Local Self-Governing Institutions and Fiscal Devolution in India:Issue and Challenges

Bishnu Prasad Mohapatra, Visiting Fellow

Research Unit for Livelihoods and Natural Resources (RULNR), Centre for Economic andSocial Studies (CESS), Hyderabad Email:bishnuprasad_123@yahoo.com

Abstract

The aim of this paper is to critically analyse the issues and

challenges linked with the fiscal decentralisation to the local

self governing institutions in India. The Local self Governing

Institutions (LSGIs) in India have playing a pivotal role in

implementing the development programmes. The 73rd Amendment Act

and the provisions of the Panchayat Act (PESA) have explicitly

codified the role of the PRIs with regard to the implementation

of development programmes. It is believed that the Local Self-

Governing Institutions on the basis of their “time and place

knowledge” develop plans and programmes based on the local needs

and resources and implement such plans and programmes keeping in

mind the extent of social and political marginalization. The

devolution of powers to the PRIs in India during the last two

decades received widespread importance because of the increasing

role played by such Institutions in the context of rapid economic

growth. It is believed that the Local Self-Governing Institutions

can be instrumental in promoting development in India, and if

required inter and intra-institutional issues can also be taken

into consideration. However, these institutions can perform

effectively if the required fiscal, political and administrative

powers are given to them within an appropriate institutional

framework. Hence, the issues regarding fiscal devolution to local

self-governing institutions assume significance considering the

current developmental role of the PRIs in India.

The present paper critically examines the importance of fiscal

decentralisation for local self-governing institutions in the

Indian federation, and how the fiscal decentralisation agenda for

the local level governing institutions was disturbed because of

the prevailing institutional and political compulsion. The

analysis of this paper is based on secondary sources of

information. The paper covers three broad aspects of this issue:

decentralisation and fiscal decentralisation, fiscal devolution

of the local self-governing institutions in India and issues as

well as challenges for fiscal decentralisation of the Indian

states. The paper argues that factors such as imbalance between

expenditure responsibilities and revenue raising powers,

confusion on whether local taxes or local transfers, issue of

equlisation, problem in federal structure and above all,

prevailing political compulsion have disturbed the fiscal

devolution agenda of local levels government in India. The paper

concludes with a broad suggestion that the local governments

should have the upper hand in designing development programmes

and raising the revenue keeping the available local resources in

mind.

Key Words: Decentralisation, Local Governments, Fiscal Transfer,

Panchayati Raj, India.

Introduction: In the present development scenario, the local

self-governing institutions in rural India spear head a crucial

role in the implementation of development programmes. These

institutions have become instrumental in designing development

plans for rural areas and implementing such programmes in keeping

the available fiscal and human resources in mind. The 73rd

Amendment Act of the Indian Constitution has widely purveyed a

set of legitimate powers to these institutions, with a stately

objective to develop them as institutions of self-government.

Hence, the powers and functions codified for these institutions

under the purview of the Indian Constitution have explicitly

pronounced the significance of these institutions. However, the

current trend of functioning of rural local self-governing

institutions in India provides a gloomy scenario because of

their failure in tackling critical human development issues.

Despite the presence of a progressive governance system such as

the Panchayati Raj, the rural areas in India still face severe human

development challenges. It is argued that the decentralised

governing institutions can provide an accountable and transparent

administration only when certain internal and external conditions

like accountability, transparency, participation and fiscal

transfers will be taken into consideration.

The Indian Constitution under its federal character has provided

ample provision for sharing the powers between the centre and the

states as well as between the states and the local governing

institutions (both at rural and urban level). Centre-State fiscal

relation has provided a wide array of the sharing powers for

revenue generation, taxation and expenditure of revenue under the

framework of the Indian Constitution. However, the legitimate

evolution of the local self- governing institutions since

1992(73rd Amendment) has forced the policy makers to re-examine

the ongoing power-sharing mechanism between the centre and the

states in India. It is believed that, the local self-governing

institutions under the Indian federal polity enjoying such

residual powers which are conferred by the state legislatures.

