Fiscal Decentralization in India

India is moving in the general direction of greater decentralization, with an emphasis on cooperative federalism across Union (federal), state and local levels. Passage of 73rd and 74th Constitutional Amendments in 1992 set the stage for greater co-operation of union government with state governments for strengthening of local governments as constitutional entities.

Since then, guided by the recommendations of periodic Finance Commissions, the fund flows from the union level to the states have undergone sea changes, enabling states to enhance their own fiscal space which was previously restricted due to discretionary fiscal transfers.

Likewise, gradual efforts have been made to strengthen State Finance Commissions (SFC) to improve the state—local fiscal relations and to streamline funds flow to local governments for efficient delivery of local public goods. In fact, one of the recommendations of the Fifteenth Finance Commission reads as follows:

“State Governments should strengthen SFCs. This would involve timely constitution, proper administrative support and adequate resources for smooth functioning and timely placement of the SFC report before State legislatures, with action taken notes”.

The SFC is an autonomous institution and mandated under Article 243 I and 243 Y of the Indian Constitution to review the financial position of the Panchayats (rural local government councils) and Municipalities respectively and make recommendations to the Governor on the principles that should govern:

1. The distribution between the State and the Panchayats and Municipalities of the net proceeds of the taxes, duties, tolls and fees leviable by the State, and their allocation between the Panchayats and Municipalities at all levels for such proceeds;
2. The determination of the taxes, duties, tolls and fees which may be assigned to, or appropriated by, the Panchayats and Municipalities;
3. The grants-in-aid to Panchayats and Municipalities from the consolidated fund of the State;
4. The measures needed to improve the financial position of the Panchayats and Municipalities;
5. Any other matter in the interests of sound finance of the Panchayats and Municipalities.

A recent book by V.N. Alok–Fiscal Decentralization in India: An Outcome Mapping of State Finance Commissions (Palgrave Macmillan, 2021)–presents an in-depth analysis of key recommendations of the consecutive state finance commissions (SFCs) across states of India in the local and national perspective.

The book reviews the working of SFCs and their critical role in strengthening local governments, both Panchayats and municipalities in the various states. The volume attempts to identify some of the emerging issues related to the efficacy of SFC in fiscal decentralization. It appraises nearly eighty SFC reports and actions taken thereon by the respective State Governments with contextual analysis. The book brings out the constraints faced by the States in implementing the recommendations and suggests roadmaps for future improvements.

As one of the first comprehensive reviews of the State-local fiscal relations with Institutional Arrangements, the book may be purchased from Palgrave Macmillan / Springer Link or accessed online on e-bin.

Dr. V N Alok is Associate Professor of Public Finance in Indian Institute of Public Administration (IIPA), New Delhi, India. He has been a member of the Fifth Delhi Finance Commission and contributed to nearly all successive union (federal) and state finance commissions in different capacities since 1995. He conceptualized the ‘devolution index’ and constructed it annually for the Government of India during 2009-2014.

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Photo credit: LinkedIn/ VN Alok. Book launch and discussion on Fiscal Decentralization in India: An Outcome Mapping of State Finance Commissions, 20th December 2021 at the Indian Institute of Public Administration.