IV State Finances-An Assessment 145-156 V Finances of Panchayati Raj Institutions 157-204 VI (A) Finances of Urban Local Bodies 205-270 (B) Reforms in Urban Areas - India's Best 271-303 Practices VII Fiscal Monitoring-Accounts and Audit of PRIs and 304-326 ULBs VIII Devolution to Panchayati Raj Institutions and 327-367 Urban Local Bodies IX Year- wise Devolution and Summary of 368-388 Recommendations D:\Documents and Settings\FINANCE\Desktop\SFC REPORT\SFC Report 07-08\Annexure\contents.doc ANNEXURES NO. Particulars PAGE NO. 1.1 Governor's order dated September 15, 2005 389-390 constituting the Commission 1.2 State Government letter dated January 31, 2006 391 regarding interim Report 1.3 List of district and field meetings held 392 1.4 List