The Gist of Yojana: May 2015

The Gist of Yojana: May 2015

Fiscal Federalism, Local Governments

Fedration Refers to a multi-level system of government. Fiscal federalism deals with the division of expenditure responsibilities, fiscal assignments, inter-governmental transfer arrangements and encompasses fiscal relations within a federation. The objective of any good fiscal fedeal arrangement is to facilitate effective, efficient and equitable allocation of resources and responsibilities among the different tiers of government and work towards, a stable federal system. Originally, the Indian federation was a dual system comprising the union and the states. The 73rd/74th Constitutional Amendments (CAs) have added part IX and Part IXA to the Indian constitution creating a third stratum of government with a three- tier system for the Panchayati Raj Institutions (PRIs). This virtually turned the Indian federation into a multi-level federal system with a multi-level public finance. Over twenty years have passed since these amendments and the conformity legislations apertaining to that enacted in 1994 by all the states. Indeed, it was a major effort towards fiscal decentralization creating democratic space for people’s participation and working towards local democratic governance at the cutting edge level.

Now that the Planning Commission, which was a non-constitutional body was scrapped and a new institution called NITI (National Institute for Transforming India) Aayog has been put in place from Januray 1, 2015, a question that immediately arises is : new role being envisaged or a renewed one for the constitutional body called the District Planning Committee (DPC) created as per Article 243 ZD? What reforms are needed to rationalize the transfer arrangements? Several such fiscal federalism issues vis-a-vis LGs require a renewed and closer look.

Cooperative federalism of India to which the new government has affirmed its faith and commitment has no parallel among the federations of the world. For example, it does not resemble Germany or South Africa where the federal governments decide major policies and where the different levels of governments function as implementing agencies. It is also different from the Brazilian model where all the three tiers of government enjoy autonomous and equal status and coordinate their policies horizontally and vertically. India cannot also be called the ‘marble cake model’ of cooperative federalism where the various levels of government have shared and overlapping responsibilities and are treated as equal partners.

An important necessary condition for shaping a viable and vibrant fiscal federalism is to have a division of labour of the functions, responsibilities and regulatory role of the various levels of a government by asking two vital questions: Who should do what? and who should tax where and what?

A simple but extremely relevant principle to guide the division of expenditure responsibilities, revenue raising assignments and of regulatory functions is to follow the principle of subsidiarity which says: What can be done best of course with minimum transaction and coordination costs at a particular level should be done at that level and not at a higher level. In other words, a convincing case will have to be made for assigning a task to each higher level of government.

The Government of India Act, 1935 and the inauguration of provincial autonomy had led to the creation of several steps to carry forward the process of democratization at the level of municipalities and village panchayats. We all know that the village panchayat was central to the ideological underpinning of India’s Independence movement and Gandhiji, the father of the nation, declared his vision of gram swaraj (village-self-rule) as the centre of social life for future India. Even so, in the Indian constitution, village panchayats were mentioned only under Article 40, that is, to create ‘units of self- government’· as part of the directive principles and therefore, did not form part of the legally enforceable part of the Constitution. The Constitution did not even accept the concept of local self-government envisaged in the Lord Rippon Resolution of 1884. It was left to the 73rd/74,h CAs to rectify this historical deficit and give local governments a constitutional status.

In the Indian Constitution, functional and tax assignments of union and states are given under three separate lists (under Schedule Vll) called union list for centre, state list for states and a concurrent list where both the tiers have joint jurisdictions. Largely following the Government of India Act, 1935, the Constitution makers followed adhoc historical arrangements rather than applying the principle of subsidiarity. The 73rd/74th CAs offered a great opportunity to re-examine the functional and fiscal domains of the three tiers and create a more rational public finance regime in India. Instead of that, the two amendments added two more lists, Schedule XI for panchayati raj institutions (PRIs) and schedule XII for urban local governments. The subjects given under these two schedules are culled out from the state list, and the concurrent list making the local government domain a happy grazing ground for everyone. The fiscal space of LGs was also left ill-defined. Government of Kerala (GoK) which took the 73rd/74,h Amendments rather seriously realised the operational difficulties and tried to disaggregate the subjects given under schedules XI and XII into activities and sub-activities and tried to bring role clarity into an otherwise amorphous and overlapping situation ‘. Although late in the day, the Ministry of Panchayati Raj (MoPR) established in 2004, realized the malady and initiated an activity mapping drive at the state level. Better late than never. Unless activity mapping is operationalized followed by devolution of functions, funds and functionaries decentralization will not take off the ground.

It is important to acknowledge that the former Planning Commission, although grown into a leviathan of sorts with no domain knowledge to provide critical policy advice, had served the nation in some important respects. Any reforming or restructuring exercise has to start from there. First, it has drawn five yearly blue prints for economic development based on elaborate reviews and studies and laid down macro-economic objectives and strategies for the economy and the nation. In what manner this exercise should continue in the future is a matter to be decided by the NITI Aayog and the new dispensation. Second, almost from the inauguration of the federal republic based on the Indian Constitution, the Planning Commission was also launched inter-alia with a resource allocation function. The creation of the Union Finance Commission (UFC) as per Article 280 of the Constitution was essentially because of the vertical imbalances in the revenue and expenditure responsibilities of the union and the states, of course reinforced by the need to rectify the horizontal imbalances in this deeply diverse sub content with great disparities in resource endowments (financial, physical and natural), development achieved, and remaining to be achieved, backwardness, ecological imbalances and so on.

