Fiscal Decentralisation in India: Evolution, Reforms, and Impacts

Imagine a country where decisions about schools, water supply, sanitation, and local roads are made not by distant bureaucrats, but by elected representatives who live in your community and understand its unique needs. This is the vision that fiscal decentralisation in India seeks to achieve. By empowering local governments with financial resources and decision-making authority, India has embarked on a transformative journey to strengthen democracy at the grassroots level. This journey, particularly gaining momentum after the constitutional amendments of 1992, represents one of the world’s most ambitious experiments in democratic governance.

The turning point: 1992 constitutional amendments 🔗

The story of fiscal decentralisation in India truly begins with the 73rd and 74th Constitutional Amendment Acts of 1992, which fundamentally reshaped the landscape of local governance. These landmark amendments granted constitutional status to rural Panchayati Raj Institutions and urban local bodies, transforming them from optional administrative conveniences into essential components of India’s democratic structure.

The amendments established a uniform three-tier system across the country. For rural areas, this meant Gram Panchayats at the village level, Panchayat Samitis at the block level, and Zila Parishads at the district level. Urban areas received a similar structure with Nagar Panchayats in transitional areas, Municipal Councils in smaller towns, and Municipal Corporations in larger cities. This wasn’t just an administrative reorganization-it was a commitment to bringing government closer to the people.

Key provisions for financial empowerment 🔗

The amendments introduced crucial provisions that laid the foundation for fiscal decentralisation. The Eleventh Schedule listed 29 functions that could be devolved to Panchayats, ranging from agriculture and land improvement to primary education and health. Similarly, the Twelfth Schedule outlined 18 subjects for urban local bodies, including urban planning, water supply, and public health. These schedules represented a roadmap for transferring both responsibilities and the financial resources needed to fulfill them.

Perhaps most significantly, the amendments mandated regular elections every five years and established mandatory reservations for Scheduled Castes, Scheduled Tribes, and women, ensuring that local governance would reflect the diversity of India’s population. Today, an impressive 49 percent of elected local representatives are women, demonstrating how fiscal decentralisation has opened democratic spaces for historically marginalized groups.

The architectural framework: constitutional articles and commissions 🔗

The constitutional framework for fiscal decentralisation rests on several critical articles that define how financial powers flow to local bodies. Article 243G empowers state legislatures to provide Panchayats with the authority to function as institutions of self-government, while Article 243H specifically addresses financial empowerment by authorizing states to allow Panchayats to levy, collect, and appropriate taxes, duties, tolls, and fees.

The role of State Finance Commissions 🔗

Article 243I introduced a mandatory requirement that fundamentally changed the fiscal landscape: every state must constitute a State Finance Commission at least once every five years. These commissions serve as the bridge between state governments and local bodies, reviewing the financial position of Panchayats and making recommendations on how taxes, duties, and fees should be distributed. They also suggest measures to improve the financial health of local governments and advise on grants-in-aid from the state’s Consolidated Fund.

The importance of this provision cannot be overstated. State Finance Commissions provide the analytical foundation for fiscal devolution, examining the revenue-raising capacity of local bodies and recommending how state resources should be shared. However, implementation has been uneven-many states have delayed forming these commissions or have not fully implemented their recommendations, creating gaps in the fiscal architecture.

The central perspective: Article 280 and Finance Commissions 🔗

At the national level, Article 280 plays a complementary role. This article established the Finance Commission, which makes recommendations to the President regarding the distribution of financial resources between the Union and states. Crucially, clause 280(3)(bb) requires the Finance Commission to recommend measures needed to supplement the resources of Panchayats in each state, based on the recommendations of State Finance Commissions. This creates a multi-tiered system where financial support flows from the central government through states to local bodies.

Learning from the past: committee recommendations that shaped the journey 🔗

The path to fiscal decentralisation wasn’t created overnight. It evolved through decades of experimentation and learning, guided by numerous committees that studied local governance and recommended reforms.

The Ashok Mehta Committee and its vision 🔗

Among the most influential was the Ashok Mehta Committee of 1978, formed during a period when Panchayati Raj institutions were struggling to survive. This committee, comprising 132 recommendations, proposed fundamental changes including a shift to a two-tier system and, critically for fiscal decentralisation, recommended that Panchayati Raj organizations should have compulsory taxing powers to mobilize their own financial resources.

