LOCAL GOVERNMENTS IN THE FISCAL SPACE OF INDIAN FEDERALISM: Towards more rational arrangements

Abstract

The Seventy-third and Seventy-fourth Constitutional Amendments(CAs) gave constitutional status to local governments (LGs) and mandated the Union and States to make them ‘institutions of self-governments’ endowed with the vital task of delivering ‘economic development and social justice’ at the local level. The task of making LGs, in particular the Panchayat Raj Institutions (PRIs), active agents of socio-economic transformation at the local level depends a great deal on the quality of fiscal decentralization. There is a strong case for assigning local governments a viable fiscal space in Indian federal system as an integral strategy towards building sustainable local democracy. However, the Indian federation has a built-in bias in favour of the Union with great vertical imbalances in the resources and responsibilities at the state level and a local government with an amorphous functional domain and weak fiscal space. In fact LGs do not occupy a respectable space in the public finance of India. This was not corrected by the above-said CAs. Though there has been some increase in the share of local governments’ expenditure in the total public sector expenditure recently India is way below most countries and continents except Middle East and West Asia. A comparison of local expenditure share reckoned in terms of GDP for Asia Pacific region also corroborates the poor position of India. A macro fiscal policy to rationalize the multiple channels of transfers keeping a well-defined space for LGs is called for. An unambiguous Constitutional clause to give a specific share to LGs may be added. Even after 67 years of Independence there are acute disparities in the availability of primary services (including toilet coverage) in the country. A necessary condition of all transfers (grants, tax-sharing etc.,) should be to ensure equalization of fiscal capacity of all LGs. All LGs should have the fiscal capacity to provide comparable levels of public services so that no citizen should suffer deprivation due to their choice of residential location.