The power sharing exercise between the states and the local level

of governments in India provide a dissenting scenario. Especially

the fiscal power vested to the PRIs, often question the issue of

rationalisation in power devolution arena, thereby provide a

platform for the academic robustness.

The local self-governing institutions in India have evolved

through a series of historical events, rules, regulations, acts

and commissions, and have finally reached a revival stage in the

form of the 73rd Amendment Act (1992) and the PESA Act (1996). It

is argued that the political and economic theories of

decentralisation have evolved over a period of time, and have

paved the way for institutionalisation of decentralised governing

institutions in India (Raghunandan: n.d). However, the

functioning of the local self-governing institutions in India has

encountered challenges, which are acute in the case of the fiscal

transfers. Such challenges hampered the functioning of these

institutions. Further, Politicisation of local democracy and the

existence of structural impediments to the effective functioning

of local self-governing institutions encourages the dominance of

the local elite in these institutions.

Thus, devolution of fiscal powers to the PRIs has provided

fruitless results. The issues of fiscal autonomy of these

institutions can be seen writ large, notwithstanding the

recommendations of the central and the state finance commissions

in that regard. Such situation has hampered the spirit of “self-

governing institutions” by reducing their functions as

“implementing agencies” of government. In the context of the

changing political scenario, party system and emergence of

structural readjustment since 1991, the macro-economic scenario

has been going through a transition phase. This scenario also

paved the way for a fresh analysis of fiscal devolution to the

PRIs. The present paper is a modest attempt to understand the

fiscal devolution to the PRIs in the context of the present

Indian federal polity.

The analysis of this paper reflects two broad realms of the

currently-functioning local self-governing institutions in India.

In the first part, there is a conceptual discussion about the

concept and theory of decentralisation, fiscal decentralisation,

and decentralisation and the broad aspects of fiscal

decentralisation in India. The second part unfolds the current

status of fiscal decentralisation to the local self-governing

institutions in India and, how as well as to what extent, the

PRIs have faced the issue of fiscal constraints in India. The

last section argues the need of policy reforms in order to

strengthen the fiscal devolution agenda.

Fiscal Decentralisation and Local Governments-Conceptual

Framework and Literature Review: Over the last two decades, many

countries around the world have embarked on the issues of

Decentralisation and Fiscal Decentralisation to the Local

Governments. According to Dillinger (1994), out of the 75

developing and transitional countries covered in a recent survey,

84 percent have embarked on a certain type of decentralisation

process. Asfaw et al (2004) summarise that decentralisation is a

complex and multifaceted concept that involves the shifting of

fiscal, political and administrative tasks to lower level

governments. Assertion in favour of decentralisation is based on

the institutional arrangement and the capability to address the

long standing development issues by devolving power and resources

from the central or regional authorities to the local governments

in order to achieve equity, efficiency and accountability.

However, researchers also argue in favour of decentralisation as

per their own standpoints which are political as well as economic

in nature. (Raghunanden: n.d).It is believed that decentralised

governance, as an outcome of decentralisation can provide

effective and competitive delivery of services at the grassroots

level. Being closer to the people, decentralised governance is

assumed to meet the needs and preferences of the people. However,

the opponents of this system have a different opinion; they argue

that decentralisation is a harbinger of macro-economic failure,

corruption and monopoly in the local governance system (Tanzi:

1995, Prud’homme:1995).

Over the last few decades, the literature on decentralisation in

general and fiscal decentralisation in particular has been

flourished in political science as well as in economics,

mediating between the broad aspects of decentralised governance

issues and the transfer of fiscal powers and authority. The

concept of “fiscal decentralisation” has been extensively

discussed in academic as well as development practitioners

circles (Oates, 1972, Bardhan: 2003, Rao: 2000, Marjit, 1999,

Oomen, 2006, Asfaw et al, 2004, Boex, 2009) and has attained

prominence because of the heightened focus given by different

countries in the world while devolving financial powers and

authority to local governing institutions.