The committee emphasized that districts should be the first point of decentralisation below the state level, with Zila Parishads serving as executive bodies responsible for district planning. It also advocated for regular social audits and constitutional status for Panchayati institutions. While the Janata Government’s collapse prevented immediate implementation of these recommendations, several states including Karnataka adopted legislation inspired by the committee’s vision, laying groundwork for later national reforms.

Building on earlier foundations 🔗

Before the Ashok Mehta Committee, the Balwant Rai Mehta Committee of 1957 had recommended establishing a three-tier Panchayati Raj system, emphasizing that local self-governing bodies were essential for democratic decentralisation. Later, the L.M. Singhvi Committee of 1986 advocated strongly for constitutional recognition of Panchayati Raj institutions, recommendations that directly influenced the 73rd Amendment. Each committee built upon the insights of its predecessors, gradually strengthening the case for fiscal decentralisation.

The reality of implementation: achievements and persistent challenges 🔗

Three decades after the constitutional amendments, India’s experiment in fiscal decentralisation presents a mixed picture. The achievements are undeniable-over 260,512 Panchayats now function across India with more than 3.1 million elected representatives. The sheer scale of democratic participation at the local level is unprecedented globally.

Financial autonomy remains elusive 🔗

However, the financial picture reveals significant challenges. According to a recent Reserve Bank of India report, Panchayats generate only one percent of their revenue through their own taxes. The overwhelming majority of their resources-approximately 80 percent-comes from central government grants, with another 15 percent from state grants. On average, each Panchayat earns merely Rs 21,000 from its own tax revenue annually, compared to receiving Rs 17 lakh in central grants and Rs 3.25 lakh in state grants.

This dependence on external funding creates several problems. Local bodies lose autonomy as higher levels of government exercise control through funding decisions. Delayed fund releases force Panchayats to seek private funding or leave projects incomplete. The lack of financial independence undermines the very purpose of decentralisation-empowering communities to address their own priorities.

Uneven devolution across states 🔗

Another major challenge is the discretionary nature of devolution. Since the constitutional amendments don’t mandate the transfer of functions, states have implemented fiscal decentralisation unevenly. While Kerala has devolved all 29 functions listed in the Eleventh Schedule to Panchayats, in Karnataka urban local bodies have complete control of only three of the 18 subjects in the Twelfth Schedule. States like Punjab, Jharkhand, and Goa have granted extremely limited autonomy to their Panchayati Raj institutions.

This inconsistency extends to revenue as well. Panchayats in Kerala and West Bengal average over Rs 60 lakh and Rs 57 lakh in revenue respectively, while those in Andhra Pradesh, Haryana, and Punjab collect less than Rs 6 lakh per Panchayat. The result is that local governance effectiveness varies dramatically depending on which state you live in.

Looking forward: strengthening the fiscal foundation 🔗

For fiscal decentralisation to fulfill its promise, several reforms are necessary. Local bodies need genuine taxing authority and the capacity to collect revenue efficiently. Property taxes, for instance, remain poorly enforced in most areas despite being a potential major revenue source. State Finance Commissions must be formed regularly and their recommendations implemented promptly rather than being delayed or ignored.

Equally important is building administrative capacity at the local level. Many Panchayats lack trained personnel with the technical expertise needed to manage budgets, plan projects, and utilize funds effectively. Investment in training and institutional strengthening is essential for converting financial resources into development outcomes.

The journey toward genuine fiscal decentralisation in India continues. The constitutional framework established in 1992 created the foundation, and various Finance Commissions and committees have provided guidance. Yet the gap between constitutional promises and ground realities remains significant. Bridging this gap requires political will at the state level, strengthened institutional mechanisms, and a genuine commitment to empowering local communities with both the resources and authority they need to shape their own futures.

What do you think? How can states be encouraged to devolve greater financial powers to local bodies when it means giving up their own control? What innovative revenue sources could Panchayats and municipalities develop to reduce their dependence on grants?

References

1. https://www.orfonline.org/expert-speak/decentralisation-75-how-the-third-tier-institutions-have-deepened-indias-democracy
2. https://www.drishtiias.com/daily-updates/daily-news-analysis/finances-of-panchayati-raj-institutions
3. https://gender.study/gender-and-governance/ashok-mehta-committee-vision-panchayati-raj/