Decentralising development

Reforms must be initiated to strengthen local bodies

Local governments can significantly contribute to India’s economic development by delivering basic infrastructure and services — such as irrigation, roads, sanitation, education, and health care. They are in a better position to align local needs with development projects. It is thus no surprise that several developed and developing countries depend on local governments to provide basic services to their citizens. While India has been familiar with local governments since ancient times, this system was disturbed during the British period. It was revitalised after Independence, and the Constitution was amended in the early 1990s to empower the third tier of government. However, it is still not functioning as intended. Fortunately, the need to empower local governments is well accepted. The ruling Bharatiya Janata Party also promised to facilitate fiscal autonomy for Panchayati Raj Institutions in its manifesto.

In this context, a recent working paper published by the World Bank and titled “Two Hundred and Fifty-Thousand Democracies: A Review of Village Government in India” has emphasised a greater devolution of “Funds, Functions and Functionaries” to the local government. With a comprehensive review of literature on the political economy of third-tier governments in India, it proposed measures to enhance the fiscal and administrative capacity to counteract the trend of “re-centralisation” driven by the digitisation of payments. Local governments across the world, on average, receive 10 per cent of total tax revenue. As highlighted in a recent Reserve Bank of India study, in some European countries  — Finland, Iceland, and Switzerland — the amount is more than 20 per cent. Local governments in India, however, are severely resource-constrained and depend on grants from higher levels of government. Panchayats’ own revenues constituted only 1 per cent of the total revenue receipts in 2022-23. Consequently, grants from higher-tier governments become the principal source of revenue, contributing more than 95 per cent of receipts. Limited revenue-raising capacity curtails their autonomy in expenditure decisions. As the 15th Finance Commission noted, “untied” expenditure constituted only 40 per cent of their total expenditure, indicating they function more as executor of central- and state-government schemes rather than a proactive entity in decision-making and policy formulation.

It is thus imperative to enact necessary legislative changes to strengthen local governments. The Constitution should clearly specify the powers and functions of Panchayats and municipalities, across various subjects. Elections to local bodies must be conducted fairly and at regular intervals. Effective fulfilment of these functions, however, will depend heavily on having adequate financial resources. In this context, the Constitution mandates the establishment of a State Finance Commission (SFC) in each state every five years to facilitate greater devolution from state governments to local bodies. However, there have been significant delays in the formation of SFCs in most of the states. Even when they are constituted, devolution remains inadequate. Therefore, it is important to improve the existing mechanism to ensure states make the necessary devolution. A system can also be evolved to allocate funds directly from the Central Finance Commission.

Besides adequate funding, it is important to build capacity and enhance transparency in local governments. For instance, the absence of a consolidated database for receipts and expenditures of local governments poses a constraint. Proper accounting will not only improve accountability but also facilitate informed decision-making and efficient resource allocation. Further, as recommended by the World Bank paper, an independent and credible mechanism can be developed to evaluate local-government performance. It is time for India to start strengthening local governments to improve developmental outcomes.