Originally started as a schematic transfer, the resource allocation was made formula-based from 1969 onwards. The formula named after the then Deputy Chairman D.R. Gadgil although modified several times retained considerable discretionary space often attracting strong protests from the states. Articles 2431 and 243Y added following the 73rd/74th CAs have provided for the creation of State Finance Commission (SFC) exactly on the lines of the UFC for rectifying the vertical and horizontal imbalances at the state sub-state level.

Third, the Planning Commission played a critical role in major policy making and project evaluation. If the NIT! Aayog is going to be only a think-tank, this is the function it has to lay emphasis upon backed up by quality research and discussion. But this cannot be a stand-alone exercise.

While the blue print of NITI Aayog has not yet been spelt out there are enough indications that the new dispensation recognizes the need for a bottom-up planning in India. It is important to underline that Articles 243G, 243W and 243ZD and 243ZE mandatorily require the initiation of bottom-up planning. As per the provisions of 243G and 243W, the rural and urban local governments will have to be endowed with such “powers, authority and responsibilities” “to function as institutions of self-government” and are required to prepare “plans for economic development and social justice” and implement the schemes proposed. Article 243ZD mandates all states to create district planning committees (DPCs) and for metropolitan areas metropolitan planning committees (243ZE). It is the task of the DPC “to consolidate the plans prepared by the panchayats and municipalities in the district and prepare a draft, development plan for the district as a whole”, and are expected to do integrated spatial planning and efficient conservation of natural resources as part of the draft plan. Being a draft, its operational validity has to be ensured through appropriate policy choices at the level of the state as well as at the level of LOs by devising relevant institutional and procedural measures.

There are 2.5 lakh PRIs and 3842 urban local governments comprising over 3 million people’s representaties. To be sure, this is a unique democratic base which no other country in the world enjoys. This great potential for a sui-generis opportunity for performing the biggest democratic bottom-up planning exercise has to be taken up as a national goal. Bottom-up planning in this country that has created the institutions of gram sabha, DPC, SFC and other avenues for people’s participation is to be seen as enlivening the given framework towards a purposive direction.

The constitutional task of implementing the mandate of planning for ‘economic development and social justice’ by the PRIs and urban local governments need different emphasis. That this type of planning is a holistic concept and department level conceptualization and implementation will not be the right approach. Certainly departmentalism has been the curse of India. Bottom-up planning even if it can be effectively done, will have no meaning if the panchayats have only schematic funds at their disposal. Look at the much touted decentralization in Karnataka and West Bengal which are built on schematic transfers’. Local governments should have a predictable flow of untied funds with the freedom to plan and prioritize.

The NITI Aayog could immediately commission a country-wide status report study, debate the Planning Commission’s efforts including the Manual prepared for Integrated Planning in 2008 and then work towards preparing a frame work that can accommodate local variations. If all the 640 districts eventually prepare district plans based on a long-term vision, with medium term goals and annual plans based on that, the nation will have the best expression of unity in diversity. Given the good progress India has made in regard to local government level, geographic information based data on geo-location, soil, groundwater, crops, river basin, watershed and so on, scientific local planning is not a pipe-dream. If supplemented with census and probably a simple household socio economic data (could use local school teachers to do adhoc surveys), household level information could be prepared and could be the anchor of planning from below. The real question is: are the DPCs, as they function in the country are politically, legally and technically empowered to deliver ‘economic development and social justice’ at the sub-state level? The NITI Aayog may do well to exercise their mind on this.

Putting fiscal assignments and transfers on a rational, efficient and equitable basis is an essential requirement of a good cooperative federal polity. The Achilles heel of Indian fiscal federalism has been the multiplicity of channels with diverse objectives and conditionalities. This has resulted in conflicting priorities and distorted outcomes. Abolishing the allocative functions of the Planning Commission does not solve the problem. The share of Centrally Sponsored Schemes (CSSs) as a percentage of gross budgetary support has been increasing continuously. Although their number has been reduced following the B K Chaturvedi Committee (2011) recommendations, they have a strong presence even today. How they are going to be addressed and made part of a viable transfer arrangement is important in establishing a more equitable and rational transfer system in the county. The practice of counterpart funding by states in implementing the CSSs has become a menacing distortion of their priorities.

Even after 68 years of Independence, the Prime Minister of this country had to take a big broom to sweep the streets as part of a Swachch Bharat campaign is a shameful verdict on the pattern of’ development’ that was underway. Whose priorities ruled the destinies of this country is an intriguing issue that needs proper examination. The primary rationale of strengthening the panchayats (making them virtually smart) and also following the letter and spirit of the 73rd/74th CAs is that every citizen irrespective of his or her choice of residence should have the basic amenities of sanitation, drinking water, housing, electricity, connectivity (both road and internet) and other public services is something that needs immediate attention. It is important to incentivize the LGs to mobilise their own source revenue That Punjab, Rajasthan and Haryana abolished property tax-the main source of local governments in 80 per cent countries of the world and several other retrograde actions are also matters of grave concern.

To conclude, India is a unique cooperative federalism. Local governments are now an integral part of the India. They have tremendous potential for bottom up planning. To make them viable, components cannot be achieved except through deliberate policy choices and fostering supportive measures. In the pursuit of economic reform this is likely to be missed. A golden opportunity is now on the anvil and it is for a democratic government to give the right direction. Social inclusion can acquire meaning only when marginalized and disadvantaged are included on their own terms. This is dharma par excellence. Strengthening LGs can be the necessary condition towards that goal.

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