India’s fiscal architecture is undergoing a radical overhaul this budget season. On Tuesday, the NDA government accepted the Finance Commission’s proposal to enhance tax devolution to states. This, coupled with efforts to rationalize and reduce centrally sponsored schemes (CSS) through the chief ministers sub-group of the NITI Aayog, and the repeated calls for cooperative federalism together suggest that decentralization to states is the new mantra.

Missing from this rhetoric of decentralization and cooperative federalism is any debate on the future of the third tier of India’s federal architecture—local governments. Indeed it’s almost as though the government is seeking to rewrite India’s federal story by limiting the focus to Centre-state relations. Yet, the twin combination of greater devolution of finances to states and the reduction of CSS afford a unique opportunity to re-script the role of local governments.

Despite the constitutional amendments of 1992, local governments have remained marginal players in India’s fiscal system. They have no tax base—revenues collected by local governments account for a mere 2.5% of the country’s total revenue pool—and are responsible for just 7% of total government spending.

The dominant narrative on devolution in India has focused on the reluctance of state governments to share power and resources. But the real blow to local governance came from the Centre and its penchant for CSS. The bulk of CSS finance subjects like health, education and sanitation are constitutionally within the domain of local governments. Rather than devolve powers, CSS ignored local governments and replaced them with an entirely new administrative structure. And as the CSS window enlarged, central ministries began to encroach on state governments’ discretionary powers to decentralize. States were forced to re-direct a large pool of their resources to contribute to their share of CSS and follow the Centre’s diktats. Karnataka, for instance, had to reverse its devolution policy and re-centralize powers for horticulture development in response to the National Horticulture Mission that chose to push money through a district-level mission office, instead of the district panchayat.

In 2004, when the United Progressive Alliance government made a serious attempt to strengthen rural local bodies. The effort was premised on the notion that the Centre could use its money and muscle power to push states towards genuine devolution. Led by the Panchayati Raj ministry, the government initiated a process of redesigning CSS to enable the Centre to direct money to local bodies. But this centralized approach to decentralization failed to cut ice. The redesign ended in an unhappy compromise where panchayats were given a minor implementation role, while state administrators, backed by central government line ministries, retained decision-making authority. The distortions this caused is best illustrated through the experience in the rural jobs guarantee programme where money was devolved to panchayats, but the state administration retained implementation responsibilities, including control over key officials. Panchayats have effectively been reduced to post offices pushing money and implementing state government orders.

The bigger problem with this centralized approach was that it served to entrench rather than challenge the failings in India’s federal architecture that the constitutional amendments had sought to redress. India decentralized because it recognized that public service delivery can only be effective when it is tailored to local needs. And this is best done through smaller federal units. But responding to local needs requires empowered local governments with the authority to tailor decisions appropriate to their contexts. In the CSS-led model of decentralization, panchayats can at best function as implementers rather than representatives of their voters’ needs.

Ironically, in 2007, the Panchayati Raj ministry launched the Backward Regions Grant Fund (BRGF) to address this problem. The fund was to provide 5,000 crore of untied money to 250 backward districts based on annual plans made by panchayats. Again, the centralized architecture of BRGF made it a victim to the problems it sought to address. Plans were rarely made and when they were, it was usually the handiwork of state administrators keen to access central money.

The move to reduce CSS and devolve more financial powers to state governments can be an opportunity to reverse the flaws in the country’s approach to empowering local governments. At a minimum, reducing the numbers of CSSs will fulfil one necessary condition for decentralization—getting the Centre out of the way. Rather than abandon the local government agenda, as the government seemingly wants to do, the Centre can spearhead a new approach to decentralization. If he wants to, Prime Minister Narendra Modi could well replicate the approach he adopted to reduce CSS—getting chief ministers to cooperate and build consensus—to the agenda of local governments.

This consensus is especially important in light of the 14th Finance Commission recommendation to devolve block grants to gram panchayats, while leaving it to states to provide financing for the district and block panchayats.

Genuine decentralization isn’t just a matter of devolving powers and resources to local governments. It requires careful administrative detailing to get the balance right between activities that are best implemented through standardized, centrally driven technocratic approaches—like curriculum design in the case of education and those that require a local knowledge and discretion—like monitoring teaching quality. In other words, genuine devolution to local governments is about fundamentally overhauling the delivery architecture. For a country whose delivery system is peopled with an overpaid, indiscipline and demotivated frontline, this is an opportunity that cannot be missed. Initiating this rethink and building the political capital to implement reforms is what the Panchayati Raj ministry and the central government’s think tank, the NITI Ayog, ought to focus on.

By ignoring local governments and seeking to rewrite India’s federal story in the context of Centre-state relations, Modi is presenting the country with a limited vision of state-building. India’s deep-rooted governance challenges can only be resolved through an imaginative re-think of our delivery systems. We need bold, ambitious reforms and, by the logic of his own efforts, Modi has an opportunity now to do just this.

Yamini Aiyar is a senior research fellow at the Centre for Policy Research and director of the Accountability Initiative.
T.R. Raghunandan is an adviser with the Accountability Initiative.

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