The need to empower the third tier

Panchayats don’t function as self-governing institutions, as envisaged, but as agents of the Union and state governments. The 16th Finance Commission should give more voice to local governments.
Image used for representational purpose.
Image used for representational purpose.Express illustration | Mandar Pardikar

The purpose of this article is to drive home the great need to create institutions of self-government and local democracy, as mandated by two constitutional amendments—one for panchayats (73rd) and the other for municipalities (74th)—initiated as part of the momentous decentralisation reforms. I wish to raise some issues relating to the third tier of government and the terms of reference for the 16th Finance Commission.

Given the two amendments as well as the two separate clauses, Articles 280(3)(bb) and 280(3)(c) added for the panchayats and municipalities, it is desirable to do away with the practice of Finance Commissions treating both under the rubric of ‘local bodies’. The problems of the two are different. FC-16 would do well to consider them separately.

That even after 30 years we cannot figure out the fiscal size of our panchayats and their place in the Indian public finance in terms of revenue or expenditure is a poor reflection of the progress made. Unlike western theories of federalism that do not recognise the institution of panchayats, the mandate of the decentralisation reforms for a gram sabha, an assembly of voters, to determine development priorities.

The task of panchayats to plan for economic development and social justice and innumerable other building blocks of a local democracy are unique and challenging. A critical question to ask is why panchayats do not function as ‘institutions of self-government’, but work as agents for the Union and state governments. Panchayati Raj Institutions are still not an integral component of the federal fiscal system.

The basic message of the twin amendments, that the Union Finance Commission and state Finance Commission are organically linked in federal public finance, is not well recognised. The State Finance Commission  is a counterpart of the Union Finance Commission created to rationalise the vertical and horizontal imbalances at the sub-state level.

Ideally, if the Union Finance Commission takes care of inter-state equity (now that the Planning Commission is abolished, a large part of inter-governmental transfer responsibility falls squarely on it) and the State Finance Commission the intra-state equity, India has the best institutional mechanism to deliver territorial equity and basic services. To be sure, the Union Finance Commission acting in tandem with State Finance Commissions can promote the golden rule of cooperative federalism—that no citizen should be denied basic services, from drinking water to primary education, because of the choice of their residential location.

Continuity and change are important to take the decentralisation reforms forward. FC-11 and FC-12, despite clear mandates to “restructure public finance”, did not find it important to include local governments in their scheme of restructuring. The efforts of FC-13 to take the lagging decentralisation reforms forward and link local grants to the divisible pool and introduce a performance grant system, stipulating conditionalities like putting in place an audit system, an ombudsman, and enabling property tax collection were not continued later. Some Union Finance Commissions dismissed State Finance Commission findings as “sketchy” and “patchy” without a close reading of the reports and offering specific suggestions.

Again, the Union and states failed to implement the decentralisation reforms in a coordinated and consistent fashion. Most states did not part with power and authority, and did not exercise the simultaneous transfer of functions, funds and functionaries. Kerala was probably an exception—it led the country in activity mapping to ensure role clarity between the tiers.

Kerala also tried to implement the mandatory function of bottom-up planning, and even attempted district plan formulation (Article 243ZD). Kerala’s people’s plan campaign initiated a multi-stage process of participatory planning, from identifying the felt needs of the people at gram sabha meetings to the final vetting and sanction by the district planning committee. In a way, it demonstrated the feasibility of the reforms.

The Union and states, avowedly committed to fostering the decentralisation process, have promoted parallel institutions that work counter to local governments and local democracy. The Local Area Development Project for each Member of Parliament and its counterpart for MLAs are classic examples. The Union and states have created several agencies that perform tasks meant to be done by local governments. It will be a great service if FC-16 institutes a Functions Fund Matrix study and estimates the parallel flow of resources during the last 30 years. That will reveal the nature and magnitude of the forces that have weakened local governance.

As per its terms of reference, FC-16 has to recommend measures needed to strengthen the consolidated funds of a state to supplement the resources of panchayats and municipalities. By and large, municipalities have strong revenue bases. The revenue-raising capacity of panchayats needs to be enhanced. There are panchayats that do not collect any tax. Although property tax is a universal local tax, states such as Rajasthan, Haryana and Punjab do not collect property tax. The Economic Survey of 2017-18 showed that rural local governments collect less than 10 percent of their total potential for local finance. A dependency regime, artificially created, cannot ensure transparency, accountability and self-government.

A full-fledged financial reporting system including the local governments is still a far cry. If FC-16 could initiate the steps and the Reserve Bank of India could come up with a federal financial reporting system that includes the Union, states and local governments, it would be a great achievement indeed.

(Views are personal)

M A Oommen

Former Chairman, Fourth State Finance Commission, Kerala, and Distinguished Fellow, Gulati Institute of Finance and Taxation, Thiruvananthapuram

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