Decentralisation reality vs rhetoric

Both the ruling party and the Opposition seek to empower local bodies, but rectifying a crucial 'birth defect' in decentralisation is the first step for progress

Even after three decades since the 73rd and 74th amendments were introduced, fiscal empowerment of the third tier of government has remained elusive. These amendments came into effect in 1993, but there has been little progress in fiscally empowering local bodies. Now, both the ruling party as well as the main Opposition have discovered that local bodies have remained unempowered, and see merit in advancing this agenda in their election manifestos. 

While the ruling party wants to empower the panchayats, the Opposition claims credit for the amendment, and promises to prevail upon the states to implement the provisions of Article 243 in “letter and spirit” to make them true institutions of local self-government.  Although both political parties underline the importance of advancing the process of decentralisation, it is not clear how this can be accomplished.

An important implementable rule of fiscal decentralisation is that there should be clarity in the assignment of functions to local governments, adequate resource handles to finance the public services demanded by citizens, and the power to appoint and manage the functionaries providing these services.  Clarity in assignment is like assigning property rights and ensures freedom, efficiency, and accountability.  Similarly, in the absence of adequate and assured revenue handles, local bodies are left with unfunded mandates and cannot perform the tasks assigned.  The power to manage the functionaries is important for fixing responsibility, and ensuring managerial efficiency and accountability by the functionaries.

In the Indian context, it is clear that there is a serious “birth defect” in the decentralisation process introduced through the 73rd and 74th Constitutional amendments, and any attempt at fiscally empowering local bodies should rectify it. The assignment of functions to the third tier is unclear; they are not given adequate revenue handles and have to depend on the subventions from the state and Union governments, and their functionaries are appointed by the state governments. Although the Constitutional amendments seek to make them units of local self-government, the responsibility for this is entirely left to the discretion of the states under Entry 5 of the State List of the 7th Schedule. Thus, even as Article 243-G and 243-W empower rural and urban local bodies to undertake functions of preparing economic development plans and implementation of schemes, including those listed in the 11th and 12th Schedules, the actual devolution of functions is left entirely to the discretion of the state governments. Thus, the functional assignment to local bodies is unclear as it is done at the discretion of the states.

Even more problematic is the assignment of finances.  Articles 243-H and 243X mandate the states to assign the power to levy taxes to the panchayats and urban local bodies. However, the extent of tax powers assigned to them and the power to change bases and rates lie entirely at the discretion of the states, which have been reluctant in assigning tax powers or to give adequate transfers resulting in local bodies invariably being left with unfunded mandates.  An important advantage of decentralisation is the possibility of linking revenue–expenditure decisions, but this is lost in the absence of a proper assignment system. Worldwide, property tax is the most important source of local revenue, but in India it is estimated to generate just about 0.2 per cent of gross domestic product, or GDP. 

The transfers too have been uncertain and inadequate. Articles 243- I and 243-Y require the governor of a state to appoint the State Finance Commission every five years to determine the assignment and devolution of taxes and grants-in-aid to the rural and urban local bodies. However, the history of the last three decades is replete with instances where states do not appoint the Commissions as mandated. When they are appointed, the quality of reports produced is often unimplementable, and the states do not process and place the reports of the Commission in the legislature with its explanatory memorandum on the action taken, as required. By now, at least six State Finance Commissions (SFCs) should have presented their reports, but this has been done in very few states. The states have been giving the local bodies some ad hoc grants, which are both inadequate and uncertain.

With the 73rd and 74th amendments, Article 280, which details the terms of reference of the Union Finance Commission, was modified to include the “measures to augment the Consolidated Fund of the State to supplement the resources of rural and urban local bodies based on the recommendations of the State Finance Commissions”. Although a strict reading of this does not necessarily entail giving grants, and even as the SFC reports are not available, the Union Finance Commissions have been recommending some ad hoc grants. The 15th Finance Commission has recommended a total of Rs 4.36 trillion for five years to urban and rural local bodies.

The late economist Raja Chelliah once remarked, “Everyone wants decentralisation, but only up to his level”.  The states, while constantly complaining about their lack of autonomy, have been reluctant to decentralise decisions below them. Concerned about the poor state of fiscal decentralisation, the 15th Finance Commission imposed entry-level conditions for availing of grants, such as finalising and presenting audited accounts. It also mandated the states to complete the cycle of appointing the SFCs and placing the reports in the state legislature. The 13th Finance Commission too had placed as many as 13 conditions.  However, the problem is that noncompliance with the conditions does not penalise the states; it is the local bodies that lose. 

It is clear that persuading the states to fiscally empower the local bodies does not succeed.  Effective decentralisation requires directly empowering the local bodies. This requires having clarity in the assignment of functions and revenue sources by amending the Constitution to add a Local List in the Seventh Schedule and penalising the state (not local bodies) for not appointing SFCs. It is also important to build capacity and handhold the local bodies in this task. In the end, decentralisation becomes healthy and sustainable in a system where there is a strong demand for decentralisation from the grassroots level.

The writer is a former director, NIPFP,  and a member of the Fourteenth Finance Commission.  He is also the editor of Indian Public Policy Review (www.ippr.in)