The literature on fiscal federalism literature which has evolved

through different periods of time, has provided a wide array of

theoretical underpinning and empirical evidences on issues

pertaining to fiscal transfers to the local level governments.

The conventional wisdom in the fiscal federalism literature, as

narrated by Oates (1972) is based on the notion that

decentralisation is preferable, when the tastes are heterogeneous

and there are no spillovers across jurisdictions. However, the

theory of fiscal federalism propounded by Oates (1972) is negated

by researchers, as Bardhan mentioned that “the issue of

spillovers is less relevant when the public goods are more local

like local roads, minor irrigation, village health clinics and

sanitation, identification of beneficiaries of public transfer

programs etc. There are also robust arguments against large size

of governments and in the favour of Cost Effectiveness (Olson,

1965 and 1972), which is believed to be another endeavor to vest

greater fiscal autonomy to local level of governments. According

to Olson (1965 and 1972) in smaller groups, the incentives for

free riding would be relatively lesser as the free-riders easier

to detect. He further mentioned that large groups face relatively

high costs while attempting to organise for collective action as

compared to local action by small groups.

In fiscal federalism literature researchers (Bagchi: 2001, Rao:

2000, Rao and Sen: 2011,Congleton: 2006, Oates: 1972) have

attempted to draw a line between the early notion of fiscal

federalism and the recent theory of fiscal federalism, keeping in

mind the rapid economic growth, globalisation led development and

Decentralisation policy reforms. According to Rao (2011), while

the traditional theories called the first-generation theories

formerly assumed a benevolent state, the second generation

theories draw on the developments in the theory of public choice

and industrial organization. The first generation theories are

largely based on the famous Tiebout (1956) model in which it is

argued that when different localities provide varying mixes of

public services financed from the tax revenues collected from the

local population, people tend to vote with their feet moving and

settle with those localities, where they perceive the most

appropriate mix of services for the taxes they pay. The so called

first generation theory has propounded two significant aspects of

fiscal decentralisation as; an effective vehicle for better

political negotiation and achievement of better delivery of

services and as a means of achieving spillover externalities of

services.

In the so-called second generation fiscal federal theory, an

attempt has been made to defuse the Tiebout(1956) model as well

as Oates(1972) idea of the decentralisation theorem. The theory

of decentralisation in the current period is heavily based on

existing political scenario, institutional arrangements, rapid

economic expansion, as well as the source of contestation between

the state and the market. It also spell out the widespread

failure of macro-economy in Latin-America, as well as lack of

fiscal discipline, inefficient public spending due to weak local

capacity, local corruption and local elite capture. Emergence of

new institutions, democratisation of polity, the advent of a

multi-party system, and transition from a planned to a market

economy (Rao:2003 cited in Litvak,Ahmed and Bird,1998) have paved

the way for fiscal decentralisation which is based on both

political (participation, accountability and transparency) and

economic(fiscal transfers, taxation) aspects of decentralisation.

According to Bardhan, the traditional theory of fiscal federalism

is now being extended to the political economy setting, with the

introduction of transaction costs in the political markets, or

political agency problems between the ruler and the ruled, as

well as between the politicians/bureaucrats and the electorate.

These transaction and agency costs may be much more serious in

the context of developing countries for reasons mentioned above.

In the context of India, the fiscal decentralisation evolved

gradually; there was a strong response from academic and

development practitioners’ circles with the flounder of

centralised approach to development and economy. The Indian

Constitution due to its federal nature also created space for

vesting fiscal powers and autonomy to the local level

governments. However, state level variances in the context of

fiscal decentralisation during the post-73rd Amendment period,

often provided insights into appropriate policy reforms, helped

to keep in check the magnitude of poverty and inequality and

ensured equal distribution of public resources. Despite the

enactment of the 73rd Amendment, which clearly spelt out fiscal

devolutions to the PRIs and the constitution of State Finance

Commissions(SFCs), the fiscal scenario of the PRIs in different

states are found to be asymmetrical (in terms of fiscal

devolution) .

