Publication Type: Reports

In 2013-14, Accountability Initiative(AI) was tasked by the Fourteenth Central 14th Finance Commission (FFC) to examine several aspects of the structure of devolution of powers, responsibilities and finances by states to rural local bodies (RLBs), based on the data provided by them to the FFC. Our study covered all decentralization models, namely, the panchayat system, the extension of the panchayat system to the 5th Scheduled Areas, Autonomous District Councils under the Sixth Schedule and other state specific arrangements.

While ascertaining the status of actual devolution of tasks and responsibilities relating to the basic civic functions of water supply, sanitation, solid waste management, drainage, roads, streetlights, community assets such as parks, burial and cremation grounds, and other means of communication such as waterways to rural local bodies, it was discovered that most states had legally endowed village level RLBs such as Gram Panchayats with regulatory and implementation powers to provide core public services. However, wide variations existed between states in the range of powers devolved upon intermediate and district level RLBs, with some states narrowing their ambit to merely undertake planning or providing advice.

The report analyses the fiscal transfers from states to RLBs by studying the frameworks governing them, and assesses the strength of the systems of public financial accountability applicable to RLBs. It particularly looks at whether states subsumed earlier Central Finance Commission grants into their own state level transfers or treated these as additional grants; an important input for the FFC. Trends, performance and efficiency of all RLB revenue sources (Tax and non-tax revenues, and transfers from State and Central governments) were analysed by looking at the financial flow data provided by states. Trends of expenditure incurred by RLBs on core functions-were covered in detail in the study of their finances.

The study was hampered by inconsistent and incomplete data received from states, in spite of follow ups alongside the FFC staff. Though the researchers attempted to check the data for consistency and normalize it, in the case of some states, regular procedures could not be followed and the data considered the most consistent was studied.

The report estimates the gap in resources for delivering core services by RLBs for 2015-2020, using benchmarks set by the state and the union Government. It ends with AI’s suggestions on strategy options, including tax and non-tax measures, for bridging the gap between core function expenditure needs and available revenues. The suggestions include that a greater proportion of central grants and shares of buoyant state and central revenues ought to be provided to RLBs, so that they can close the fiscal gap and provide local core services that meet benchmarked standards. Concurrently, local revenue collection must be incentivised. In particular, property taxes remain largely untapped by RLBs.

AI’s report was a critical input that was relied upon by the FFC to recommend increasing the amounts allocated to local governments from the divisible pool of taxes from Rs. 86161 crore to Rs. 287436 crore, an increase of 234 percent over the grants recommended by the 13th FC. This amounts to a 344 percent increase in the allocation of basic grants, from Rs. 56335 crore to Rs. 249978 crore. In the case of performance grants, which, as a proportion of the total grants has been brought down to 10 percent and 20 percent in the case of rural local governments and urban local governments respectively, the increase is relatively modest; from Rs. 29826 crore to Rs. 37458 crore. All in all, this amounts to an increase in the FFC grant to local governments, from 2.28 percent to 4 percent of the central divisible pool of taxes. This is big money, translating at the Gram Panchayat level for instance, to an increase from Rs. 5 lakhs to Rs. 25 lakhs per year, depending upon the size of the Panchayat concerned.