Fiscal Autonomy: Restraints and Limits

Asha Sarangi and Lipika Ravichandran, Centre for Political Studies, Jawaharlal Nehru University

Relevance of the Practice

It was only with the coming in of the 73rd and the 74th Amendment Act that the fiscal decentralization of local government was strengthened. The urban and the rural bodies have their own revenue raising sources in terms of taxes and non-tax revenues and formulate their expenditures accordingly. In India, the fiscal decentralization itself is a breakthrough. In order to increase their own resource mobilization, the urban local bodies are encouraged to tap the debt instruments like long-term bonds. This has been incentivized by the union government. The union government pays the urban local bodies Rs. 13 crores (approximately €1.3 million) for every Rs. 100 crores (approximately €10 million). In 2018, in the state of Gujarat, the Surat municipal corporation mobilized Rs. 450 crores (approximately €45 million) via bonds to fund a sewage treatment project.

The urban-rural interplay works at various levels in this entire exercise of financial arrangement, particularly when it comes to allocating the funds and their required expenditures. For example, the District Planning Committee is a constitutional body (Article 243ZD) which consolidates the plans prepared by the panchayats and the municipalities in the district and prepares a draft development plan for the district as a whole. The legislative member’s local area development fund (MPLAD/MLALAD) is effectively utilized for the development of both rural and urban areas within his/her constituency with the aid of the District Planning Committee.

Description of the Practice

The Indian Constitution envisages for the financial autonomy of the local self-governments through Article 243(H) (Panchayati Raj Institutions) and 243(X) (Urban Local Bodies), both of which empower them to levy, collect taxes, fees and tolls. But in real terms, this autonomy is not given in practice because it is the state government that decides the amount of taxes, tolls and fees to be levied and collected. However, the local bodies are involved and invited at times by the state and district level bodies to participate and execute these activities.

A number of institutions are involved in carrying out these practices. For example, the state level bureaucracy and its outreach through the district administration is responsible for allocating the funds and their expenditures at various local levels. Most often, the elected bodies and representatives of people are involved in the decision-making exercise of various sorts.  Where the government has invited the private sector to be part of public-private partnership (PPP) projects, the private sector works along with the public sector’s undertakings and projects. 

The urban local governments deliver several public services such as providing safe drinking water, wastewater treatment, solid waste management, public transportation system, investment opportunities, public safety measures, women’s safety rules and regulations, and control of infectious diseases and epidemics etc.  In these and many other such activities for the public welfare and good, a number of permanent government functionaries, including the lower-level officials, are entrusted with these tasks to achieve the objectives in a certain time frame. 

The urban local bodies levy taxes like professional tax, property tax, entertainment tax whereas the rural local bodies levy taxes on agricultural land, local fair, and land use planning etc.  Furthermore, the state government makes funds available to local bodies through grants in aid from its consolidated funds.[1]These provisions are mentioned in Article 243(H) of the Constitution.

Assessment of the Practice

The devolution of financial powers under the 74th Amendment Act has left the responsibility on the states to devolve expenditures from the list of 18 municipal functions listed in the 12th Schedule of the Indian Constitution. The state also has the ambit to introduce taxes, duties, tolls and fees as stated in Article 243(X). Moreover, it can assign revenues from various taxes to the urban governments. According to Article 243(Y), state finance commissions (SFCs) are responsible for the tasks of revising and endorsing federalization of tax revenues and grants-in-aid to urban local governments. This provision of devolution of financial arrangements has been limited and inadequate.

In the case of rural local governments, the Panchayati Raj Institutions (PRIs) similarly have to depend on the state governments for finance and expenditure as well as decentralization of financial powers based on the respective state to raise revenues.

Since the local government is not given much fiscal autonomy, local governing bodies of various sorts have to mobilize sources on their own too.[2] This kind of financial constraint results in non-completion of several projects and policies that are otherwise listed in the state governments’ vision documents of the five-year plans. 

The state government’s populist policies at times hamper the developmental goals and objectives seriously. Another factor that intervenes in this is vote bank politics, affecting the welfare- oriented policies of state and its local level governmental bodies. At times the rationale of imposing a particular tax and its collection is arbitrarily decided without involving all the stakeholders. 

Local government bodies are often not involved or even made aware of the major resources like land and water and their potential utilization needed in the present context.  The neo liberal policies, with the assistance of multinationals and corporate sectors involved, aim at excluding a large number of local stakeholders from arriving at decisions and redesigning the policies beneficial to the people at large.

References to Scientific and Non-Scientific Publications

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[1] Isher J Ahluwalia and others, ‘State of Municipal Finances in India’ (Indian Council for Research on International Economic Relations 2019).

[2] On these own sources, see the Introduction to Local Financial Arrangements in India, report section 3.1.