India : Fiscal Decentralization to Rural Governments

Abstract

The objective of this study is to review
 panchayat finances, identify issues and make recommendations
 to improve the fiscal decentralization system. Using
 Kamataka and Kerala as case studies, this report describes
 the context for rural decentralization in India, summarizes
 the current fiscal situation of district, block and village
 panchayats, identifies the main problems arising from the
 current practice, and outlines a set of reform options that
 might better satisfy the objectives of the central and state
 governments. Kamataka and Kerala were examined because these
 two states are generally thought to be more advanced than
 others in implementing rural fiscal decentralization and are
 therefore relevant for drawing lessons for the rest of
 India. There is a hierarchical arrangement of
 center-state-local governance. The 73rd Amendment to the
 Constitution made India one of the most politically
 decentralized countries in the developing world. By the
 Constitution and in practice, local government has an urban
 and a rural stream. Rural local governments are divided into
 three levels: district (zilla), block (taluk), and village
 (gram) panchayats. The design and implementation of the
 decentralization program are a state government
 responsibility. However implementation of key aspects of the
 program is lagging. Districts and blocks have no taxing
 powers and little expenditure autonomy. Both in Karnataka
 and Kerala, they more or less function as spending agents of
 higher-level governments. Gram panchayats are closest to the
 people, have some independent taxing power, and some
 discretion in expenditure decisions. Hence they are the
 primary subjects of this study.