Bring government closer to people

To make India an advanced economy by 2047, devolving more power to local governments is crucial, and the 16th Finance Commission can play a pivotal role in this regard

As India prepares to become an advanced economy in the next 25 years, a key ingredient to making the leap will be devolving governance functions to lower levels of government. A distinguishing feature of advanced economies is their significant allocation of revenues and responsibilities at the local government level. These include primary education, health care, basic law and order, and civic infrastructure — sewage, water supply, road maintenance and local zoning and regulations. The 16th Finance Commission, which is being set up, can be used to lay out the road map for this transformation and, thereby, also implement the 73rd and 74th amendments to the Constitution, which were intended to empower local government.

India’s share of sub-national (state plus local) spending at 60 per cent of total spend is quite high at its level of development. The 14th Finance Commission shifted about 10 per cent of the divisible pool share of resources to the state level, resulting in a total share of 42 per cent. The 15th Finance Commission basically kept the divisible pool share but it had to account for J&K becoming a Union Territory, and so it kept 1 per cent back and left 41 per cent for the states. As a result, sub-national spending, which was about 50 per cent in 2013-14, jumped to about 60 per cent of the total government spending. Other large federal states spend less. Brazil spends around 50 per cent at the sub-national level, Germany 46 per cent, the United States around 40 per cent, and Indonesia around 35 per cent. Only Canada and China spend more than 70 per cent at the sub-national level. India’s share of sub-national spending when looked across the world is high.

Shifting resources from the Centre to the states that was done by the 14th Finance Commission by itself does not help. Having more money to spend in Lucknow, or Patna, or Mumbai really does not help the people in these states if it does not reach the lower levels of government. But the devolution from the Centre to the states, which was proposed by the 14th Commission almost a decade ago and was accepted by the 15th Finance Commission, cannot be reversed as it is too late. For genuine devolution, the focus must now shift to looking at ways to ensure more resources flow to local institutions, such as panchayats and mayors, a point also made by Vijay Kelkar, chairman of the 13th Finance Commission, in his Sukhamoy Chakravarty Lecture of 2019. Without this, many of India’s ambitious schemes such as the National Education Policy, Swachh Bharat, Smart Cities, to name a few, will remain grand designs on paper but will stall in their implementation.

For example, without greater authority in the hiring and monitoring of teachers in local schools, teacher absenteeism will not be addressed however much we modernise our education policy and curriculum. Similarly, many smart city projects are hampered by the inability of city mayors to deliver on their components of the scheme. Besides better implementation, the costs for hiring government employees, teachers, and health workers also decline if the hiring is done at the local government level than at the state level. The cost of delivering services at the same time improves and is made more effective and monitorable.

Going forward, where India must focus is the share of local government, which remains very small. India’s local government spend is less than 4 per cent of total government spending. This share is much smaller than in most advanced economies, but also much lower than in centralised authoritarian governments like China, where local government spending exceeds 50 per cent of total spending by government. China is an outlier in this, but in most advanced economies, the share is much higher than in India. The 28 countries in the EU spend 23.2 per cent at the local level, Canada 21 per cent, the US 29 per cent. In Latin America, local government spending is around 12.7 per cent and most analysts feel it should be much higher. If India is to map its way towards becoming an advanced economy by 2047, it must prepare a road map for greater devolution from state-level spending to local governments, and raise more local government revenues.

Local governments must also be allowed to raise their own resources. The best way to do that is to allow for an increase in property taxes and higher user fees. India has a very low property tax rate, accounting for around 0.5 per cent of its total tax revenue and only a little over 0.1 per cent of GDP. The OECD countries on average collect about 5.6 per cent of total tax revenue in property taxes (about 1.9 per cent of GDP) with Korea at 15.1 per cent and the US, UK and Canada at over 11-12 per cent at the highest levels. Among BRICS countries, China collects around 10 per cent of its revenue through property taxes, and Russia and South Africa between 4 and 5 per cent. 

Property taxes are the most difficult to avoid and must be paid even for improperly registered properties, so their costs of collection are also relatively low and they tax wealth not income. Objections to higher property taxes, such as from low-income elderly owners, can be handled through different means such as grandfathering clauses that exempt them during their lifetime. In many developed countries, in addition to property taxes, municipal-level income and business taxes are also used to raise revenue for local government’s use. But in India, the easiest way to raise revenue for local authorities would be property taxes on housing and commercial property applied uniformly across the state. The 15th Finance Commission provided grants to states subject to them updating their property tax rates and improving collection. That route could be used to discuss raising rates by the 16th Finance Commission to increase local government resources.

Shifting responsibilities and resources to the local government level cannot be done overnight. It will require improving the capacity of local government to deliver services that are now being done through state governments, but a road map for it must be laid now. The 16th Finance Commission will be a good place to start this discussion, if India is to become an advanced economy by 2047.

The writer is a senior visiting professor at ICRIER and a distinguished visiting scholar at the Institute for International Economic Policy at George Washington University. He is also the co-author of Unshackling India, HarperCollins, 2021