Significance of Fiscal Decentralisation for Local Self-Governing

Institutions: The whole idea of decentralized governance is based

upon some key factors such as people’s participation,

accountability, transparency and fiscal transfers (Braun and

Grote, 2002:89; Tanzi 2001:13; Romeo 1999: 137; Crook and Manor

1998:2; Litvack et. al 1998:7). Fiscal decentralisation,

according to Oommen (2008), is an integral subset of

decentralisation and assumes significance because without its

proper functioning decentralisation becomes inoperative and

meaningless. Fiscal transfers have an important influence on the

effective functioning of democratic decentralised institutions,

as they provide impetus to these institutions to work as self-

governments by vesting autonomy to make timely and prompt

decisions regarding their finances. It is also argued that sound

fiscal decentralisation reforms require sound decentralised

finances as well as sound decentralised governance and

administration. (Boex: 2009). Fiscal autonomy of democratic

decentralised institutions has been argued on the ground that

“the guarantees for local autonomy lies in the way local

governments have at their disposal financial resources which they

can autonomously deploy to implement their local level

development. Without financial resources any decentralised

governance system is empty. Therefore financial resources must

cement autonomy (Department of Economic and Social Affairs, UN).

As decentralised governance needs requisite powers for effective

functioning and service delivery, it is believed that transfer of

powers can help decide the allocation and distribution of public

resources, the power to implement policies and programs and the

power to raise and spend public revenues for these as well as

other purposes. (Johnson: 2003). The fiscal portfolio of local

self-governing institutions is believed to be based upon the

income from “own revenues” and “assigned and devolved revenues”

of the government and semi-government organisations (Sahasraman:

2012). It is believed that weak fiscal devolution can make the

democratically decentralised institutions handy by creating a

culture of “dependency syndrome”. However, the opponents of

fiscal decentralisation argue for limited fiscal devolution, with

regard to collection of taxes from local revenues through

managing available resources.

To summarise, Decentralisation in the current development

scenario emerges as a key strategy of governance to address the

long-standing human development issues. Fiscal decentralisation

as an important subset of decentralisation has attained

significance, as it is believed that fiscal transfer to local

self-governing institutions can produce effective result in

addressing the development needs. Nonetheless, the theories of

fiscal decentralisation have evolved through different stages;

and, in the context of globalisation and extensive economic

policy reforms, in the developing and transitional countries,

research on fiscal decentralisation research has flourished

significantly. In the context of India, the emergence of third

tier governments (PRIs) and their fiscal issues have provided

enough scope to re-look into the existing pattern of fiscal

decentralisation, as it is argued that without fiscal devolution,

the spirit of self-governance may be floundered. In the

subsequent section, a humble attempt has been made to unfold the

issues regarding fiscal devolution to the PRIs in India.

Local Self-Governing Institutions and Fiscal Devolution in India-

A Historical Analysis: Democratic decentralisation in India has a

strong historical background, the stages of evolution, revival

and growth starting from the ancient Vedic civilisation (1200 BC)

to modern India. The concept of “self-rule” in rural India

prevailed during the ancient era in the name of “sabhas” which

were the fertile breeding grounds for making “participatory

community based decisions of self-rule” by the designated

traditional village head or a group of heads. The Panchayats had

both executive and judicial powers, including the power to decide

land revenue, village administration and providing taxes to

higher administrative bodies. Mathew (1994) mentioned that the

important characteristics of these Panchayats were (during

ancient period) that they had been the pivot of administration,

the centre of social life, an important economic force and, above

all, a focus of social solidarity.

