Will decentralisation help India?

Published: March 18, 2020 5:15 AM

A bottom-up approach will address pressing concerns across different population groups & areas.

decentralisation, fiscal decentralisationAlthough the share of local expenditure has increased, more than 50% goes towards interest payments and salaries, leaving less room in the sub-national government’s budget for dealing with a medical crisis like coronavirus, and economic and social development initiatives.

By Ejaz Ghani

Decentralisation has long been recognised as an efficient instrument for development. It builds institutional capacity at the grassroots level, improves delivery of economic and social services to meet people’s needs, and prevents sectarian violence. A strong state is not always associated with a centralised state.

While a strong centralised state may formulate a policy quickly, ensure urban elites that a single internal market for goods and services and citizenship rights will trump local concerns, it can also stoke tensions across different groups. Local governments are often better positioned to identify economic and social problems. Decentralisation and democratic suppleness at the grassroots level reduces the threat of conflict. Trade-offs between the centre and local favour increased decentralisation. Large countries like China, India and the US are too big to be governed efficiently from centre.

India has made progress in decentralisation through three different channels-political, administrative and fiscal-but a lot more needs to be done. Economic and social progress continues to be uneven across population groups, gender groups, and geographic areas. Much more needs to be done to address long-term concerns of uneven development. The immediate concerns relate to the threat of coronavirus and lifting more than 150 million people living in poverty and social misery.

Fiscal decentralisation: Although the share of local expenditure has increased, more than 50% goes towards interest payments and salaries, leaving less room in the sub-national government’s budget for dealing with a medical crisis like coronavirus, and economic and social development initiatives. There is room for improving economic democracy through fiscal decentralisation to create a level playing field.
Administrative decentralisation: The extent of administrative decentralisation varies across different services. There is wide variation in the decentralisation of execution and supervision of development programs. For instance, India has devolved the implementation of most education programs to the sub-national level, but financing and oversight in many cases is retained at the national level.
There is a huge potential for using administrative decentralisation to improve service delivery outcomes by taking advantage of better local information and monitoring. Empirical evidence is yet to support a consistent positive relationship between the degree of administrative decentralisation and investment in people’s education and health in India, which is the best indicator of public service delivery.
Political decentralisation: In 1992, India approved the 73rd Constitutional Amendment Act that encompassed a set of reforms implementing a nationally-standardised and decentralised system of local government. These reforms, also known as the Panchayat Raj, have shown some progress on decentralisation beginning the process of eliminating gender inequality. This has scaled up women’s economic participation, but a lot more needs to be done.

India needs to deepen and unbundle the decentralisation agenda to promote economic and social democracy, and provide budget responsibility to local governments.

More fiscal resources—fiscal stimulus program—are needed to support the local governments to tackle coronavirus, which will grow exponentially soon. Increased fiscal stimulus will also promote rural structural transformation. Under the present arrangement, local governments make little or no contribution to the design and implementation of economic and social development programs. They have limited autonomy and resources to provide meaningful service. Earmarked transfers designed by the centre should not continue to dominate local government finances.

It is vital to make an accelerated transition from top-down to bottom-up approach in the development agenda to improve the delivery of public goods. Take education and health, where responsibility for design, financing and service delivery are assigned to different levels of government. Providing the right incentives, and aligning rules and practices in decentralisation will improve economic and social outcomes.

India’s decentralisation agenda needs to be better aligned with the spatial development agenda. Most cities, including megacities and secondary cities, are financially broke. An empowered and autonomous chief executive should lead a city government with the municipal body. City mayors need to take the lead in spatial development and delivery of local public goods, and tackling the challenge of coronavirus.

There are even bigger challenges facing India’s fiscal decentralisation agenda. While the system of interstate fiscal transfers more resources to the lagging regions, this is mostly the case when such pro-poor redistribution has explicit rules. This is not the case with all other forms of implicit interstate fiscal transfers that tend to dominate fiscal transfers. Many transfers from the central government to sub-national governments are skewed towards the more prosperous states.

India’s fiscal decentralisation will benefit from greater transparency and ensuring that interstate transfers do not act as a disincentive for fiscal responsibility by sub-national governments. Fiscal transfers need to be governed by explicit rules, increased transparency, and ensuring that interstate transfers do not act a disincentive for fiscal responsibility by sub-national governments. Simply directing financial resources to local government may not be sufficient to tackle problems like coronavirus or to create a level playing field for a more inclusive economic and social development. It will need to be complemented with improved capacity, accountability, and participation at the local level, and above all, social learning at the grassroots and global level.

Author has taught economics at Oxford University, and worked for United Nations and World Bank

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