Finance Commission must focus on strengthening local bodies: Raghuram Rajan

Business Standard

23-07-2025

Former Reserve Bank of India Governor Raghuram Rajan on Wednesday said the 16th Finance Commission should focus on handing over more funds to local bodies, including municipalities and panchayats, to empower them to address issues affecting the people more effectively.
Speaking to news agency PTI, Rajan noted that the previous finance commissions devolved more funds to the local bodies. He said, '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.'
The Finance Commission, established under the Indian Constitution, plays an important role in improving the financial health of municipalities. The commission evaluates the fiscal condition of municipalities and advises state governments on various aspects of fiscal decentralisation.
Highlighting the contrast with other major economies, Rajan noted that local government employees in India are significantly lower than in countries like China and the United States.
Rajan also called for the need to decentralise in a large country like India, noting that the country is overly governed from the Centre and state capitals. He added, 'I think the 16th Finance Commission should focus on making that happen through carrots and potentially sticks.'
Panagariya urges local resource boost
It's noteworthy that in November last year, 16th Finance Commission Chairman Arvind Panagariya asked the local rural and urban bodies to focus on raising their resources, stating that such a move will mobilise the citizens in terms of their expectations and demands from the local bodies.
Recently, Panagariya also pointed out that most states have urged the Union government to raise their share of the tax pool to 50 per cent. According to a PTI report, states currently receive 41 per cent of the divisible tax revenue, while the Centre retains the remaining 59 per cent.
Rajan's views on PLI scheme
While speaking to PTI, the former governor also shared his assessment of the government's Production Linked Incentive scheme and added, 'I do not think we have any strong public data to evaluate the PLI scheme.'
With all government programmes, he said, there has been some success as the country is now exporting more cell phones. However, he questioned, '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.'
In 2021, the Central government introduced PLI schemes for 14 crucial sectors, including telecom, electronics, pharma, textiles, and auto. The scheme, launched with a total allocation of ₹1.97 trillion, aims to boost domestic manufacturing and enhance export competitiveness.
Rare earth curbs
Commenting on the rare earth export curbs from China to India and other countries, Rajan stated, '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.'
Commenting on the semiconductor sector, Rajan said that while some sort of 'antagonistic' power could restrict India's chip access, building a complete chip-making ecosystem domestically would be prohibitively expensive.