However, during the British rule, the government’s policy towards

elevating the panchayatiraj institutions in India, to institutions

of self-government was not impressive and praiseworthy. During

this period, administrative and fiscal centralisation was a

colonial necessity. At the same time the difficulty of

administering a large country with a number of principalities,

different languages, cultures and traditions did force the

central government to devolve some powers to regional units

(Rao:2000). However, till the country’s independence, several

policy measures were initiated by the British Government,

including the government of India Acts 1919 and 1929, which paved

the way for strengthening decentralised Governance in pre-

independent India. The Government of India Act, 1935 pronounced

the era of federalism by adding the concept of “Quasi-Federalism”

(Rao: 2000)

Local Self-Governance and Fiscal Decentralisation during Post-

Independence Period: During the post-independence period, the

Indian constitution adopted the Panchayat Raj system as a part of

the “directive principles of state policy” in an effort to

decentralise the administrative powers to the grassroots.

However, at the same time, the constituent assembly adopted a

federal structure with an intention to create a strong centre.

Johnson (2003) mentioned that the most enduring image of

decentralisation in India has been Gandhi’s vision of village

swaraj, in which universal education, economic self-sufficiency,

and village democracy would take the place of caste,

untouchability and other forms of rural exploitation. But till

1992, the Panchayati Raj Institutions in India had no legitimate

powers because of centralised character of the Indian federalism,

which called for strong union, centralised planning and programs

for economic development. According to Rao (2000), Indian

federalism formally evolved as a two-tier structure until 1992.

Nonetheless, local government units existed both in rural and

urban areas, which basically acted as agencies of the state

government. Despite the presence of state specific initiatives in

states such as Kerala, West Bengal, Karnataka and Odisha, the

Panchayati Raj institutions remained in a dormant stage till

1992; this was due to different factors inter alia inadequate

powers, poor finances and lack of political will. The important

component of federalism i.e. fiscal federalism which is based on

assignment of adequate revenue powers to local level of

governments hardly existed in many states.

The 73rd Amendment Act: The 73rd Constitution Amendment Act

provided impetus to the LSGs in India by devolving requisite

powers & functions, which are political and economic in nature.

It is argued by the proponents of decentralised governance in

India that the 73rd Constitution Amendment Act has ushered a

greater degree of uniformity in structure(Three-tier),

Composition(reservation for SCs,STs and women), powers and

functions(financial and planning), of these institutions with an

objective to achieve faster social and economic development.

The following are the important features of the act which

pronounced the greater Fiscal autonomy to the PRIs in India;

Devolution of powers including fiscal power: Devolution of

powers including fiscal power to the PRIs is the most

significant aspect that reflected through the 73rd

Constitution Amendment Act. It was suggested that the

functions of 29 subjects under the 11th Schedule of the

Indian Constitution will be devolved to the PRIs for

ensuring effectiveness in functional aspects. However, the

current trend of power devolution to the PRIs has provided a

dismal scenario because of the failure of different states

in this regard, particularly with respect to the devolution

of fiscal powers.

Assignment of revenue powers: A significant component of the

73rd Amendment is vesting fiscal powers to the PRIs. An

important component of such process is based on the

collection of tax revenue from local sources, as assigned by

the states to these institutions. According to Oommen(2004)

28 types of taxes and rates, which are eminently local in

nature have been assigned to the local governments since the

enactment of 73rd Amendment Act. However, fiscal autonomy of

the PRIs is still largely regulated and controlled by the

state.

Plan for Economic Development and Resource Management:

Another significant aspect of fiscal character of the 73rd

Amendment Act is based on the preparation of plan for

economic development, keeping the available resources in

mind. This has been provided in order to retain the autonomy

of the local self-governing institutions, which believed to

be another assay in the area of fiscal autonomy. However,

the current trend of promoting development programmes and

resource management has become handy, because of the

existing macro and micro level difficulties.

