India: The third tier

Suman Bery, Director-General

Member, Prime Minister’s Economic Advisory Council

GINI Network Workshop

Singapore, August 8 2010

• An independent economic research organisation; 53 years strong

• Current research areas include:- Macro Analysis and Forecasting- Household and Consumer Behaviour- Consumer Trends- Trade Policy Analysis- Infrastructure and Regulation

About NCAER

The Problem

• India’s constitution formally recognises two levels of government: “union” and states.

• Clear provisions for allocation of revenue, expenditure between this first and second tier. (Finance Commission; State and concurrent lists).

• 73rd and 74th amendments in 1993 gave official political recognition to a “third tier”: panchayati raj institutions and urban local bodies.

The Problem

• Legislation national in scope; some areas excepted. Built in many cases on earlier structures.

• Implementation left to state governments.

• Primarily political, but also administrative: “funds, functions, functionaries” to be devolved.

• Three million elected representatives to 250,000 bodies. Women’s reservation.

The Problem

• Recent concerns: social indicators, service delivery, welfare programmes; search for “inclusive growth”.

• Also concern to integrate local taxes into national “goods and services tax” (GST).

• NCAER engaged in major research programme on political decentralisation and service delivery, supported by IDRC grant.

Revenue Devolution

• Thirteenth Finance Commission (2010-2014); reported end-2009. Accepted in principle.

• ‘To make recommendations on ”the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of recommendations made by the Finance Commission of the State”’

Revenue Devolution

• Reflects acute sensitivity on part of states, centre not to disturb constitutional balance, state autonomy (cf. Brazil 1988).

• Makes statutory revenue devolution problematic. Past FCs resorted to small ad hoc grants in past. Not fully drawn.

• FCXIII : transfer share of divisible pool as grants-in-aid, above the share of the states, through the Union Budget. Award is 1.93% of “divisible pool.”

Revenue Devolution

• Grant divided into basic and performance-based component; performance subject to state-level conditionality.

• Elements of conditionality: improved accounting, auditing for LBs; prompt transfer of funds; enabling legislation to expand property-tax base; service standards for key local services etc.

• Needs to be complemented by local taxation, user charges etc.

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Looking Ahead

“The emergence of rural and urban local bodies as key players in bringing about a development transformation has been recognised by this Commission. Local bodies must be increasingly empowered to fulfill their responsibilities, and …this would…involve a fundamental rethink of the Constitutional arrangements regarding inter-governmental allocation as well as devolution of resources to the third tier”.

Expenditure Issues

• Serious under-provision of local services, partly (not entirely) due to financing problems.

• 52% of rural population has access to rural sanitation; 70% of urban households to piped water.

• SFCs: share of rural local bodies in state expenditure should rise from 5-6% to 15%.

Expenditure Issues

• Unsatisfactory social indicators have led to a massive increase in targeted central programmes (CSS-centrally sponsored schemes).

• Growing “agency” functions (i.e. tied expenditure) of panchayati raj institutions (PRIs) in administration of these schemes. (2009-10 estimate Rs 95,000 crore), even while own resources are grossly inadequate.

Expenditure Issues

• Severe resistance at both central and state government level to expand block grants/untied transfers to third tier: inadequate capacity; possible elite capture, dilution of political credit (e.g. NREGA).

• Increasing academic research exploring links between devolution, decentralisation and service delivery

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Concluding Remarks

• Attempt to empower “third tier” politically still a work in progress.

• States jealous, protective of their constitutional rights. Reflected in current debate on GST.

• Under-provision of quality local public goods reaching crisis proportions. Not just India.

• Worth comparing experiences across region.

Thank You