Finance Commission needs to focus on strengthening local bodies, says Raghuram Rajan

The 16th Finance Commission should focus on devolving more funds to local bodies, municipalities and panchayats to enable them effectively deal with problems facing the people, former RBI Governor Raghuram Rajan has said. Observing that previous finance commissions devolved more funds to states, Rajan told PTI Videos, "Now we need to focus also on devolving funds from states to municipalities to panchayats, etc. That third level of devolution is what we need far more of." Citing examples of China and the US, Rajan pointed out that the number of local government employees in these countries is significantly higher than the share of local government employees in India. Emphasising on the need for more decentralisation in a large country like India which is overly governed from the Centre and state capitals, he said,"I think the 16th Finance Commission should focus on making that happen through carrots and potentially sticks." Recently, 16th Finance Commission Chairman Arvind Panagariya had said that a majority of states have recommended that the Centre increase their share in tax revenue distribution to 50 per cent. Currently, states receive 41 per cent of the divisible tax pool, while the remaining 59 per cent is retained by the Centre. The Finance Commission, mandated by the Indian Constitution, plays a crucial role in strengthening the financial position of municipalities (urban local bodies). It reviews the financial position of municipalities and makes recommendations to state governments on various aspects of fiscal devolution.When asked what is his assessment of Production Linked Incentive (PLI) scheme, Rajan said, "I do not think we have any strong public data to evaluate the PLI scheme." He noted that as with all government programmes, there is some success as India is exporting more cell phones now. "But has it (PLI scheme) done enough to move the needle on jobs in a big way? I think at least...the job numbers you see in the periodic labour force surveys (PLFS) suggest not yet," Rajan, currently a professor of finance at Chicago Booth said. In 2021, the PLI scheme for 14 key sectors including telecom, electronics, pharma, textiles and auto was announced with an outlay of Rs 1.97 lakh crore to enhance India's manufacturing capabilities and exports. Responding to a question on China's rare earth material exports curb to India and other countries, Rajan said,"We need a strategic view of different industries and ask where we can be held up by bottlenecks, and where it is relatively easy for us to undertake production to elevate those bottlenecks." He noted that sometimes some sort of antagonistic power can limit "our access to chips, but it is very, very costly for us to have an entire chip manufacturing sector." "So we have to find alternative ways of getting those chips...for example through creating domestic buffers of key chips," he said. According to Rajan, in some areas, India has the opportunity to produce more rare earth metals."For example, I understand there are reserves of some of these rare earth materials in Kashmir. Could it be a win-win situation to create more employment in Kashmir which is really very important both from an economic perspective and also from a geo-strategic perspective."