Institutionalization of State Finance Commissions (SFCs):

The State Finance Commissions were created to examine fiscal

relationships between the states and PRIs as well as the

Urban Local bodies (ULBs) with regard to the collection of

tax revenues by the latter and to suggest the necessary

recommendations thereon. However, state level experiences

show that the effective functioning of these institutions

with regard to rationalising the fiscal relation between the

states and local governments is questionable. The SFCs

believed to have missed a great opportunity to contribute to

the process of building fiscal federalism (Oommen: 2010) and

their recommendations are largely ignored; this hampered the

spirit of self-governments (Palharya: 2003).

To summarise, the 73rd Amendment to the Indian Constitution has

aptly provided fiscal powers to the local self-governing

institutions in order to make them more efficient and

accountable. The act has also provisioned for the constitution of

State Finance Commissions in the states to examine the fiscal

scenario of the local governments and suggest suitable

recommendations to the state to that extent. However, after two

decades of enactment of 73rd Amendment, the fiscal positions of

PRIs in different States highly disarray and asymmetric in

nature. The problem of fiscal decentralisation presents two broad

scenarios: policy failure or failure of state governments and

failure of the local governments. These broad issues are analysed

in the subsequent section in order to understand the major gray

areas and deduce policy suggestions.

Fiscal Decentralisation and Local Self-Governing Institutions in

India: The Areas of Tension: It is argued that fiscal

decentralisation is the fiscal empowerment of the lower tiers of

the government and involves the devolution of their taxing and

spending powers along with the arrangements for rectifying

mismatches in resources & responsibilities (Oommen: 2006 cited in

Fukasaku and De Mellow: 1999; Tanzi: 1996 & Oommen: 2004).

However, the current fiscal power devolution to PRIs in India has

been providing two broad areas in which the problems are

prevailing.

Policy failure: Rao (2011) argues that an important feature of a

successful system of fiscal federalism is the assignment of

adequate revenue powers to sub-national governments that forge a

strong link between revenue and expenditures at the margin.

However, experience from different states reveals that, the

fiscal devolution process has been more or less confined to the

mere delegation of authority without devolving powers of taxation

and revenue generation. Failure of the states to devolve the

desired fiscal powers to the local-level governments gradually

turned these institutions to extended wing of the state

governments. Particularly in the case of fiscal devolution, it

has been observed that there was fiscal delegation in different

states, without devolving powers; this has severely affected the

fiscal position of the PRIs. There is no mechanism devised to

assess(or map) the potential source of revenue of the PRIs, and

therefore no mandatory targets have been set in this regard,

which is yet another policy gap.

Failure of the Local Governments: The 73rd and 74th amendments

(for urban local bodies) have made India the largest democratic

setup with the biggest representative base in the world. There

are 2.5 lakhs local governments in India with 3 million

representatives, which itself shows the vastness of the Indian

Democratic setup (Oommen: 2010). However, the extent of fiscal

autonomy enjoyed by these institutions, in the context of

spending and generating revenues, clearly establish their role in

the current development scenario. The PRIs in major Indian

states, have failed to utilise the potential revenue generation

source, because of their over dependent nature and the serious

capacity gap. Further, improving the revenue is largely linked to

two major factors-appropriate redesigning of fiscal transfer

system and proper institutional arrangements; both are lacking in

the case of PRIs.

Challenges:

Confusing power devolution agenda: The crucial factor that

crippled the fiscal autonomy of the PRIs is the incomplete

process of power devolution to the PRIs by different state

governments. While states such as Kerala, West Bengal, Karnataka

and Madhya Pradesh have devolved the desired powers to the PRIs,

other states such as Odisha and Jharkhand are lagging behind in

the process. A study conducted across Andhra Pradesh, Gujarat,

Kerala, Madhya Pradesh, Maharashtra, Tamil Nadu, Odisha, Punjab,

Haryana, Assam and Goa also discovered that most states granted a

plethora of functional responsibilities but there was no

executive follow-up of granting adequate powers, staff and

additional financial resources. (Fernandes:2003).

