Haseeb A Drabu: Encroachment, not empowerment

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The UPA government has revived Rajiv Gandhi's proposal of the Centre funding the panchayats directly. In the Presidential address it has been emphatically stated that, "The Government will ensure that all funds for poverty alleviation and rural development programmes get directly credited to Panchayat bodies to enable them to serve the people better." Now, as then, the reasons for this have been couched in terms of empowerment, decentralisation and effective participatory democracy. In reality, it is quite the opposite.

First, what are the amounts that the government could be talking of? The major schemes with an exclusively rural focus have a budgetary allocation of Rs 22,000 crore to Rs 25,000 crore in 2003-2004. Add to this the money that will flow to the panchayats through the Twelfth Finance Commission which could be anywhere between Rs 5,000 crore and Rs 8,000 crore.

Then there are the RIDF loan provisions and the rural component of numerous other state schemes. Adding up all this, the government is looking at transferring about Rs 35,000 crore or about 1.5 per cent of the GDP directly to the 2.3 lakh village panchayats.

Anyone with a nodding sense of the institutional capacity of panchayats to raise resources and spend money should know the chaos and wastage that will be in store.

What makes it worse is that before making such a change, the Centre has not even underwritten the expenditure additionality consequent upon the formation of the third tier.

Prior to "empowering" panchayats and making them the new spending kiosks of India, the Centre should have provided funds for the initial establishment costs of constructing and equipping minimal office facilities which most panchayats lack. This issue has been conveniently left to be addressed first by the State Finance Commissions and then the National Finance Commission.

In addition to this, there are systemic issues which will not only strike at the roots of the existing three-tier fiscal-federal structure but will more importantly distort the governance structure. The worst hit by this proposal will of course be the state governments.

As it is, the states are in a bind. Following the setting up of the third tier, the State Finance Commission's recommendations have by and large taken the view that even the local core functions need funding through transfers from the state. Their recommendations have therefore been confined to transfer of resources from state governments.

Not only does this reduce the panchayats and local bodies to the status of an agency, which is accountable upwards rather than downwards to a taxpaying electorate, it puts a great fiscal stress on state finances. There is no corresponding transfer of functions that has happened alongwith the transfer of finances.

With the State Finance Commissions doing little to expand the local fiscal domain, the formal introduction of the third tier has not led to any convergence in the cross-state variation in local resource generation.

All this has meant that the states are getting squeezed from below by the panchayats as far as expenditure is concerned. At the same time, on the revenue side, because of the logic and design of tax reforms, like uniformity in sales tax and a unified VAT, the states are faced with a serious reduction in the flexibility to raise revenues.

This at a time when their responsibility to spend on areas like health and education is on the rise. All these trends are bound to impoverish the states, reduce the significance and impair their ability to deliver.

Finally, there are also issues of political economy insofar as the power equation between the Centre and the sub-national tiers is concerned. The state governments, can collectively, if not individually, stand up to the Centre for unfair or biased norms of transfers.

The process of consultation, though far from perfect, is at least institutionalised in the form of the Finance Commission and the Planning Commission. It is difficult to see how the 2.3 lakh panchayats are going to redress their grievances about discriminatory transfer norms vis-a-vis the Centre.

Admittedly, there is a need to restructure the fiscal devolution to the rural tier. But this should start with involving the panchayats in decision-making so that local priorities determine the deployment of expenditure on rural development, since prioritisation from afar has led to incomplete and wasteful utilisation.

This can only be done by respecting the existing institutional mechanism of planning wherein a state has a state sector plan and a district plan. The shares of district plan must be increased and be an aggregration of the panchayat priorities. If that is done, the states will benefit insofar as their state sector plans don't have to compete with the district plan outlays.

On their part, the panchayats, who lack the institutional capability to spend effectively such large magnitudes of money, will be better placed to utilise the money with the help of the district machinery.

haseebd@business-standard.com