By Sumarbin Umdor
The Sixth Schedule is a key feature of asymmetry federalism in India, also referred to as asymmetry within asymmetry. This asymmetry is also manifested in their fiscal arrangement. While the political aspects of the Sixth Schedule and the Autonomous District Councils (ADCs) have been widely covered over the years, the fiscal aspects of these institutions remain underexplored. This is a significant gap, as understanding the fiscal policy, revenue generation, and expenditure patterns of ADCs (ten such councils in 4 states) is crucial to evaluating their governance efficacy and impact on devolved functions.
Limited Role of Finance Commissions: The Finance Commission plays a critical role in recommending fund transfers from the Union to States and local governments. However, ADCs have received sporadic attention from successive Finance Commissions. Notably, in the Finance Commission purview, the Sixth Schedule remains part of the areas excluded from the provisions of the 73rd and 74th Constitutional Amendments. The 13th Finance Commission recommended grants of Rs. 1,357 crores for the excluded areas, whereas the 14th Finance Commission did not allocate grants to these areas. However, the 15th Finance Commission provided grants for these areas. An evaluation of the finances of different states by successive commissions provides only limited insights into the finances of the ADCs. This narrow coverage of ADC finance under the Finance Commission studies and other reports shows the gap in understanding the finances of the ADCs.
Revenue Challenges and Deficiencies in Accounting and Auditing: ADCs possess constitutional authority under the Sixth Schedule to mobilise and utilise financial resources for devolved functions. In addition to shared revenue from the state government, ADCs also receive grants in aid for undertaking different state government schemes. Yet, multiple studies identify common challenges in revenue mobilization and expenditure. A common thread found in these studies is the low own revenue generation, the high dependency of ADCs in the transfer from state governments and a high proportion of revenue expenditure heads, including salary and administrative costs.
The ADCs also have an underdeveloped system of accounting and financial reporting. Different ADCs follow different accounting practices, although the CAG suggested a uniform accounting system in 1977. Compared to the accounting system introduced in the Panchayats and Municipalities, their accounting practices have not undergone any significant transformation over the years. All the ADCs use a cash-based single-entry system for transactions. Comparatively, Panchayats also use a cash-based single-entry system, whereas municipalities are suggested to use an accrual-based double-entry system. Most ADCs differ in terms of the classification of their accounting heads, whereas Panchayats and Municipalities have a simplified classification into three heads. While the internal audit mechanism varies across ADCs, the internal audit in Panchayats and Municipalities is designated to the State Audit Agency under the supervision of the CAG. The external audits for ADC, Panchayats and Municipalities are all done by the CAG of India.
Issues of Accountability and Direct Funding: There have been issues of accountability in the finances of ADCs. Reports of corruption and mismanagement of funds are also found across ADCs of different states over the years. The audit of ADCs by the CAG of India is not being done regularly due to the failure of the councils to furnish necessary documents to the auditors. It has also been observed that the grassroots-level bodies under the ADCs have not formalised the accounting and auditing mechanism, unlike their Panchayats counterparts, which have a model accounting system and online portals for accounting and auditing.
ADCs do not receive direct transfer from Finance Commissions in terms of Grants in Aid. The funds received by the ADCs from the Centre are transferred through the state government. This has led to a demand for direct funding by different ADCs. In 2015, the NITI Aayog recommended one-time assistance of Rs. 1000 crore to the ten ADCs that had been sanctioned through the Ministry of Finance. This had been the most significant transfer the ADCs received in recent years from the Centre. However, this resource pool had not been fully tapped by the ADCs due to their failure to submit utilization certificates on time.
Another gap in resource sharing is that the ADCs are considered rural local governments, although there are provisions for the arrangement of town committees in the Sixth Schedule. Therefore, there is no mechanism of resource sharing with town committees of the ADCs for urban development as they are not a part of the municipalities under the 74th Amendment of the Constitution.
Reforming ADC Finances
To improve the financial health and accountability mechanisms of the ADCs, several key reforms are necessary. ADCs must augment their own tax and non-tax revenue collection, including from sources such as professional tax and other local levies. At the same time, there is a need to reorient expenditure patterns—shifting away from high spending on revenue heads like salaries and administration, and channeling more resources toward capital formation and development projects.
This reallocation can be achieved by enforcing fiscal discipline and curbing gratuitous and non-essential expenditures. A successful restructuring of expenditure would enhance the role of ADCs, allowing them to function not only as custodians of tribal culture and identity but also as drivers of grassroots development.
The 16th Finance Commission recommendation could play a critical role in this transformation by linking financial transfers to ADCs with their tax effort and expenditure reforms. Such an approach would incentivize improved revenue generation and responsible fiscal management, thereby strengthening the institutional capacity of councils in the long run.
The devolution of resources to the ADCs should be subjected to utmost accountability and transparency. The council accounting methods had been revised partially by the Comptroller and Auditor General (CAG) which introduced the revised list of Major and Minor Head for the accounting system for the Tripura Tribal Area Autonomous District Council and the Bodo Territorial Council. To strengthen the CAG’s effort towards this, technical inputs from specialized bodies like the Institute of Chartered Accountants of India may be sought for preparing accounting manuals for all the councils. By allocating resources for this purpose, the 16th Finance Commission could start accounting reforms in the ADCs which have been an ongoing process in the Panchayats and Municipalities. Progress in the implementation of accounting reforms and regular furnishing of accounts for audit could be further used for allocating performance grants to the ADCs.
Another critical area where the ADCs’ finances need reformation is found in the design of transfer to urban towns and village local governments. While there are provisions for the town committees in the Sixth Schedule and several towns are found in the ADC areas across the states, the resources devolved to the councils at the grassroots level so far have been part of the grants to the rural local bodies for the Panchayats only. The 16th FC could reform this by recognizing the existence of urban and rural areas in the Sixth Schedule areas and designing the transfer mechanism accordingly.
Finally, one of the key steps in enhancing the process of fiscal transfer to ADCs lies in their inclusion in the Terms of Reference of the next Finance Commission. As previously mentioned, this is manifested in the irregular and sporadic transfer to ADCs as parts of excluded areas by different commissions over the years. Including ADCs in the transfer of resources as a separate constitutional local governing body will be helpful for their smooth operations.
The fiscal empowerment of ADCs is integral to strengthening their role not just as custodians of tribal identity and autonomy, but as active agents of grassroots development. Addressing the current lacunae in fiscal transfers, accounting practices, and transparency will pave the way for more effective governance in India’s Sixth Schedule areas.
(This is an extract from an article title ‘Fiscal Aspects of the Sixth Schedule’ by the author and his PhD student, Dr. K Vanlalhruaitluanga, published in the Economic and Political Weekly in August 2025, and was part of the presentation by the author to the Chairman and Members of the 16th Finance in May 2024)