Poor budgetary allocation: The extent of fiscal devolution

depends on the expenditure responsibilities and revenue

assignments devolved to the lower tiers. However experiences from

different States shows that, the fiscal allocations to the PRIs

have declined sharply (Oommen: 2006), which has restricted their

development agendas. The total expenditure of the local

governments(PRIs and Urban local bodies),as a proportion of the

combined expenditure of the union, state and local governments

was about 6.4% in 1998-1999 to 5.1% in 2002-03.This indicates the

magnitude of fiscal poverty of rural local self-governing

institutions in India.

Tax Decentralisation & the role of SFCs: In most states, the

reports regarding the recommendations of the SFCs were not taken

into account which is another gray area in fiscal

decentralisation. It was observed that the own tax revenue of the

local governments has been declined from 5.71% to 3.97% in 15

major states in India (Oommen: 2006). It is also argued that, the

PRIs should have the right to collect taxes from private

taxpayers (Marjeet: 1999) which is not reflected in States’ tax

decentralisation agenda.

Fiscal Dependency: It is argued that the so called financial

decentralisation has given birth to fiscal dependency of the PRIs

over central and state hierarchies. This scenario has led to the

fiscal inefficiency of the PRIs by reducing their role as mere

implementer of government programs. For the implementation of

different programs the PRIs have to wait for “sanction orders”

from upper level government departments, which hinder the timely

and effective implementation of development programs.

Gap in coordination: One of the most important pre-conditions for

efficient fiscal federalism is clarity in the assignment system.

Not only should the assignment system be clear as far as

possible, but when there is overlapping, there should be systems

and institutions in place to resolve it (Rao: 2011). However, in

the case of PRIs, the intra and inter institutional coordination

gap is also largely seen in the process of transferring funds to

the PRIs, which is another challenging area in fiscal

decentralisation. The flow of funds from higher to lower tiers

has become cumbersome affair because of undue delay, technical

incompetency and an attitude of high-handedness.

Policy Recommendations: The PRIs in India need a greater degree

of political will and effective fiscal devolution for functioning

as institutions of self-governance. The following aspects need to

be taken into consideration for this purpose.

It is necessary to assign more powers to PRIs for raising

revenues from the local sources i.e. both tax and non-tax

revenue for enhancing their fiscal viability. This urged a

fresh analysis of fiscal relationship between the States &

PRIs.

Fiscal devolution to PRIs should be realistic based on

current development needs and priorities. It should be

rationalise on the basis on assigned development programs to

PRIs & extent of fiscal position.

Financial allocation to PRIs should be based on certain

minimum criteria like developmental needs of the people and

areas. A clear cut mechanism needs to be devised for

determining the budgetary allocations for the PRIs.

PRIs need more orientation regarding functional duties and

fiscal matters. Revenue generation should not be treated as

non-obligatory function of PRIs and the States finance

commissions’ recommendation should be taken into

consideration.

The fiscal disbursement process should be free from

bureaucratic incompetency and political control. The process

should be done timely with maintaining utmost transparency.

Conclusion: Local Self-Governing Institutions in the current pace

of Development have to play critical catalytic role, which can

address the long-running human development issues like poverty

and illiteracy. These Institutions in the context of 73rd

amendment act, has received fresh impetuous which recognizes

their status as Self-Government. However, the prevailing

political climax coupled with bureaucracy-led administrative

control has been reduced the sanctum sanctorum of these

institutions, pushing them as another extension wing of the State

and Central Government. The fiscal decentralisation of the

Panchayats, which was given priority in the emergence of 73rd

amendment, has lost direction and reached at such a stage, which

urged a fresh policy review. The issues of finance of the

Panchayats remain in the nascent stages because of the utmost

apathy shown by the political classes towards this end. Despite

the constitutional mandate, poor finances have been restricted

the functions of the local governments. The state governments

should take these issues seriously and must change their policies

regarding the fiscal devolution to the local governments. This

should be done in keeping into mind the ongoing development

trends and the development need of the rural areas.

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