Financial Health of Sub-national Governments in India (An Empirical Analysis)

Dr Om Prakash Bohra* and Dr Nagaraju Velde** Sadi Taha** Abdelrahim Nassoura**


The Panchayati Raj Institutions in India have a long history. After introduction of 73rd Constitutional Amendments Act, it has got recognition in the Constitution of India. Traditionally, a very few responsibilities were shouldered by these Institutions. With the introduction of 11th Schedule, PRIs are assigned a large number of functions as per the provisions made in the Panchayati Raj Act of the each State. In the preamendment period these bodies had been empowered to levy very few taxes and fees. Since there was no regular election (after 73rd CAA it became mandatory to have election every fifth year) the panchayats were ruled by the rich landlords/power groups in the rural areas. With limited or almost negligible taxation power the lords of the panchayats carried out no responsibility. The devolution of resources from the States was very limited. Since independence, the Constitution provides arrangements regarding the fiscal transfers from Centre to sub-national governments-States (and now to local governments, PRIs and ULBs). The centre-state fiscal relations and its delivery mechanism were in place developed for long but no separate provisions existed for local governments until the recent Constitutional amendments were made. The Constitution through 73rd and 74th Amendments and the article 243 I and 243 Y provides for the constitution of State level Finance Commission (SFC).. A large number of states have accepted and implemented the most relevant recommendations To support the finances of the local bodies the article 280(1)bb and c were also inserted. With this provision the Government of India have to share some responsibilities and make provisions for the devolution of resources to the local bodies through the State governments. The Tenth Finance Commission for the first time recommended for devolution of resources to the local bodies. In the total transfer for the local bodies, Rs 1000 crore were earmarked for Urban Local Bodies (ULBs) and Rs 4380.93 crore for the PRIs. The PRIs were given Rs 100 per capita and the ULBs on the basis of ratio of urban population in the total population. Similarly, the Eleventh Finance Commission had recommended Rs 10,000 crore (Rs 8000 crore for PRIs and Rs 2000 for ULBs) for the local bodies, both rural and urban. In addition to the devolution of resources from the Central Finance Commission, the State Finance Commission of the respective state had also recommended sharing of tax and non-tax revenue of the State. Some of them have recommended for global sharing of tax revenue only whereas others were in favor of sharing of buoyancies of total revenue of the States and recommended of devolution of revenue from tax and non-tax sources. To achieve the fiscal autonomy, the PRIs have been empowered to raise revenue through their own sources, as enlisted in the respective state acts. However, the PRIs could not impose these taxes to the full potential. The PRIs are also given additional assistance for the development work in the form of Centrally Sponsored Schemes. The Rural Development accounts for about half. The MP/MLA/MLC/Sarpanch local area development funds are also directed for the development work in the constituencies of these elected bodies. The privatisation of some select services may also reduce the expenditure, which in turn help to improve the financial position of the PRIs. A Strong comprehensive computerized data base in the form of e-panchayat would also attract the investors and the tourists in the rural areas, which would lead to revenue enhancement. (The Madhya Pradesh model of e-governance and “gramsamparak”).